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< | It is strongly recommended that you include your outline in the body of your essay by using the outline as section titles. The headings below are there to remind you how section and subsection titles are formatted. | | | Multiple Personality Nondisorder in the Mortgage Market | | | “It’s become a freelance business, in essence—that’s what it is.”
The U.S. housing market suffers from multiple personality nondisorder. The 2008 housing crisis, largely caused by the proliferation of mortgage backed securities (MBS), exposed the existence and inherent clashes between several of these personalities. MBS were created, as many alternate personalities are, as a response to a major trauma: The Great Depression. The U.S. government created these assets through a government-sponsored entity (GSE) known as Fannie Mae. By buying loans from loan originators, Fannie Mae was able to stimulate the market for mortgages by increasing the overall liquidity and size of the lending market. A larger mortgage market was beneficial for many of the economy’s different personalities: buyers had more money available to buy new homes, lenders could sell their newly created loans to GSE, and investors could buy the new GSE created MBS. Because GSE retained some the risk underlying the loans the bundled, only low-risk, fixed-rate loans where the homebuyers were unlikely to default or foreclose were purchased to form these assets which meant GSE, buyers, and loan originators could all coexist with a united interest in producing as many responsible loans as possible. | |
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< | In the 70’s, the united interest and coexistence of these multiple personalities began to disintegrate when private entities began selling their own MBS. These private MBS creators lacked the regulation of the GSE and created their assets without the mandated risk retention of the GSE. This created a situation where the interests of the buyers, a large home lending market seeking to make quality, low-risk loans, became decoupled from the desires of loan originators, investors, and the financial sector, to create, bundle, and sell the highest quantity of loans regardless of quality. Because private MBS creators were willing to buy subprime mortgages, a category of loan GSE wouldn’t touch, loan originators were willing to make more subprime mortgages with the knowledge that the risk would soon be sold to a private MBS creator and then passed on again to investors throughout the economy. This caffeinated investing created short-term benefits for the economies many personalities (buyers, loan originators, investors, and even the government) but set the stage for the 2008 crash when the decoupled interests of these personalities came to the fore. | >
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But the securitization of mortgages was not part of the original
architecture, nor were "Fannie" or "Freddie" the original parties:
the FHA doesn't come into your story. Nor is the Depression the
correct starting point: it's the Second World War and the various
forms of social benefit (higher education, mortgage assistance,
socialized lifetime healthcare) that accompanied demobilization in
order to ensure social peace. Your history is being distorted by
the need to maintain the metaphor.
In the 70’s, the united interest and coexistence of these multiple personalities began to disintegrate when private entities began selling their own MBS. These private MBS creators lacked the regulation of the GSE and created their assets without the mandated risk retention of the GSE.
Not necessarily correct. Another story would be that Fannie and
Freddie were not actually retaining risk, they were hiding it behind
the implicit government guarantee. This implicit guarantee, like
the fabled "Greenspan put," allowed the financial industry to grow
very large relative to the US economy through an immense credit
subsidy made unconsciously by US taxpayers who never voted for it or
really understood what was going on until the risk-takers with
implicit guarantees blew up the global economy at their expense.
You may not believe this story for some reason (which ought not to
be because it doesn't fit your metaphor), but you should deal with
it.
This created a situation where the interests of the buyers, a large home lending market seeking to make quality, low-risk loans, became decoupled from the desires of loan originators, investors, and the financial sector, to create, bundle, and sell the highest quantity of loans regardless of quality. Because private MBS creators were willing to buy subprime mortgages, a category of loan GSE wouldn’t touch, loan originators were willing to make more subprime mortgages with the knowledge that the risk would soon be sold to a private MBS creator and then passed on again to investors throughout the economy. This caffeinated investing created short-term benefits for the economies many personalities (buyers, loan originators, investors, and even the government) but set the stage for the 2008 crash when the decoupled interests of these personalities came to the fore.
That's only a
metaphor, and in this case one that obscures. What actual
economic mechanism is being described? | | | “Complexity so intricate no one can fathom it. Large things within small things, small things within large things—things encompassing things which would seem to be beyond them. Chaos.” | | | “Federal troops. The eighty-second airborne. The paratroopers. On every corner. And camps. Work camps. Put them all in work camps…But wouldn’t the presence of federal troops depreciate property values?” | |
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< | Much like a lawyer drinking heavily to avoid acknowledging a midlife crisis, the government was forced to address its issues aggressively and immediately to avoid a total collapse. TARP, Dodd-Frank, and other immediate legislative responses served to rein in the behavior of financial institutions who were the final recipients of the risk of MBS transactions. Unfortunately, these regulations did nothing to reduce the complexity and distance that creates the environment where the mortgage market forgets its founding purpose of supporting a healthy housing market and instead focuses on profits on traded mortgage assets. The government’s response did succeed in the short-term in keeping the entire economic system afloat, but without addressing and acknowledging the dissonance between the economics multiple personalities the recovery did not address the long-term conflict that remains. | >
> | Much like a lawyer drinking heavily to avoid acknowledging a midlife crisis, the government was forced to address its issues aggressively and immediately to avoid a total collapse. TARP, Dodd-Frank, and other immediate legislative responses served to rein in the behavior of financial institutions who were the final recipients of the risk of MBS transactions.
No, it wasn't
reining in the behavior that was immediate, it was
recapitalization. What we did was replenish the banks using
public money, temporarily nationalize General Motors and one
of the largest shadow banks, and allow a "creative
destruction" in the investment banking part of the financial
industry, by allowing not only Bear, Stearns but also Lehman
Brothers to go under. Accompanied by modest fiscal stimulus
(the most that the current President could get from a very
hostile Congress) and some very significant central bank
risk-taking, these steps prevented a broader collapse in the
economy consequent on the failures of the US financial
sector. By comparison, the subsequent attempts to deal
preventively with systemic risk from financial institutions
were late, small, and so far of uncertain
utility.
Unfortunately, these regulations did nothing to reduce the complexity and distance that creates the environment where the mortgage market forgets its founding purpose of supporting a healthy housing market and instead focuses on profits on traded mortgage assets. The government’s response did succeed in the short-term in keeping the entire economic system afloat, but without addressing and acknowledging the dissonance between the economics multiple personalities the recovery did not address the long-term conflict that remains. | | | “That precise point when consciousness is heightened and everything glows.” | | |
(All quotes are drawn from Lawrence Joseph's Lawyerland) | |
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Yes, and like Arnold in the first essay, the metaphors aren't
helping you grapple with the real subject you have chosen. As with
the first essay, which you should certainly revise, the route to
improvement here is to reduce or eliminate the merely metaphorical
material in order to concentrate more closely on your real subject.
Some linking of factual sources in this piece would be particularly
useful.
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