AEI’s March 28, 2007 Subprime Seminar – VI
Doom’s effort to produce a complete transcript of AEI’s March 28th seminar on the Subprime Mortgage Crisis [1] is now about one half done. The plan from this point is to start at the beginning and work through the segments not yet covered.
Seminar moderator Alex Pollock did a good job of teeing up the discussion. He helped put the subprime meltdown into perspective by quoting a famous 19th century economics journalist on that era’s bubbles and manias. We in the 21st century may have made progress in lots of areas, but on this story it would seem that we’ve not advanced at all. Pollock frequently writes on housing and banking issues, and is often asked for expert testimony. In fact his most recent effort [2] was published just yesterday.
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Previous partial transcripts of the March 28th event:
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It was a real pleasure to produce this transcript, even though I now see there is a PDF version of Pollock’s introductory remarks on the event site. I’ve just added emphasis in a few places. Transcript times represent the audio recording of the seminar. The video times run about 20 seconds greater.
Alex Pollock [0:00:00]: – We’ll begin. Welcome to our discussion of "Mortgage Credit and Subprime Lending: Implications of a Deflating Bubble".[1] The conference is cosponsored by the American Enterprise Institute and the Professional Risk Managers International Association, and on behalf of both, let me say how pleased we are to have you all here today. I’m Alex Pollock, a Resident Fellow at AEI, and we have an excellent panel, whom I will introduce in a moment. [0:00:30]
Briefly to set some context, we had a big housing boom with unprecedented increases in real house prices facilitated by a mortgage lending boom and, notably, a subprime mortgage lending boom. As we all know, the subprime boom is over and the bust is here. Former enthusiasm has been replaced by large financial losses, the bankruptcy or closing of numerous subprime lenders, layoffs, accelerating defaults and foreclosures — what Moody’s has just referred to [3] as a stunning erosion in mortgage credit quality, a liquidity squeeze, and of course escalating political recriminations. What was not so long ago praised as creative or innovative expansion of homeowership is now described as an irresponsible and culpable activity. [0:01:35]
How much more bust will we have? Is this problem confined to the subprime sector, as a whole panel of regulators told the Congress yesterday? [4] Or will problems spread to other parts of the mortgage market. What are the implications for house prices, that is, the market value of the most important asset for households by far? What are the implications for the market for mortgage related securities and the housing industry? And are there wider implications for monetary policy and the overall economy. [0:02:13]
Of course, and needless to say, booms and busts are hardly new. As they recur in financial history, they differ in detail, but they display the same general patterns. You would think that we would learn, but we don’t. [0:02:33]
I personally can never think about this subject without recalling the marvelous Victorian prose of Walter Bagehot in Lombard Street published [5] in 1873. Some of you who know me have heard this before.[6] And you should enjoy it again as I quote:
"… The mercantile community will have been unusually fortunate if during the period of rising prices it has not made great mistakes. Such a period naturally excites the sanguine and the ardent; they fancy the prosperity they see will last always, that it is only the beginning of a still greater prosperity. They altogether over-estimate the demand for the article they deal in or the work they do. They all in their degree, and the ablest and cleverist the most, … trade far above their means. Every great crisis reveals the excessive speculations of many houses no one before suspected. …"Bagehot continues … [0:03:38]
"… The good times of too-high price almost always engender much fraud. All people are most credulous when they are most happy; and when much money has just been made, when some people really are making it, and when most people think they are making it, there is a happy opportunity for ingenious mendacity. Almost everything will be believed for a little while, …" [0:04:06]Alas, how true in 1873, and in 2007.
