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06/12/2011

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an observer

This statement neither makes sense nor does it have factual support

"a disastrous error by allowing Lehman Brothers to fail after having led the banking industry to believe that the Fed would not permit a major bank failure—whereupon the industry lost all confidence in government policy"

Jimbino

I still need an explanation from one of these econ gurus why it is that, if mortgage interest were not deductible, we homeowners, sister and brother (say), wouldn't just frustrate the law by living in each other's homes. We would then be able to deduct all mortgage interest as well as other expenses related to supplies, upkeep and repair, not to mention depreciation, and then pass the tax breaks on to each other.

Renters are likewise not disadvantaged by the mortgage-interest deduction, as they indirectly gain from the deduction enjoyed by their landlord, who is normally in a higher tax bracket than they are.

A.P

No, simply Real Estate gains a distorted advantage over other industries, investments and economic activity.
However, expanding the tax reach to mortgage interest without at least equal withdrawal of other taxes would hardly be an improvement.

City Index

People love to talk about crisis. For economists crisis is their favorite world. In 25 five years working in the financial sector I never heard economist telling that the scenario was good. However we always see people spending money, supermarkets full, traffic jam (people have money for petrol). Como on, stop for a moment to talk about the "c" world.

The Bomb

Jimbino: Your scheme is a decent one. However, I do see two possible flaws: (1) owner occupied housing receives a much lower interest rate than rented housing; (2) what happens when sister dates a slob who damages the property? In your situation, owner has all the risk of loss, and receives no compensation for the risk. That is a problem which would make me less likely to make the economic decision to rent.

Dennis Tuchler

The only reasons I can think of for favoring owning over renting has to do with involvement in community and home maintenance. Home-owners tend to be more active as volunteers and participants in the political process. They also tend to take care of their own homes or condominium units better. Of course, the latter point might be weakened by suggesting that home-owners will often over-spend in home improvements that don't add market value. But the improvements do produce value by improving consumable amenity.

archer

The greater impact of the failure of Fannie and Freddie is on the accelerated eroding of confidence in government as regulator. Government may fail to adopt necessary regulations. Or, even though regulations are in place, regulators may just be lax, incompetent, or corrupt. Fannie and Freddie's demise is the result of the second problem. (Of course a third problem could be too many regulations and a fourth problem could be regulators who are too aggressive. But Fannie and Freddie didn't fall into either of these groups).

The people who passed and supported Dodd-Frank are also the people who supported the lax oversight of Fannie and Freddie. That's a very disturbing problem

NEH

Archer, It's all about Management - Delegation and empowerment of those to carry out their delegated responsibilities. The empowerment function was hamstrung by the Lobbies under the control of those very organizations which were to be regulated. Not only Fannie May and Freddie Mac, but the rest of the Financial Industry as well. Don't be disingenous and blame the Government and the Regulators for failure. The problem is systemic in nature. One could say, that K-Street (Lobbby Land), is the Fifth Estate. Perhaps the only Estate...

TANSTAAFL

Jimbino's point about why the mortgage interest deduction does not disadvantage renters, relative to owners, is well taken.

His theory that a sister and brother (for example) could live in each other's homes and pass the tax breaks on to each other is less persuasive. Such an arrangement naturally implies non-arm's-length pricing between the parties to the transaction, which the tax law (correctly) frowns upon. The theory also ignores the fact that barter transactions are fully subject to income taxation.

denis

very informative article. learned a lesson. thanks.

an observer

using "filters" to tackle "Regulatory Capture"

Posner talks about a sympton, "Regulatory Capture." Notice that he doesn't give the antidote: just disregard anything coming out of the mouth of anyone whose job is to repeat themselves for money: all republican candidates and most democrats.

Note this story on anti-global warming.

http://www.space.com/11960-fading-sunspots-slower-solar-activity-solar-cycle.html

The since on the Earth is hard enough, without letting people into the debate, academic or otherwise, with $$$ or their living in the game

Mardik

A little bit more "hope" a little bit more "change" towards socialism and a little bit more time and things will work out fine.

Harris Pike

This is a little off topic from the main points of Posner's post, but when he mentions the governments non-bailout of Lehman as negative does he mean strictly because it caused a decrease in confidence of other banks or because the government's policy should have Brenton bail-out all banks? I'm a firm believer that the government should not have provided as large of baiilouts as they did under the premise that with weaker banks there would be a gap between supply and deman where more small banks could enter the field creating competition for the large banks, forcing those banks to make smarter self-regulated decisions. Granted this works in theory, but in practicality it would mean the downfall of our current banking system and chaos/bank distrust during the years it takes for competition to build.

MBT Shoes

thank you very much.

Eric Rasmusen

"The financial crisis might actually have been worse without Fannie and Freddie. They collapsed and were simply taken over by the federal government. Had their debts instead been debts of Morgan and Goldman and other private banks, those banks might have collapsed and been taken over by the federal government as well, providing daunting challenges to the government’s ability to run the banking system."

Fannie and Freddie collapsed because a bigger part of their portfolio was in risky housing bets, but they wouldn't have been able to make those bets except that their creditors thought the government would bail them out. So if they had never existed, there would have been enough less risky housing bets that the worst insolvency by far--- their's-- would never have happened.

It looks as if the losses to the government from Fannie and Freddie will dwarf all the other losses. AIG comes second, but GM and Chrysler were relatively cheap (that is, less than 40 billion dollars!), and aside from that and maybe Citigroup, TARP will break even. (One caveat: I don't know what has gone on with the Fed's purchase of junk securities; this may be a huge hitherto hidden loss.)

an observer

The financial crisis might actually have been worse without Fannie and Freddie . . .

