Thursday, August 16, 2007

One of the mysteries of the American subprime mortgage mess, now sinking financial markets worldwide, is how so many bad loans got written.

Well, that mystery isn't very deep. Lenders used to care about who they loaned money too, because they'd be out the money if they didn't pay back. Mortgage markets haven't worked like that for years: the loans get resold in a secondary market, so all the originating lender cares about is that the homeowner stay solvent long enough for the mortgage to get flipped. It's a pretty simple point (though, as of a couple of years ago, I was annoyed to note that the highly credentialed experts defending the business had somehow failed to notice).

But that doesn't solve the mystery. It just moves it. OK, the originating lenders were writing crap loans because they could sell them --- but why was anyone in their right mind willing to buy?

Why were they willing to buy? Because the financial rating agencies were telling them that this crap did not stink. And why were they saying that? Because of a bunch of rulings which simply defy common sense. Witness yesterday's story in the Wall Street Journal (link works for me), which explains at great length that

In 2000, Standard & Poor's made a decision about an arcane corner of the mortgage market. It said a type of mortgage that involves a "piggyback," where borrowers simultaneously take out a second loan for the down payment, was no more likely to default than a standard mortgage.
They reversed themselves in 2006, at which point the statement was obviously false. But it was obviously false in 2000, as well. A buyer who can't scrape together cash for a down payment is obviously living closer to the edge than one who can. That's the whole point of requiring a down payment, which had been standard practice in the mortgage market for decades.

This sort of moral hazard and pure arrant stupidity in positions of power would be a marvelous object lesson for libertarians to cite, if only Standard and Poor's were part of the government. But since they were in the private sector, we're supposed to just assume the invisible hand will hold them accountable. Not a problem --- if they were the only ones getting hurt.

Tuesday, August 14, 2007

I recently went to see the Edward Hopper exhibit, which still has a few days left at Boston's Museum of Fine Arts. Lovely stuff --- the iconic Nighthawks, many other famous pictures I'd only seen in books, and a few supposedly famous ones that I hadn't.

As usual for these exhibits, I wanted to wrap up by seeing some related work (as I'd followed up the earlier Monet exhibit by looking with newer eyes at the New England luminist paintings which had addressed similar concerns of light in a rather different way). In Hopper's case, this would be art from the "ashcan school" of New York at the turn of the 20th century --- a clear influence on Hopper. And, by luck, the MFA has a few fine examples in its collection, so I headed down stairs.

The MFA is currently prepping for construction, though, on a major extension, which has really cut down on available gallery space. The Luminists are still up on the walls, due perhaps to their New England connections. A place has been found for the Winslow Homers in an out-of-the-way rotunda. But choices must be made. While Hopper is upstairs, the gallery that formerly held the ashcan paintings, and American work of similar vintage, is now given over to some donor's jewelry collection.

Via Yglesias, we learn of an Air Force General who knows just how to help the long-time Iranian catspaws that we've been pleased to endorse as the Iraqi "government" --- bomb Iran. Matt and his source both astutely observe that this is insane; the source cites the near-certainty that the Shiite militias in Iraq (all of which have Iranian support, even when they're fighting each other) would respond by turning on our troops as one, making just about the entire country impassable to them. Which is true, as far as it goes. But if we look at a bigger picture, it's insane for another reason.

The big picture is that the Chinese leadership is trying to displace us as the dominant world power, in, say, a fifty-year time frame. (Their planning horizon is at least that long). And over the shorter term, to shore up their energy reserves, they've signed deals with just about anyone with oil exports, from our inoffensive neighbors in Canada, to Dubya's bête noir in Venezuela, to the genocidal freaks now running things in Sudan. Almost needless to say, this friendship campaign has not missed Iran, which beyond its oil wells, is already a regional power in its own right, which (for good or ill) is currently aligned to work against us.

So, what's the effect of bombing Iran? To drive them further into the arms of the Chinese, who are trying to make themselves players on the world stage, and will take any allies they can get.

If it was just one loon in the air force, well... Curtis LeMay never got to start World War III. But this loon is probably a stalking horse for our vice-loon, Dick Cheney...