…in which they described the new policies and procedures as “inconsistent with many of the most basic principles we teach.” Among their complaints: “the absence of any adequate opportunity to discover the facts charged and to confront witnesses and present a defense”; the designation of a Title IX compliance officer, “rather than an entity that could be considered structurally impartial,” as investigator, prosecutor and judge; “the failure to ensure adequate representation for the accused,” especially for lower-income students. The professors also faulted the university for having “apparently decided simply to defer to the demands of certain federal administrative officials,” and law-school administrators listened. They adopted new procedures, independent of the university’s and far friendlier to due process.”, “Harvard Law Pushes Back”, Wall Street Journal

Review & Outlook

Harvard Law Pushes Back

Even liberals objected to Obama’s lack of due process in sexual misconduct cases.

The University of Virginia held a two-day conference last February on “Sexual Misconduct Among College Students.” One of the speakers was the Education Department’s Assistant Secretary for Civil Rights, Catherine Lhamon, who touted her office’s efforts to compel colleges and universities, under pain of losing federal funds, to adopt draconian policies on sexual harassment and assault.

These policies have raised serious concerns about due process and basic fairness for the accused, and an audience member asked Ms. Lhamon how she planned to deal with such “push-back.” Her reply: “We’ve received a lot of push-back, and we need to push forward notwithstanding.” The recent experience of Harvard Law School demonstrates the value of pushing back.

Photo: Getty Images

Both Harvard Law and Harvard College, the university’s undergraduate division, were on the Office of Civil Rights’ list of 55 institutions under investigation for violations of Title IX, the law that is the basis for the OCR’s sexual-misconduct mandate. Effective with the 2014-15 academic year, Harvard’s administration instituted universitywide “Interim Policies and Procedures” designed to satisfy the OCR’s demands.

Most institutions yield to OCR’s pressure without significant dissent. But at Harvard, 28 law professors—including liberal luminaries Elizabeth Bartholet, Alan Dershowitz, Nancy Gertner, Janet Halley, Duncan Kennedy and Charles Ogletree —signed an open letter, published in the Boston Globe, in which they described the new policies and procedures as “inconsistent with many of the most basic principles we teach.”

Among their complaints: “the absence of any adequate opportunity to discover the facts charged and to confront witnesses and present a defense”; the designation of a Title IX compliance officer, “rather than an entity that could be considered structurally impartial,” as investigator, prosecutor and judge; “the failure to ensure adequate representation for the accused,” especially for lower-income students.

The professors also faulted the university for having “apparently decided simply to defer to the demands of certain federal administrative officials,” and law-school administrators listened. They adopted new procedures, independent of the university’s and far friendlier to due process.

Accused students will now have the right to a lawyer and access to financial assistance if they need it. Cases will be adjudicated by an independent panel rather than by the Title IX compliance officer. On Dec. 30 the OCR accepted the new procedures in a settlement agreement with Dean Martha Minow.

The resolution does not address all of the law professors’ concerns. Although the law school has improved its procedures, it is still subject to the university’s policies.

The professors are concerned that these policies define sexual harassment in a way “that goes significantly beyond Title IX and Title VII law” and impose “rules governing sexual conduct between students both of whom are impaired or incapacitated” by alcohol or other drugs, which are “starkly one-sided as between complainants and respondents.” Such impairment vitiates an accuser’s consent but is not a defense for the accused.

Dean Minow also agreed to OCR’s demands to modify the procedures in ways that raise further due-process concerns. The law school must include “a statement that complainants have a right to proceed simultaneously with a criminal investigation and a Title IX investigation,” which could make it impossible for an accused student to defend himself in the university proceeding while preserving his right against self-incrimination.

And it must adopt an “explicit prohibition of public hearings in cases involving sexual assault or sexual violence,” so that it will be difficult for the public or the press to monitor the process for abuses.

Still, the law school’s new procedures are a significant improvement over the university’s, and they promise more fairness than the kangaroo-court systems many universities have adopted under OCR pressure. The investigation of Harvard College is still under way, and the university could do far worse than to follow the lead of Harvard Law, the school that pushed back.

…The interest savings to Treasury due to the difference in the “market” rate of interest that would have been paid under normal circumstances on its longer-term debt versus the artificially low interest rate actually being paid as a result of the Fed’s extraordinary polices has to be borne by someone.”, John Keener, Charlotte, N.C.

Letters

Fed Does Help Treasury Make Money

Regarding Robert Eisenbeis’s letter of Jan. 20: While I generally agree with his well-reasoned accounting analysis as to the “true substance” of “intragovernmental fund flows,” in the current environment the Federal Reserve’s actions have had the same effect as generating revenue for the Treasury.

