Thursday, Jan. 7, 2010
Written 9:45 a.m.
FINALLY, DOWN: For the first time since Thanksgiving, mortgage rates fell in Bankrate's weekly survey.
The average 30-year fixed fell 7 basis points, to 5.26 percent. There weren't many people taking advantage of the drop, though. Mortgage applications are at a 12-year low, according to data from the Mortgage Bankers Association. Things usually are slow this time of year, but activity is particularly light right now.
BANK BUTCHER FOR THE WORLD: The New Yorker's John Cassidy has an article in the Jan. 11 issue about the Chicago School economists and their reaction to the financial meltdown. Economists at the University of Chicago laid the intellecutal groundwork for the bank deregulation that, in my opinion, led to the near collapse of the banking system.
Cassidy went to the University of Chicago to interview some of these economists. "The overall reaction I encountered," he writes, "put me in mind of what happened to cosmology after the astronomer Edwin Hubble, in 1929, discovered that the universe was expanding, and was much larger than scientists had believed. The profession fell into turmoil. Some physicists stuck to the existing theories, which posited a stable universe. Others, Albert Einstein included, tried to adapt the old models to Hubble's data. Still others attempted to come up with a new account of how the galaxies formed; it was this effort that ultimately produced the theory of the big bang."
Most of the Chicago economists belong to that first group -- the one that denies reality because it conflicts with their mathematical theories. These economists -- among them, Eugene Fama and John Cochrane -- believe that markets are efficient and that people make rational economic decisions. I guess they never shadowed a first-time homebuyer who bought an overpriced house with a risky loan. Someone like that doesn't fit the theory.
One of Cassidy's more eye-popping revelations is that the economists of the Chicago School tended to downplay the importance of the banking sector. In fact, some of them regarded money as unimportant. I'm trying to wrap my head around that notion. It's like finding out that there's an astronomer who doesn't think gravity is important.
When Cassidy asked Fama about the credit bubble that burst, Fama replied: "I don't know what a credit bubble means. I don't even know what a bubble means. These words have become popular. I don't think they have any meaning."
I think "credit bubble" means that there was a speculative frenzy in debt instruments such as mortgage bonds. As prices of these bonds zoomed, yields and interest rates plunged. Speculators used this cheap money to fuel a boom in house prices. Owner-occupant homebuyers joined the stampede because they feared that, if they didn't buy immediately, they would be forever priced out of homeownership. Then, when mortgage investors demanded that lenders buy back bad subprime loans, the bubble burst in two stages -- one in February and March of 2007, and then in August of that year.
That's a one-paragraph definition of this bubble. I suppose it doesn't fit Fama's theory.
The article is available online only to New Yorker subscribers. Otherwise, you'll have to buy it at the newsstand. However, the New Yorker Out Loud podcast features a 10-minute interview with Cassidy. If you don't subscribe to the podcast on iTunes, you can find it here on the magazine's Web site.
Read more Mortgage Matters blogs.