Sunday, October 14, 2012

Book Review: Behind The Housing Crash by Aaron Cleary

This is the second book by Aaron Cleary I've read. The first is Worthless. He blogs as Captain Capitalism. I enjoy the majority of his rants and economic observations.

Behind the Housing Crash was written in 2008, before the crash had fully happened. Aaron worked as a credit analyst at several banks during the crashing years, and totally saw it coming. His management wouldn't listen. They continued to issue bad loans until the entire thing came crashing down on them and the rest of us.

So what caused the housing crash? This is an interesting part. Most people, when I mention this book, want to hear "Bush did it" or "the sub prime borrowers did it!"  Or some other accusation against a single person or group. As if anything in our economy is that simple.

Aaron Cleary credits several things with the housing crash. I will hit the high points. Buy the book if you want all the details. Please buy it from my affiliate link, provided below for your convenience. Aaron Cleary credits several things with the housing crash. I will hit the high points. Buy the book if you want all the details. Please buy it from my affiliate link, provided below for your convenience. The Kindle version is only $5. Isn't preventing another economic crash worth at least that much?
  • The Soft Skin Economy- we have approximately 3 generations who have never been told "No!" They don't like to hear it, and don't want to hear it. They'll just keep asking until somebody tells them yes, or they run into a manager who takes their side and tells the mean credit analyst to make the loan anyway. 
  • Congress, 1978- buy the book for the explanation. Congress rolled out 401k programs in 1978. This effectively made the stock market the Congressionally sanctioned investment. Millions of people with no clue rolled into stocks. Now, rather than buying stocks for the long term payout, people started buying stocks "because I bet I can sell it for more than I bought it for". This lead to a lot of short sighted thinking and things like the tech bubble and various other bubbles. 
  • Low interest rates- Former Fed chairman Alan Greenspan lowered short term interest rates following 9/11. This was necessary to stave off the recession we eventually got following the housing crash. Had this not happened, we would have gotten the recession much earlier. But this had the unintended consequence of all the short term ARMs and Interest Only loans and other bad behavior.
  • Greed- self explanatory. People were far more interested in their own short term gains than long term gains and risk management. This included everybody: bankers, Realtors, real estate developers, borrowers, me, probably you. Yes, I'm sure you had a part to play in all this too. Also greed on the part of the large firms like Goldman Sachs, but that's barely touched on in this book. 
  • "Everybody else is doing it"- everybody else is buying these huge McMansions and cashing out equity to buy Hummers. Maybe I should too. Interest only? Why not!
  • Repackaged mortgages- banks would make loans, then sell them. I saw this with several of my mortgage refinances. I'd get a loan from one bank, then find out a month later another bank would service me. HSBC was the worst. I celebrated when I refinanced out from under them. This reduced a bank's motivation to do a decent credit analysis, because it wouldn't be their problem in a month anyway. Then most of these mortgages were packaged together into one big investment. 
I'd like add a few I picked out:
  • Blind faith- it'll all work out. If I say that in the context of church, you'd laugh at me.  But it happens every day in our economy and nobody bats an eye. All the data indicates certain loans and government programs WILL NOT WORK PERIOD, but people take it on blind faith they will be fine. 
  • Commission structures- bankers get paid by commission. That gives them incentive to make the loans. They don't care what happens after that. What if commission structure were changed to more of a book royalty system? The banker gets a small amount when the loan is made, and is paid a stipend per loan at regular intervals over the life of the loan. If the loan goes into default, the banker stops receiving the royalty. That might give them incentive to make better loans rather than bigger loans. Or make the banker on the hook if the loan goes into default. Yeah, make the banker a cosigner on all high-risk loans they make.
Those were written from my analysis of the book. He mentions commission. I asked a question about it.
I’ll also explore along with Aaron Cleary the Law of Unintended Consequences. He mentions it in the book. When Congress decided to favor the stock market as a retirement mechanism, they hopefully didn’t intend for the tech bubble and housing bubble and all the idiotic day trading. But those happened as an unintended consequence. Hopefully, when “liar loans” were created, nobody intended for them to be abused, but it happened as an unintended consequence.
The economy is a complicated mechanism, and when it goes bad, often there isn’t a simple blame or a simple fix. If you’re looking for one, you need to spend more time reading about the economy and less time listening to talking heads on your favored 24 hours news or business network blabbing about it.

You can buy the book here.

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