Michael Novak’s Shoddy Economic Analysis Part II

Last updated on: July 1, 2009 at 12:14 pm by Morning's Minion

Michael Novak’s Shoddy Economic Analysis Part II 2009-07-01T12:14:06-05:00 Morning's Minion

LOGO Patheos Explore the world's faith through different perspectives on religion and spirituality! Patheos has the views of the prevalent religions and spiritualities of the world.

Almost exactly two years ago, when this blog was first launched, and we were all more naive and innocent (!), I wrote a post entitled “Michael Novak’s Shoddy Economic Analysis“. I took him to task for misreading the economic data to prove his point, which was that inequality did not increase under the Bush administration. Well, folks, everybody’s favorite Catholic laissez-faire liberal has struck again, and this time he muses on the global financial crisis. In a nutshell, he blames it on the government and on poor people. This is what he says:

“government action was the principal villain in the 2009 debacle. It was the federal government that forced banks to make sub-prime loans to poor families (who were known to be unable to pay their mortgages on a regular basis)….The federal government even guaranteed the work of two huge quasigovernment mortgage companies—Fanny Mae and Freddy Mac—that wrote more than half of all mortgages during the fateful years.”

This is so wrong I don’t even know where to start. Let me talk about the global financial crisis, which started in the US subprime mortgage market and spread across the world. The explanation I will give is conventional wisdom, on which nearly everybody agrees. Some might emphasize some points over others, but there is nothing controversial here.

Let me start with the global savings glut, something Ben Bernanke has been talking about for a long time. Basically, the huge increase in global savings driven by China and the oil exporters pushed long-term interest rates to all-time lows. These savers wanted to recycle their funds into US securities, which fed a credit boom. What is bound to happen? Well, cheap money led to mounting debt, and the result was an asset price boom, particularly notable in the housing market. It fueled an environment in which people thought prices would rise forever, and people could make capital gains forever, and debt went through the roof. Now — and this happens time and time again — when you get a credit boom, underwriting standards tend to slip. After all, nobody can lose, so while rain on the parade? This was all aided and abetted by a loose monetary policy, which kept rates low at the short end, and encouraged financial institutions to take on greater amounts of risk.

The second angle is the lax regulatory environment. There were many failures here. Mortgage originators could simply wash their hands of risk by selling it on, thus limiting their incentive to actually monitor it. At the same time, CDOs were created by packaging assets of various quality in one jumbo instrument, and this gave the illusion of safety. Nobody really knew where the bodies were buried and the ratings agencies gave their seal of approval, relying on highly dubious statistical models. Regulators were asleep at the wheel, and did not fully understand the complex interconnections among systemically-important financial firms that proved too big to fail (at least without taking the whole financial system down with them). They stood by when leverage went through the roof, and when firms clearly did not have enough capital or liquidity to support their underlying assets. Market discipline simply did not work.

Were Fannie and Freddie responsible? No. The GSEs might have invented securitization, but this was a private sector affair. More than 84 percent of the subprime mortgages in 2006 (the peak year) were issued by private lending institutions. During 2004-06, the subpime years, the share of subprime loans held by the GSEs fell from 48 perecent to 24 percent. A key reason is that the GSEs were subject to tougher regulation than the private sector. This is not to say that the GSEs were entirely blameless — they did ride the surprime wave to a limited extent, but only out of concern that their market share was dropping fast. Like many other institutional investors, they did so by buying securities that they thought were totally safe.

The next point relates to blaming the subprime crisis on lending to the poor. Again, this is totally off. I’ve addressed this before, and will recap briefly. During the peak of the boom, the private sector made 83 percent of the subprime loans to low- and moderate-income borrowers. Many people on the right are blaming the Community Reinvestment Act of 1977, which required banks to lend in the communities they serve. But top economists like Robert Gorden and Janet Yellen have debunked this myth completely. For a start, the timing is off — the CRA comes from 1977, and was actually weakened by the Bush administration during the subprime boom. Also note that the CRA is restricted to banks and thrifts that are federally insured. In fact, only 20-25 percent of subprime loans came from institutions fully under the CRA. And they were well-known for their good behavior– Janet Yellen (president of the San Francisco Federal Reserve) showed that independent mortgage companies made subprime loans at twice the rate of banks and thrifts. The CRA has actually been a force of moderation.

To get back to the start — if anything is to blame for this crisis, it is the culture of greed, the notion that you can make lots of money by taking financial gambles, by creating something out of nothing. As Pope Benedict noted, “We see it now in the collapse of the great banks that money disappears, it’s nothing…Whoever builds his life on this reality, on material things, on success … builds (his house) on sand.” And speaking of “these fundamental errors that have been revealed in the failure of the large American banks” he noted that “the error at the basis of it is human greed.” Indeed. Too bad Michael Novak refuses to acknowledge such an obvious point.

Previous Post

July 1, 2009

So, One Can Commit Intrinsic Evils In War?

