Recently I have reading "Freefall" by Joseph Stiglitz, another book about the recent financial crisis. I haven't managed to finish it (and probably won't as it is due back at the library today) but will review it anyway.
I didn't like this book much. I found Stiglitz's style annoying. He is a liberal prone to taking partisan shots. He will say things like "We believed such and such but we learned we were wrong" where he doesn't really mean "we" but "crazy right wing Republicans". If Alan Greenspan writes a book confessing error that is ok but I don't like such confessions on behalf of others. Particularly since I doubt the real crazy right wing Republicans have learned much of anything and especially not what Stiglitz is claiming was learned.
On a more substantive note I didn't find the book very interesting. A rather conventional and predictable explication of what happened from a liberal perspective is mixed with what seem to me to be some often rather poorly thought out proposals for alleviating the problems.
For example on pages 103-104 Stiglitz writes:
The government (through the Federal Reserve) has been lending money to the banks at very low interest rates. Why not use the government's ability to borrow at a low interest rate to provide less-expensive credit to homeowners under stress? Take someone who has a $300000 mortgage with a 6 percent interest rate. That's $18,000 a year in interest (.06 x $30,000[sic]) or $1,500 a month, even with no payback of principal. The government can now borrow money at essentially a zero interest rate. If it lends it to the homeowner at 2 percent, payments are cut by two-thirds to $6,000. For someone struggling to get along at twice the poverty rate, around $30,000 a year, that cuts house payments from 60% of the before-tax income to 20%. Where 60 percent is not manageable, 20% is. And apart from the cost of sending out the notices, the government makes a nice $6,000 profit per year on the deal. At $6,000 the homeowner will make the payments, at $18,000, he or she will not.
Stiglitz is proposing that the government give 2 percent interest only mortgages so stressed homeowners can payoff their existing 6 percent mortgages and drastically reduce their expenses. He further claims this will be a good deal for the government. This proposal is totally deranged.
First Stiglitz does not explain how someone with an annual income of $30,000 obtained a $300,000 mortgage. A likely explanation of course is a grossly fraudulent loan application (for example claiming an annual income of $120,000). This is theoretically a serious crime and while it may be too much to expect such homeowners to go to jail, the government certainly shouldn't be bailing them out.
Second while it is true that the government can currently borrow money for 30 days at near 0 rates the government can't borrow money for 30 years (much less forever) without paying interest. Borrowing short and lending long is a classic recipe for trouble.
Third Stiglitz does not say how much the house is actually worth but, under current conditions, $200,000 or less seems likely. Lending $300,000 against a house worth $200,000 to a homeowner with an annual income of $30,000 is a really bad idea whether done by a bank or the government. At least for someone intending to profit as Stiglitz claims the government would.
Fourth it is hardly certain that the homeowner will be able to make payments of even $6,000 a year. Property taxes and other expenses on even a $200,000 house can be substantial and the homeowner may have other priorities. In any case the homeowner won't live forever at which point the government will own a $200,000 home with $300,000 mortgage not a desirable situation to be in.
Stiglitz goes on to claim that banks will be opposed to this sort of thing because they don't want the competition. In fact under current conditions the banks would be delighted to unload all their lousy $300,000 mortgages on the government. Something like this is actually happening as the government is currently guaranteeing (through Fannie Mae, Freddie Mac and the FHA) lousy refinancing loans which are getting the banks out from under a lot of dubious loans. This is costing the government a lot of money (far more than the direct payments to the banks Stiglitz complains about in this book). Perhaps at some future point when all the bad loans are gone the banks will try to get rid of the government competition but not just yet.
So in conclusion I didn't find a lot of value in this book. Stiglitz has a economics Nobel prize and there are occasional indications in this book that he is capable of writing an interesting and worthwhile book. However I don't think "Freefall" is it. Give it a pass.
Friday Cat Blogging – 24 November 2017
3 hours ago