Thursday, April 15, 2010
Even a little bit of restraint on the GSEs would have helped.
The current financial crisis definitely resulted from government generated moral risk. The massive federal-government-created and -managed enterprises, Freddie Mac, Fannie Mae and the Federal Home Loan Banks, aka Flubs, (henceforth, collectively the GSEs) are ground zero for the crisis. They were simply too big not to dramatically impact the market. Collectively, the GSEs purchase half of the mortgages issued in the U.S. Collectively, they issued most of the mortgage-backed securities (MBSs) currently in circulation. By design, these institutions created a vast moral hazard that built up over four decades until the system collapsed under the weight of risky behavior.
The GSEs created moral risk in several ways.
(1) By design, the GSEs separated the profit earned from a particular mortgage from the risk of issuing that mortgage. ...
(2) By design, the GSEs hid the hazard of buying their MBSs by using their implied government guarantee. ...
(3) By design, the GSEs had much better credit ratings than did any private actors. ...
I can’t repeat this often enough: By design, the GSEs were intended to distort the markets in favor of more-risky lending and that is exactly what we got. The private institutions that failed did so because they (a) mimicked the business model and practices of the GSEs, (b) bought GSE-issued MBSs, and GSE stock, based on their high ratings and/or (3) issued insurance against the default of the GSEs’ MBSs based on their high ratings.
Here are some thoughts from Steve Horwitz:
FMM: A phrase currently en vogue among politicians attempting to expand government power is “systemic risk.” Does such risk exist? If so, where does it occur and what (if anything) should be done to protect against it?
SH: It exists, but it’s largely created by government! The biggest systemic risk is when government policies cause firms to be tied together in ways that are problematic. The implicit guarantees to Fannie and Freddie created huge systemic risk that markets never would. Same with “too big to fail” in general, as well as Greenspan’s promise that the Fed would clean up the results of any asset bubble. Those policies created risks that run through the whole system.
Charlie Gasparino describes the interaction of public and private players resulting in subsidized risk: (by all means read the whole thing)
Mr. Forstmann knows a thing or two about greedy investment bankers: He's been calling them on the carpet for years, most famously during the 1980s when he fulminated against the excesses of the junk-bond era. He also knows that blaming banking greed alone can't by itself explain the financial tsunami that tore the markets apart last year and left the banking system and the economy in tatters.
The greed merchants needed a co-conspirator, Mr. Forstmann argues, and that co-conspirator is and was the United States government.
"They're always there waiting to hand out free money," he said. "They just throw money at the problem every time Wall Street gets in trouble. It starts out when they have a cold and it builds until the risk-taking leads to cancer."
Easy money wasn't the only way government induced the bubble. The mortgage-bond market was the mechanism by which policy makers transformed home ownership into something that must be earned into something close to a civil right. The Community Reinvestment Act and projects by the Department of Housing and Urban Development, beginning in the Clinton years, couldn't have been accomplished without the mortgage bond—which allowed banks to offload the increasingly risky mortgages to Wall Street, which in turn securitized them into triple-A rated bonds thanks to compliant ratings agencies.
The perversity of these efforts wasn't merely that bonds packed with subprime loans received such high ratings. It was also that by inducing homeownership, the government was itself making homeownership less affordable. Because families without the real economic means to repay traditional 30-year mortgages were getting them, housing prices grew to artificially high levels.
This is where the real sin of Fannie Mae and Freddie Mac comes into play. Both were created by Congress to make housing affordable to the middle class. But when they began guaranteeing subprime loans, they actually began pricing out the working class from the market until the banking business responded with ways to make repayment of mortgages allegedly easier through adjustable rates loans that start off with low payments. But these loans, fully sanctioned by the government, were a ticking time bomb, as we're all now so painfully aware.
All of which brings me back to Mr. Fortsmann's comment about policy makers helping turn a cold into cancer. What if the Fed hadn't eased Wall Street's pain in the late 1980s, and again after the 1994 bond-market collapse? What if policy makers in 1998 had allowed the markets to feel the consequences of risk—allowing LTCM to fail, and letting Lehman Brothers and possibly Merrill Lynch die as well?
There would have been pain—lots of it—for Wall Street and even for Main Street, but a lot less than what we're experiencing today. Wall Street would have learned a valuable lesson: There are consequences to risk.
In this manner financial players are incented to misprice risk to the detriment of the financial system and everyone else in the real economy.