Next Post

July 1, 2009 Defining "Moral Imagination"

Browse Our Archives

Select a Category 2019 A Consistent Ethic of Life Aaron Weldon Abortion absurdity Abuse Scandal Academics Adoption Advent Africa agreement/disagreement with Church teaching Alexander Schmemann Alexham Alterity America Amnesty International Anarchism angels Anglicanism Animals Annual Statistics Anthony Anxietas Apocalyptic Apophatic Appalachia Aquinas Art Atheism Atonement Augustine Authority Baptism Beauty Bible biblical criticism biblical scholarship Bioethics Bishops Black Catholics Black Theology Blackadder Blogs Books Breastfeeding Brett Salkeld Buddhism Bush administration Byzantine Catholic Calvinism Canada Canon Law Capital Punishment Capitalism Caryll Houselander Catholic Blog Awards Catholic Blogging Catholic League Catholic Social Teaching Catholic Worker Movement Catholicity CFL Charity Children Chris West Christ and Culture Christian Democracy Christian Unity Christmas Christology Church Church Doctrine Church History Climate Change Cohabitation Colbert Collegiality Communion Communism Comparative Theology Competition Conferences conscience conscience rights Consequentialism Consistent Life Ethics Consumerism Contraception Contrition Conversion Converts Coptic COVID-19 Creation Critical Thinking Cross Cuba Culture Culture of Death Culture of Life Darfur David Cruz-Uribe David Wheeler-Reed Death Death Penalty Democracy Demons Desert Fathers Devil Dialogue dignity Disability Disarmament discernment Discipleship discrimination Dissent Distributism Division Doctrine Domestic Church Dorothy Day Double Effect Doubt Down syndrome Driving Early Church Easter Eastern Churches Ecclesiology Economics Economy Ecumenism Education El Salvador Election Election 2020 Ellul Embryonic Stem Cell Research Empire Energy Enlighenment Environmentalism Ephraim Radner Episcopal Church epistemology Equality Eschatology Ethics Eucharist Europe Euthanasia Evangelization Evil Evolution Excommunication F.X. Durrwell Facism Facts Fair Trade Faith Family Fashion Feddie Feminism Feminist theology Fertility Fetal Rights Fiction Film Finances First Things flags Folk Religion Food Foreign Affairs Forgiveness Frank Sheed Free Speech Freedom gay & lesbian persons Genocide George W. Bush George Weigel Gerald L. Campbell Girard/Mimetic Theory Global Warming Globalization Gnosticism Good Friday Grace Gratitude Greed Grey Cup 2009 Guadalupe Guest Post Guest Posts Gun Control Gustave Martelet Habitat for Humanity Hans Urs von Balthasar Harry Potter Hate Speech Health Health Care Healthcare Heather King Hebrew Bible Henri de Lubac Henry Karlson Herbert McCabe Heresy HHS Mandate Controversy History Holidays Holiness Holy Spirit Homiletics Homily Homosexuality Hope Hospitality How Far Can We Go? How Far Can We Go? Human Person Human Rights Humanae Vitae Humility Humor Hunger Hunting Identity Idolatry Ignacio Ellacuría Imagination Immigration In Memoriam Income Inequality Inculturation Indigenous People Individualism Inklings Intellect Interdependence Internet Interpretation Interviews Introduction Iraq War Islam Israel Jain James Alison James Martin Jazz Jesus Christ Jews Joe Biden Joe Hargrave Johann Baptist Metz John Allen John Henry Newman John Paul II John the Baptist John XXIII Jonathan Josef Pieper Joseph (the husband of Mary) Joseph Bernardin Joseph Ratzinger Josh Brumfield Journals Joy Judgment Just War Justice Kari Lundgren Karl Rahner Katerina Ivanovna Kenya Keynes Kingdom of God Kyle R. Cupp Labor Language Latin America Law Leanne Ogasawara Legion of Christ Leisure Lent Liberalism Liberation Theology Libertarianism Libya Lies Life life & dignity & responsibility of the human person Literature Little Way Liturgical music Liturgical Year Liturgy Living Simply Living Wage Local Church Lombard Lord of the Rings Louis Dupre Love M.Z. Magic Magisterium Mark DeFrancisis Mark Gordon Marriage Martin Luther Martin Luther King Jr. Martyrdom Marxism Mary Masculinity Matt Talbot Matthew Fish Matthew Levering McCain Media Memorial Day Mennonites Mental Illness mercy Michael Iafrate Middle East militarism Miroslav Volf Mitt Romney Modesty Moral Theology Morality Mormonism Morning's Minion Mother Teresa Music Muslims Natalie Nate Wildermuth Nationalism Native Americans Nature Nazis Neuhaus New Evangelization New York City News NFP nihilism Nonviolence Not Abortion Nova's Ordo Nuclear weapons Nuns Obama Occult Old Age Opus Dei Ordination ordination of women original sin Orthodoxy Oscar Romero Other Voices Pacifism Palestine Palin Papacy Papal Peace Messages Papal Social Encyclicals Particular Affections Partisanship Patriotism Paul Paul Ryan Paul VI Peace Pentimento persecution Personalism Phantastes Philosophy PKD Planned Parenthood Pluralism Poetry Policraticus Politcal Apathy Politics Poll Pope Benedict XVI Pope Francis Pope John Paul II Pope Leo XIV Population Postcolonialsim Poverty Power Prayer Preaching Predictions Predictions for 2012 President Barack Obama priestly formation & discernment Pro-Life Progress Prophetic Witness Proportionalism Public Diplomacy Public Policy Question Quotes Rachel Maddow Racism Radical Catholic Mom Radical Catholicism Raymund Schwager Real Catholic TV Real Presence Reconciliation Reginald Garrigou-Lagrange Religion religious freedom Responsibility Ressourcement Resurrection Rick Garnett Ridiculous Crap You Never Thought You'd See Robert Barron Roe v. Wade Roman Curia Rome Russia Sacraments Saints Salvation History Sam Harris Sam Rocha Same-sex Marriage Saskatchewan Roughriders Satire School of the Americas Science Scripture Seamless Garment Second Vatican Council Seeing Sex sexual violence Sexuality Sia Sin social justice Social Security Socialism Society of Jesus Sofia Loves Wisdom Solidarity Sophia soteriology Soutenus Spirituality Sports St. Dismas St. Joseph Stanley Hauerwas Statistics Stimulus Suffering Sunday Reflections Supernatural Supreme Court Symbolism Syria Taxing Technology Terrorism The State The Tea Party The Trump Administration Theological Anthropology Theology Theotokos Thomas Merton Throwaway Culture Tim Muldoon Tim Riley Tim Tebow Time Titian Tolkien Torture Toys Trade Traditionalism Transgender Transportation Transubstantiation Trinity Truth TV U.S. Affairs Uncategorized Unions unity among people who disagree US Catholicism USCCB Usury Utilitarianism Utopia Valentine's Day Vatican Vatican II Veterans Vicarious Suffering Video Violence Virgin Mary Vocations Voluntary Associations Voluntary Poverty Voting Vox Nova vox nova blog war War and Peace War Strategy Wealth Weirdness Welfare state Women Women Priests Work Woundedness Youth