In re-reading Posner's comments (as well as those of Eric Rasmusen and others) the conclusion becomes clear that neither understands why the financial crisis was so destructive. Both simplistically think the crisis was an asset bubble, which it was not. The tulip mania was an asset bubble.

The financial crisis was systematic fraud, worked by millions of borrowers falsely misrepresenting their ability to repay their loans.

As Munger (Buffett's partnet) has explained, fraud (especially about debt) is especially destructive because the false promise to repay affects the behavior of the lender. He uses the example of embezzlement, but the analysis also applies to loans.

By rights, if the loans had been honesty written, there should have been no financial crisis,even if the prices of house were in a bubble. This is because the borrowers were supposed to be able to repay their loans out of income (on installment), regardless of the value of their respective homes. Borrowers do not promise to repay their mortgages by selling their house.

The American Public knows this truth. It knows that the gov't should have prosecuted millions of borrowers for loan fraud. The Supreme Court has signaled that there is no defense to such prosecutions,with its recent willful blindness ruling.

Having failed to enforce the criminal laws, Obama is now FUBAR. Obama's failure, the failure of all Washington, is that middle class values matter.

Christopher Graves

The 2008 financial collapse was indeed the bursting of a price bubble brought on by the inflationary policies of the Federal Reserve holding interest rates artificially low for a prolonged period of time. There was fraud involved, no doubt, but the primary reason for the financial crisis was monetary policy. The policies of Freddie Mac and Fannie Mae, egalitarian policies of the Clinton and Bush Administrations encouraging more lower income people to buy homes, and the Community Reinvestment Act all helped channel excessive funds made available by the Fed into the housing market. If these policies had not been in place, the bubble would have developed anyway, but perhaps it would have occurred in another particular market. The lack of judgement displayed by bankers and businessmen during this episode were induced by the distorted signals sent by the artificial interest rates. Derivatives and other market innovations to shield investors from risk likely created moral hazard as did earlier bailouts of the financial industry.

I disagree though that we do not want to encourage home-ownership even if we do not want to use these means of doing so. Judge Posner comments along the following lines: "I don’t think there was ever a good reason to promote home ownership over renting (so I would favor the abolition of the deductibility of mortgage interest from federal income tax). It ties up a lot of the capital of individuals and reduces labor mobility."

This line of analysis makes sense in purely economic terms, but there is more to life than economic efficiency. While economic considerations are important and should be considered in where to live and how settled one becomes in a particular location, it is but one consideration. There are some very painful trade-offs in these matters that should be especially troublesome for conservatives. I am afraid that Judge Posner and many other free market advocates do not pay adequate attention to these trade-offs.

Conservatives, and some on the left, have emphasized the importance of a "sense of place" in cultivating the personal well-being of humans. Without feeling a connection to other people in a settled community over time sharing a particular way of life, people are more prone to feel alienated and feel devoid of a sense of purpose. Individuals cannot flourish outside of a social field that they dwell in. This social field develops over time spontaneously as people form social bonds with one another and is held in place by common customs and habits. This social process is organic & holistic.

If people move around too frequently simply looking for more economic opportunity, then they become social atoms showing little concern for other people or their social environment apart from what they can drain from their superficial social life in the moment. An overly mobile population leads to communities disintegrating into aggregations of unrooted, overtly selfish, short-run utility maximizers. The organic and personal is replaced by the mechanistic and the impersonal. This dynamic undercuts each of the Six Canons of Conservatism laid out by Russell Kirk:

"Belief in a transcendent order, or body of natural law, which rules society as well as conscience."

"Affection for the proliferating variety and mystery of human existence, as opposed to the narrowing uniformity, egalitarianism, and utilitarian aims of most radical systems;"

"Conviction that civilized society requires orders and classes, as against the notion of a 'classless society'."

"Persuasion that freedom and property are closely linked: separate property from private possession, and the Leviathan becomes master of all."

"Faith in prescription and distrust of 'sophisters, calculators, and economists' who would reconstruct society upon abstract designs."

"Recognition that change may not be salutary reform: hasty innovation may be a devouring conflagration, rather than a torch of progress."

A mytho-poetic attachment to a particular place is a vital part of human existence. We cannot abstract place away without dire consequences.

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The people who passed and supported Dodd-Frank are also the people who supported the lax oversight of Fannie and Freddie. That's a very disturbing problem..

elastic bracelets

The crisis has changed the financial landscape worldwide and its costs are yet to be evaluated.

Gabriel

article that you fit quite interesting to read & give another value to me

jim

I continue to be surprised at the extent of subsidy presumed to stem from the deductibility of mortgage interest. True enough, dropping the deduction will make home ownership less favorable and rates of ownership will, almost surely, decline. But those deductions won't be eliminated under any proposal I've seen. The deductions will intead be claimed by landlords. Merely transfering the deduction from owners who occupy their homes to owners who rent them out does not eliminate the subsidy. In fact, as another commenter points out, the landlord is likely in a higher tax bracker implying an increase in the amount of deductions taken, not a decrease.

To make the case that the extent of subsidy will be reduced requires showing that the extent of housing consumed by households will be less. Maybe that's so, maybe households will decide to live in smaller homes, but without establishing that case, I don't see why eliminating the interest deductibility for owner occupied housing is so uncritically accepted as fact.

small business financing

It knows that the government should have prosecuted millions of borrowers for loan fraud. The Supreme Court has signaled that there is no defense to such prosecutions,with its recent willful blindness ruling.

parça kontor

Private banks like Morgan Stanley and Goldman Sachs and Countrywide bought mortgages

Pepe Fanjul

Really nice post...It contains lots of information..Well Fannie and Freddie were effective in obtaining congressional and presidential assistance to ward off threats to their activities and their profits.Thanks

MBT Sale

Thanks for the cool badgees! When do we find out who the Petties nominees are???

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