More on moral hazard ... here
I'm no economist, but the problem is that deregulation is being seen in a vacuum, without reference to the bigger picture, and I think the bigger picture was influenced -- possibly even dominated -- by something worse than regulation.
I refer to the complete absence of any standards. Not long ago, Glenn Reynolds made a nostalgic reference to the stuffy uptightness of old-fashioned bankers:You know, we may just find that all those "stuffy" and "uptight" traits that old-fashioned bankers used to be mocked for were actually a good thing. . . .Truer words have never been spoken and I've blogged about this before. It used to be that you had to actually qualify for a loan. You had to demonstrate income, creditworthiness, equity in the home, that the downpayment wasn't borrowed, etc. before the stuffy uptight pinstriped guys would even think about giving you a loan. It was good that they were uptight. The "system" (for lack of a better word) worked.
So, what made these stuffy uptight guys decide they could get away with ditching the old uptight unfair standards that said (among other things) that some people are more worthy of getting loans than others?
The answer, as most of us know, is the government. It wasn't as if these guys just stripped off their pinstripes and dove into the economic orgy room; they did something that's really perfectly in character for stuffy uptight guys -- they did as they were told. And they were told not to ever under any circumstances do anything that might in any way be interpreted by anyone at ACORN to have so much as a smidgen of an appearance of anything resembling discrimination. (A word denoting pure, unmitigated evil.)
Bad as the loss of banking standards might be, it's not what I think is the overarching problem.
In my view, the biggest the loss of standards came in the form of the all-encompassing government guarantee. It was a gigantic blank check, and it operated to cover all sins. That no bank could ever be allowed to fail, and every mortgage would be backed by big daddy at FANNIE and FREDDIE meant that there really was no downside to anything, whether deliberate irresponsibility or government-mandated irresponsibility. The taxpayers would be responsible.
It is the height of dishonesty to characterize their behavior as the "free market." There is nothing free about being underwritten by the government, and because taxpayers are forced to foot the bill, it is in fact a profound distortion of the market. A market operating on money which people were forced by the government to pay in cannot be called free. And on a personal level, if I am given a financial guarantee that the taxpayers will be forced to bail me out of anything I do, nothing I do with that money (a guarantee is virtually money) is free, and it is absurd to characterize my behavior as the result of "deregulation."
Just in case it still hasn't sunk in, here again:
The volume of highly risky loans facilitated by the GSEs continued to grow dramatically each year, even after 2003.
Bank regulators required the loosened underwriting standards, with approval by politicians and the chattering class. A 1995 strengthening of the Community Reinvestment Act required banks to find ways to provide mortgages to their poorer communities. It also let community activists intervene at yearly bank reviews, shaking the banks down for large pots of money.
Banks that got poor reviews were punished; some saw their merger plans frustrated; others faced direct legal challenges by the Justice Department.
Flexible lending programs expanded even though they had higher default rates than loans with traditional standards. On the Web, you can still find CRA loans available via ACORN with "100 percent financing . . . no credit scores . . . undocumented income . . . even if you don't report it on your tax returns." Credit counseling is required, of course.
Ironically, an enthusiastic Fannie Mae Foundation report singled out one paragon of nondiscriminatory lending, which worked with community activists and followed "the most flexible underwriting criteria permitted." That lender's $1 billion commitment to low-income loans in 1992 had grown to $80 billion by 1999 and $600 billion by early 2003.
More reiteration of this point and the moral hazard aspect here
In order to curry congressional support after their accounting scandals in 2003 and 2004, Fannie Mae and Freddie Mac committed to increased financing of "affordable housing." They became the largest buyers of subprime and Alt-A mortgages between 2004 and 2007, with total GSE exposure eventually exceeding $1 trillion. In doing so, they stimulated the growth of the subpar mortgage market and substantially magnified the costs of its collapse.and here
It is important to understand that, as GSEs, Fannie and Freddie were viewed in the capital markets as government-backed buyers (a belief that has now been reduced to fact). Thus they were able to borrow as much as they wanted for the purpose of buying mortgages and mortgage-backed securities. Their buying patterns and interests were followed closely in the markets. If Fannie and Freddie wanted subprime or Alt-A loans, the mortgage markets would produce them. By late 2004, Fannie and Freddie very much wanted subprime and Alt-A loans. Their accounting had just been revealed as fraudulent, and they were under pressure from Congress to demonstrate that they deserved their considerable privileges.