We have a distinguished panel to discuss the implications of the deflation of our most recent bubble. Their detailed biographies are in you conference material. We’ll hear first from Desmond Lachman, who’s a Resident Fellow at AEI, having previously been a Wall Street economic stategist. His research includes global currencies and emerging market economies, multilateral lending institutions, and lately the housing bubble. Desmond and I have been reinforcing each others’ bearish outlook on this for some time now. [0:04:46]
Next will be Nouriel Roubini, who’s next to me here, who is Professor of Economics at the New York University Stern School of Business, and is Chairman of Roubini Global Economics. He’s also served as the Senior Economist for International Affairs at the White House Council of Economic Advisors among many other assignments, and written provocatively on today’s topic. [0:05:10]
Our third speaker will be Chris Whelan [personal home page], who is over next to Desmond, who is Senior Vice President and Managing Director of Institutional Risk Analytics, to which he brings experience as an investment banker research analyst and a journalist, including working in both equities and fixed income, as well as risk management, and Chris has been my excellent partner in organizing this conference and thank-you again, Chris. [0:05:37]
Tom Zimmerman will be our last speaker, bringing us first hand securties market perspective. Tom is a Managing Director at UBS Investment Bank, where he manages the firm’s mortgage credit and Asset Backed Securities research. His research has appeared in numerous fixed income reference works, and he’s a member of the UBS team voted first in the latest institutional investor survey of fixed income analysts. [0:06:05]
Each member of the panel will speak for from 12 to 15 minutes, after which we’ll give the panel a chance to respond to each other or make comments. We’ll then open the floor to your questions, with adjournment scheduled for 4 o’clock. [0:06:21]
And now the panel. Desmond, you have the floor. [0:06:25]
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Notes and References
[1]: "Mortgage Credit and Subprime Lending: Implications of a Deflating Bubble", Event, American Enterprise Institute & Professional Risk Managers’ International Association, March 28, 2007.
[2]: "Clear and Practical Mortgage Disclosure", Testimony by Alex Pollock, Committee on Public Services and Consumer Affairs (Council of the District of Columbia) / AEI, June 8, 2007.
[3]: "Record foreclosures hit mortgage lenders", by Noelle Knox, USA Today, March 13, 2007.
"There’s been a stunning erosion of mortgage quality," said Mark Zandi, chief economist at Moody’s Economy.com. "It’s primarily in the subprime market, but the entire market is weakening … and that adds to problems in the housing market, and by extension the broader economy." Retailers are already feeling the effect, he said, because homeowners tend to spend less when they fear their homes are worth less.
[4]: "Subprime and Predatory Mortgage Lending: New Regulatory Guidance, Current Market Conditions and Effects on Regulated Financial Institutions", hearing, US House Committee on Financial Services — Subcommittee on Financial Institutions and Consumer Credit Hearing, March 27, 2007. There is testimony by Pollock on the hearing site.
[5]: "Lombard Street: A Description of the Money Market (1873)", by Walter Bagehot, Project Gutenberg Etext.
[6]: "Credit Crack-Up", by Alex Pollock, WSJ / AEI, March 12, 2007.
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John,
Just to be fair I think you should show that this guy Pollock has an ox to gore in this one, he has personally tried to compete against Fannie Mae. The AEI does as well, they are systematically trying to dismantle anything born of the New Deal. It should be noted that much of the failed policies of this current administration were born at AEI. It is also alleged that the AEI was trying to bribe scientist to do a hit job paper to discredit global warming. So in a nutshell when I see anything the AEI puts out my eyes tend to glaze over. I find them suspect at the very least.
http://www.businessweek.com/magazine/content/03_31/b3844097_mz020.htm
http://en.wikipedia.org/wiki/American_Enterprise_Institute
http://www.fair.org/index.php?page=1449
http://www.guardian.co.uk/international/story/0,,2004230,00.html
http://www.pfaw.org/pfaw/general/default.aspx?oid=2070
Metro -
Mr Maloni, a retired senior Fannie lobbyist argues much the same thing at his Bill Maloni’s GSE Blog. The political dichotomy on this issue is palpable. I don’t remember the bribery issue (although it rings a bell) but I have examined extremely egregious, I dare say evil, efforts on ecology issues on the AEI web site. I have great respect for the institute’s banking experts, but AEI comes with a large dose of right wing institutional bias, even (especially) the serious researchers.
John,
I would argue it really is not even right wing but neocon bias. Calling it right wing is insulting to conservatives. I note that one of the AEI fellows Newt Gingrich is already distancing himself from the Prez calling him incompetent just this past week. And yes you can call them evil, I do!
Metro -
I’d like to be a bit selective. There are some really worthy gentlemen at the AEI. On the other hand, on the subject of ecology, this was evil.
I did not know Chrichton was on their list too. Figures. He is a jerk IMHO.