Select a Month June 2026 May 2025 February 2025 January 2025 July 2024 May 2024 April 2024 March 2024 February 2024 January 2024 December 2023 July 2023 March 2023 January 2023 December 2022 November 2022 October 2022 September 2022 August 2022 July 2022 June 2022 November 2021 September 2021 July 2021 June 2021 May 2021 April 2021 February 2021 January 2021 December 2020 November 2020 October 2020 September 2020 August 2020 July 2020 June 2020 May 2020 April 2020 March 2020 February 2020 January 2020 December 2019 November 2019 September 2019 August 2019 July 2019 June 2019 April 2019 March 2019 February 2019 January 2019 December 2018 November 2018 October 2018 September 2018 August 2018 July 2018 June 2018 May 2018 April 2018 March 2018 February 2018 January 2018 December 2017 November 2017 October 2017 September 2017 August 2017 July 2017 June 2017 May 2017 April 2017 March 2017 February 2017 January 2017 December 2016 November 2016 October 2016 September 2016 August 2016 July 2016 June 2016 May 2016 April 2016 March 2016 February 2016 January 2016 December 2015 November 2015 October 2015 September 2015 August 2015 July 2015 June 2015 May 2015 April 2015 March 2015 February 2015 January 2015 December 2014 November 2014 October 2014 September 2014 August 2014 July 2014 June 2014 May 2014 April 2014 March 2014 February 2014 January 2014 December 2013 November 2013 October 2013 September 2013 August 2013 July 2013 June 2013 May 2013 April 2013 March 2013 February 2013 January 2013 December 2012 November 2012 October 2012 September 2012 August 2012 July 2012 June 2012 May 2012 April 2012 March 2012 February 2012 January 2012 December 2011 November 2011 October 2011 September 2011 August 2011 July 2011 June 2011 May 2011 April 2011 March 2011 February 2011 January 2011 December 2010 November 2010 October 2010 September 2010 August 2010 July 2010 June 2010 May 2010 April 2010 March 2010 February 2010 January 2010 December 2009 November 2009 October 2009 September 2009 August 2009 July 2009 June 2009 May 2009 April 2009 March 2009 February 2009 January 2009 December 2008 November 2008 October 2008 September 2008 August 2008 July 2008 June 2008 May 2008 April 2008 March 2008 February 2008 January 2008 December 2007 November 2007 October 2007 September 2007 August 2007 July 2007 June 2007 May 2007

TAKE THE

Religious Wisdom Quiz

Who led the animals onto the ark?

Select your answer to see how you score.

Isaac Jacob Noah Moses