“Without [the GSEs’] commitment to purchase the AAA tranches” of the bulk of the subprime mortgage-backed securities issued between 2005 and 2007, “it is unlikely that the pools could have been formed and marketed around the world.”
To be sure, the investment banks were more than happy to buy up the rest of the toxic debt, but one reason these banks took on too much leverage was their confidence that, in the event of a downturn, the Fed would cut interest rates — and keep them low — to stimulate the economy. They called this “the Greenspan put” after former Fed chairman Alan Greenspan (a “put” is a financial option purchased as protection against asset-price declines).
If the media were honest...
This was completely foreseeable and in fact many people did foresee it. One political party, in Congress and in the executive branch, tried repeatedly to tighten up the rules. The other party blocked every such attempt and tried to loosen them.
Furthermore, Freddie Mac and Fannie Mae were making political contributions to the very members of Congress who were allowing them to make irresponsible loans. (Though why quasi-federal agencies were allowed to do so baffles me. It's as if the Pentagon were allowed to contribute to the political campaigns of Congressmen who support increasing their budget.)
Isn't there a story here? Doesn't journalism require that you who produce our daily paper tell the truth about who brought us to a position where the only way to keep confidence in our economy was a $700 billion bailout? Aren't you supposed to follow the money and see which politicians were benefiting personally from the deregulation of mortgage lending?
I have no doubt that if these facts had pointed to the Republican Party or to John McCain as the guilty parties, you would be treating it as a vast scandal. "Housing-gate," no doubt. Or "Fannie-gate."
Instead, it was Senator Christopher Dodd and Congressman Barney Frank, both Democrats, who denied that there were any problems, who refused Bush administration requests to set up a regulatory agency to watch over Fannie Mae and Freddie Mac, and who were still pushing for these agencies to go even further in promoting sub-prime mortgage loans almost up to the minute they failed.
Even the New York Times reported in 2003 that attempts were made to reign things in:
The Bush administration today recommended the most significant regulatory overhaul in the housing finance industry since the savings and loan crisis a decade ago.
Under the plan, disclosed at a Congressional hearing today, a new agency would be created within the Treasury Department to assume supervision of Fannie Mae and Freddie Mac, the government-sponsored companies that are the two largest players in the mortgage lending industry.
The new agency would have the authority, which now rests with Congress, to set one of the two capital-reserve requirements for the companies. It would exercise authority over any new lines of business. And it would determine whether the two are adequately managing the risks of their ballooning portfolios.
The plan is an acknowledgment by the administration that oversight of Fannie Mae and Freddie Mac -- which together have issued more than $1.5 trillion in outstanding debt -- is broken. A report by outside investigators in July concluded that Freddie Mac manipulated its accounting to mislead investors, and critics have said Fannie Mae does not adequately hedge against rising interest rates.
This attempt was thwarted by political protectors.
Last Tuesday, Rep. Barney Frank (D-MA) finally got around to it. With Treasury Secretary Tim Geithner as the guest star, the House Committee on Financial Services convened to ponder “the future of housing finance” — specifically, how to clean up in the aftermath of the collapse of Fannie Mae and Freddie Mac. So-called government-sponsored enterprises, or GSEs, Fannie and Freddie have now drained hundreds of billions of taxpayer dollars with no end in sight.
But while the GSEs went belly-up, costing Americans dearly, the fortunate few sitting on their Boards of Directors got filthy rich. These same directors — some of the biggest names in Democratic Party politics and business — failed spectacularly to fulfill their fiduciary obligations.
A federal report by the Office of Federal Housing Enterprise Oversight condemned the boards of both Fannie and Freddie, calling their actions contributing to the housing meltdown “malfeasance.” Freddie Directors like Emanuel were blasted for failing to confront the “management issues that were root causes of many of the problems that led to the ongoing restatement of the financial reports of the Enterprise,” and permitting management to profit from cooking the books to the tune of $5 billion in 2003 alone.
But even a brief stay on the Fannie or Freddie Boards was its own source of fat profits. Among the rewards for Democratic Party “public service,” a lucrative board membership on Fannie and Freddie was considered the Taj Mahal of plum positions. Now, as the housing market limps forward and there are warnings of a new wave of foreclosures, the culpable coterie remains largely anonymous.
What’s more, this group of lifetime political hacks puts the Obama administration at risk, just as it struggles to forge a way forward through the financial wreckage wrought while America’s wealthiest, most powerful Democrats made their careers.
