Thursday, September 25, 2008

Just the Facts, Not the Meme, Ma'am

Colbert I. King is a man of impressive credentials. Before becoming a Pulitzer Prize-winning columnist for the Washington Post, he has been a Treasury Department official, World Bank executive, and vice president at what was once known as Riggs Bank.

So it comes as that much more of a surprise that, with the wealth of knowledge he has at his fingertips, he should make the mistake of repeating one of the most egregiously erroneous memes of the current -- if manufactured -- financial panic.

What's even more disturbing is that King could have avoided his error just by reading his own newspaper.

Here is what King had to say in his regular column on Saturday, September 20:

...banks have been foreclosing on homes at a rate not seen since the Great Depression.
Six days earlier, an economic analyst took on this oft-repeated but unproven claim in the pages of the Post's Outlook section. Donald Luskin actually checked out the facts, however, and wrote:

Patient zero in this epidemic is the Democratic candidate for president. As it would be for any challenger, it's in his interest to portray the incumbent party's economic performance in the grimmest possible terms. Barack Obama has frequently used the Depression exaggeration, including during a campaign speech in June, when he said that the "percentage of homes in foreclosure and late mortgage payments is the highest since the Great Depression." At best, this statement is a good guess. To be really true, it would have to be heavily qualified with words such as "maybe" or "probably." According to economist David C. Wheelock of the Federal Reserve Bank of St. Louis, who has studied the history of mortgage markets for the Fed, "there are no consistent data on foreclosure or delinquency going all the way back to the Depression."

The Mortgage Bankers Association (MBA) database, which allows rigorous apples-to-apples comparisons, only goes back to 1979. It shows that today's delinquency rate is only a little higher than the level seen in 1985. As to the foreclosure rate, it was setting records for the day -- the highest since the Great Depression, one supposes -- in 1999, at the peak of the Clinton-era prosperity that Obama celebrated in his acceptance speech at the Democratic National Convention late last month. I don't recall hearing any Democratic politicians complaining back then.

Even if Obama is right that the foreclosure rate is the worst since the Great Depression, it's spurious to evoke memories of that great national calamity when talking about today -- it's akin to equating a sore throat with stomach cancer. According to the MBA, 6.4 percent of mortgages are delinquent to some extent, and 2.75 percent are in foreclosure. During the Great Depression, according to Wheelock's research, more than 50 percent of home loans were in default.

Moreover, MBA data show that today's foreclosures are concentrated in that small fraction of U.S. homes financed by subprime mortgages. Such homes make up only 12 percent of all mortgages, yet account for 52 percent of foreclosures. This suggests that today's mortgage difficulties are probably a side effect of the otherwise happy fact that, over the past several years, millions of Americans of modest means have come to own their own homes for the first time.

One sentence there stands out for me, and bears repeating (italics added, below):
According to the MBA, 6.4 percent of mortgages are delinquent to some extent, and 2.75 percent are in foreclosure.
Luskin's article discusses several other aspects of the economy, as well, and would be a useful tonic to those chicken littles who insist the sky is falling.

With the Wall Street bailout on the near horizon, pickpocketed taxpayers and pickpocket legislators alike would be well advised to study the facts of history rather than just repeating the most frightening rumors that come to their attention.

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