Geithner specifically pinpointed the beginning of Fannie and Freddie’s abuses “in the late 1990s and in the last decade,” when boards permitted “a dramatic increase in risk on their balance sheets and a substantial erosion in underwriting standards more broadly.” These actions “caused a huge amount of damage,” Geithner concluded.
The secretary did not name names, but they are public record: a litany of Clinton associates and friends whose success in propelling themselves and one another into the stratosphere of American high society has earned them a reputation as crony capitalists.
If you still haven't had enough, here's "fun with Barney."
Update: Roger Lowenstein writes in the NYT:
Fannie and Freddie developed as tools of credit enhancement; direct handouts offended laissez-faire sensibilities, whereas loan guarantees were nearly invisible. The practice of disguising government aid dates to the rescue of farmers and homeowners during the Depression. Mortgage capital barely existed and so, in 1934, the New Deal chartered the Federal Housing Administration to stimulate mortgage lending. Within a generation, the government was operating 74 separate programs to bolster credit through guarantees, insurance or outright loans, according to Sarah Quinn, a Ph.D. candidate at the University of California, Berkeley, who researched these programs. The point, Quinn says, was nearly always the same: “to camouflage, hide, or understate the extent to which [the U.S. government] actually intervened in the economy.”
No organizations epitomized the charade so well as Fannie and Freddie. Fannie was created in 1938 to purchase mortgages and allow lenders to write more loans. In the ’60s, when the mortgage industry sputtered, the Johnson administration began to use Fannie to sponsor securitizations — that is, to guarantee pools of mortgages and sell them to investors. A House committee in 1966 saw what was, then and now, the fundamental hazard with such guarantees: to investors “it makes no difference what the quality of these assets are.”
President Johnson was perfectly willing to let Fannie backstop investors, but he had a problem. Every mortgage Fannie purchased went on the government’s books, which were already strained by the Vietnam War. After valiant efforts to manipulate the budget, Johnson hit on a solution — privatize Fannie, so that its expenditures would be somebody else’s problem.
The clever twist was that Fannie, which exited the public sector in 1968, wasn’t wholly separate. Investors viewed Fannie, and its new sibling, Freddie, as having the implicit backing of the Treasury. This lowered the companies’ costs and arguably led to lower interest rates for borrowers.
As long as Fannie and Freddie stuck to conservative underwriting, the arrangement seemed to work. But Congress was eager to use the twins for political purposes, like increasing homeownership and affordable housing. As Dwight Jaffee, a professor at the Haas School of Business at Berkeley, observed, legislators persuaded themselves that Fannie and Freddie could further such causes “basically at no cost.”
When Fannie and Freddie began to face competition in their business of securitizing loans and providing liquidity to the mortgage market, their profits and stock prices took a nosedive. Seeking to recoup, the firms took more risk. And thanks to their implicit Treasury support, they could borrow virtually at will. Eventually, their debts reached the absurd level of 100 times their capital. When mortgage values tanked, a bailout was unavoidable.
Are the firms really so indispensable? Unlike during the Depression, a private market for mortgages does exist (albeit, it is dormant now). The government might consider making a calculated exit. A strategy proposed by Jaffee is for Fannie and Freddie to gradually raise the fees they charge for guaranteeing the value of mortgage securities. At some point, private companies would be able to securitize mortgages for less, and the business would shift to the private sector. Functions the market will not support (like helping affordable housing) are best transferred to the government, financed on-budget.
America may want a private mortgage market, or it might want the security of a subsidized market. What every administration since L.B.J.’s has coveted and what has always been a lie is that we can get a subsidized market free.
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[Most emph. orig.] "There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.
Human Action, a Treatise on Economics, Ludwig von Mises (Fox & Wilkes, 4th rev. ed., 1963)
"A quarter century of uninterrupted and unprecedented credit expansion begun by the US in the 1980s, however, came to an abrupt halt months later in August 2007 when global credit markets froze, precipitating an economic crisis the severity of which surprised all except those who expected it.
"Among those who foresaw the crisis was Peter Warburton. In 1999, Warburton warned in his extraordinary book, Debt & Delusion, that changes in our financial system masked deep maladjustments that would someday make themselves known, that rapidly rising valuations would readjust, perhaps violently, and that we were particularly blind in recognizing the dangers which confronted us.
"Warburton was not an Austrian economist who believed in the inevitable collapse of excessive credit driven markets. Warburton instead believed that debt-based money and credit aggregates controlled by central bankers were critical components of modern functioning economies. [...]
"the leading economies..have fallen victim to a dangerous illusion, related to the anarchic development of global capital and credit markets. … the thesis is very straightforward: that both citizens and governments have become heavily addicted to borrowing and no longer care about the consequences.
"Seen through Warburton’s eyes, the delusions of modern economists are many, such as central banking’s believed containment of inflation, what economists such as Paul Samuelson and Ben Bernanke call “the great moderation”, which is, in fact, but a communal delusion; a collective and fatal error the consequences of which have yet to be fully experienced. [Emph. add.]
PUBLISHING THE TRUTH A THREAT TO THEIR KINGDOM
"Published in 1999, the first printing of Debt & Delusion sold out, befitting a work of elegantly written prose and unique insights. In the book industry, it is expected that a sold out first printing is followed by a second and a third and so on until public demand is satisfied. [...] But although Debt & Delusion sold out, it was never reprinted by its original publisher."
And, because I have a longer memory than some, I can think of other instances in which people were begged to accept money as loans that they hadn't asked for.
It will not surprise anyone that often, these loans end up sour.
But GSEs have nothing to do with that. Such things went on long before anyone ever thought of a GSE.
I would listen more thoughtfully to Chicago School schoolma`ms if any of them ever showed the slightest interest in past economic behaviors.
GSEs may have had a baleful effect recently, but they were not and could not possibly be 'the cause.'
Nor could letting LTCM go have been 'the cure.'
It is amusing to recall that when the NY Fed brought 24 big bankers into a small room to let LTCM down easy, at least half of the men -- highly compensated men, experts and geniuses, with an implacable theory to support them -- learned nothing. Zero, zip, nil, nada, nothing. Because 10 years later, they were doing what LTCM had done and going bust for the same reason.
Moral hazard was involved in only the sketchiest way. As Frank Zappa once said, some people say hydrogen is the most abundant thing in the Universe, but that's wrong. Stupidity is the most abundant thing in the Universe.
I was pretty ticked at the time, but had I known that people with no hope of paying them, would have loans pressed upon them for the greater glory of fairness (and to line the pockets of the despicable dems in congress and their accomplices on Wall St), I might have thought better of it.
And always the shadowy cabal of Masters-of-the-Universe Dems are pulling the marionette strings, while poor li'l weak, tender, and ineffective W. Bush sobbed with frustration in his lonely, lonely Oval Office...
BTW - did you see this?
One political party may not have a monopoly on contributing to the problem, but one party was more resistant to heading off problems.
Huh? By whom?
The role of GSEs was to act as a secondary market for mortgages, which was required to facilitate the CRA.
The only way to implement the CRA was to ditch lending standards.
The only way to get around risk pricing on those mortgages was to dilute the risk through bundling.
I happen to think that both Republicans and Democrats had good intentions here, although the bulk of reality challenged idiocy rests with the Democrats, for whom intentions more often trump results.
I also happen to think that home ownership helps create stable communities.
I don't know how to reconcile these two assertions.
But it is very clear that the CRA and GSEs injected a moral hazard toxin into the banking system.
Which makes blaming the Chicago school akin to blaming your arm for the dog bite.
But my mortgage was for only $21,000.
At about the same time, a Chicago conglomerator, whose name I now forget, was apparently making lots of money, so a Chicago bank pressed him to borrow $100,000,000.00 from them.
Sure, he said, I'll take your $100,000,000.00. Unlike me, he didn't have to show any income stream to cover repayment, or even interest; and unlike me, over the next couple of years, his net income did not exceed $25,000.
I repaid my loan. He didn't.
It is a myth to think that bankers treat each other or their golf buddies the way they treat you and me.
It only happens that bundled residential mortgages probably precipitated the current crisis. It could have been lots of other things. In a way, it probably was lucky that it was only residences that popped. At least with residences there were tangible assets that could be worked out.
Wall Street was a bucket shop. There were many more trillions of bets (default swaps) waiting to implode, and they were not backed by anything.
The New Dealish methods that were resorted to by, say, Mitch McConnell, and which worked to the degree they could have been expected to work, would have been of no use if a couple big banks had been caught with their swaps down.
There was no government-sponsored moral hazard involved in these bets, which were neither regulated nor even reported.
The Chicago School is desperate to save its ideology, but it cannot do it and still pass reality tests.
Unsupervised markets crash.
Draconian regulations aren't necessary if the government just stays out of our lives. There are already laws against fraud, stealing, etc. Enforce them and we're home free.
*Union contracts included
If you're going to kick anyone who profited from the FIRE bubble, whilst knowing that it was a fraud, out of the Republican Party, then you're going to be very lonely indeed.
It'll be you & Ron Paul holding the national GOP convention in the ballroom of the Sioux City airport Hilton.
"...you've already used the "It's Bush's Fault" meme past its sell date."
Really!!! I did not know that TRUTH had a "sell-by" date. Learn somethin' new every day.
"BTW - did you see this?"
Yup. Apparently WaMu employed only Democrats, right? Not a Republican in the bunch, eh?
But that article points out something useful, which is that it's ludicrous to try to pin the FIRE bubble on the CRA and ACORN. So it's nice to see you coming around, gaining a greater understanding of the scope of the problem.
"There are already laws against fraud, stealing, etc. Enforce them and we're home free."
Exactly. Exactly. EXACTLY.
It's because the Bush the Younger admin. REFUSED to enforce such laws with regard to Wall Street that he must accept the lion's share of the blame for the subsequent collapse.
Is it W. Bush's fault that the bubble began? No, it isn't.
But it is his fault that he did nothing effective to stop it.
One can claim that the evil Dem Congress thwarted him, but then one is saying that Bush was a weak and ineffective President - not the kind of legacy that he hungered to leave.
And in any case, going through Congress is only one avenue open to the President of the United States. That W. Bush did NOTHING after Congress kicked his keister was the true failure.
"One political party may not have a monopoly on contributing to the problem, but one party was more resistant to heading off problems."
Sure. But the other party was more culpable in creating the problems, so it's probably a wash.
For instance, Phil Gramm and Hank Paulson are Republicans, and between them they were largely responsible for gutting Great Depression I era banking restrictions, and allowing banks to leverage up 40:1 - the results of which were both catastrophic and surprisingly swift. We crashed LESS THAN TEN YEARS after Glass-Steagall was repealed, and LESS THAN FIVE YEARS after the SEC agreed to let banks leverage themselves to infinity and beyond.
"The only way to get around risk pricing on those mortgages was to dilute the risk through bundling."
But neither the CRA, the GSEs, nor risk-management required banks to knowingly make toxic loans to people that they assumed were lying, on homes that everyone knew had been intentionally misappraised.
Nobody was forced to participate in the fraud.
I do agree that the wild abandon and intentional "wink, wink" lack of due diligence with which the GSEs purchased fraud-laced mortgages and CDOs was a moral hazard which helped to fuel the mania, rather like punchbowls full of cocaine and meth at a Hollywood or Davos party.
"Wall Street was a bucket shop. There were many more trillions of bets (default swaps) waiting to implode, and they were not backed by anything."
You've got the tense wrong - those bets are STILL waiting to implode, and once the housing market in the U.S. completes its plunge to another 30% down from today, we're likely to see just how much damage those bombs are gonna do: Are we talking hand grenades, or MOABs?
Interesting times, to be sure.
So even more reckless and irresponsible would be the promotion of policies, rules and regulations that add to instability. Two posts down, more to follow.
Glass-Steagall, for example, was a regulation that encouraged stability. During its reign, banks were stable, they grew enormously and most Americans felt prosperous.
It takes a particular kind of fanaticism to declare 1) that this is a bad system; and 2) that I have a system that's better, even though when that system was tried before, it produced much, much worse results.
Whether residential prices decline a lot more or not, we know for certain (it isn't often you get this kind of certainty) that commercial prices are going far, far down.
I suspect that this will have its impact on residential prices, and the effect could hardly be good (unless you are a buyer).
In one sense, residential prices have already deflated to nothing. Condos in Florida, for example, are unsalable. I suppose you could say that, well, yes, one could be sold if the price were marked down 90%, but few people are prepared to sell at all on such terms.
There's been thousands of banking systems since the beginning of trade and commerce. Which one are you referring to in (2)?
Joe Stiglitz says it better than I can: here
When government sponsored agencies (such as Fannie Mae and Freddie Mac) control 90% of secondary mortages (circa 2003), the market can hardly be called "unregulated".
The lesson I draw from both your cites is that detailed regulation is doomed to failure, therefore it falls under the "systemic negative" category, and that you nevertheless support the regulatory effort despite its failures.