To the extent of its debt held by the Fed, Treasury has been able to effectively borrow funds at a rate equal to the nominal rate paid by the Fed on banks’ excess reserves. But there has been even bigger savings to Treasury. By maintaining artificially low long-term interest rates through its QE initiatives, the Fed’s actions have resulted in savings to Treasury on all of its debt issuance.

Those savings have come at a significant cost to investors as the Fed’s actions have resulted in an income transfer from savers to borrowers, including the Treasury. The interest savings to Treasury due to the difference in the “market” rate of interest that would have been paid under normal circumstances on its longer-term debt versus the artificially low interest rate actually being paid as a result of the Fed’s extraordinary polices has to be borne by someone. To the extent of the debt that has been funded by the U.S. economy, the savings to Treasury effectively represents a cumulative “tax” on the U.S. economy.

But even more troubling is that the Fed’s actions are also having a long-term negative impact from a geopolitical and security perspective as it debases the debt held by central banks outside the U.S., thus hastening the demise of the dollar as the global reserve currency. The price to be paid will be well beyond the current interest savings to the American taxpayer.

John Keener

Charlotte, N.C.

Comments from Mike Perry, former Chairman and CEO, IndyMac Bank, January 30, 2015:

I just received Peter J. Wallison’s (of the American Enterprise Institute) new book Hidden in Plain Sight: What Really Caused The World’s Worst Financial Crisis And Why It Could Happen Again and am going through it….love the Preface, Basics, Introduction, and fabulous testimonials (some very smart and important people said very nice things about it book and his non-mainstream view about the root-cause of the 2008 financial crisis…). I mostly a agree with Mr. Wallison….although he is a little short on macroeconomic, monetary policy, balance of payments, etc. that also played important roles. I have already made a few postings from his  excellent book and plan to make some more. Also saw his AEI colleague Edward Pinto’s WSJ OpEd this week: “Building Toward Another Mortgage Meltdown”.

I also read in an LA Times article this week that FHFA’s Mel Watt testified that they (the government) put such underwriting controls in place that a 3% down mortgage is now as safe as a 10% down one….B.S.….go price the mortgage insurance difference in the private markets. (I just made a blog posting about this article at Statement #585.)

I read this line below in a recent article (about something else) and then lost it and googled it:

“You know, more than 100 years ago, Upton Sinclair wrote this, that ‘It’s difficult to get a man to understand something if his salary depends upon his not understanding it.’”

I would say that this is the real estate brokerage, home building, and mortgage finance industry in a nutshell…..aided and abetted by the consumer groups and the federal government…..they all push for reduced underwriting standards in the good times (to help the economy, jobs, low-income borrowers, and industry profits/salaries), when the economy is strong and home prices are rising.

And then it inevitably goes too far (because of the free market distortions caused by well-intend government housing and housing finance policies) and fails, when the economy suffers and/or housing prices decline and the mortgage lender is the one who is blamed by all of these parties.

Now, you would think some of these parties (especially the government and mortgage lenders) would have studied the true, root-causes of the crisis (like I and Mr. Wallison have) and permanently learned the very painful lessons of the 2008 financial crisis and therefore will not repeat them, but they have not. Why? Because as Upton Sinclair said: “it’s difficult to get a man to understand something if his salary depends on his not understanding it.”

“This is a ridiculous statement. Ask the private mortgage insurance companies what they are going to charge for this 3% down mortgage vs. a 10% down mortgage. I bet the mortgage insurance for the 3% down-payment mortgage is a lot more (I just checked with a friend in the industry and here is what he said: “MI is credit dependent, but a 710 FICO would be about 0.44% per year on a 90% LTV and about 1.11% on a 97% LTV”.) So more than double the cost, because the credit risk by the private marketplace is perceived to be more than double. And that risk isn’t just to Fannie Mae, Freddie Mac, and the private mortgage insurer. Unfortunately, we learned as a result of the 2008 financial crisis, that it’s also the mortgage borrower who is at risk (of being stuck with an underwater mortgage), as well as the American taxpayer (who bailed out Fannie and Freddie to the tune of $180+ billion), the housing market and economy as a whole. Is Mel Watt really qualified to be the director of the Federal Housing Finance Agency and make statements like this? I could be wrong, but I don’t see how a longtime, former politician has the skills or experience for this very important role.”, Mike Perry, former Chairman and CEO, IndyMac Bank

Fannie Mae, Freddie Mac regulator defends 3% down payment mortgages

This Jan. 8, 2015, photo shows a home for sale in Charlotte, N.C. Fannie Mae and Freddie Mac are launching a program to back mortgages with down payments as low as 3%. (Chuck Burton / Associated Press)

By Jim Puzzanghera

The regulator for bailed-out housing finance giants Fannie Mae and Freddie Mac told lawmakers Tuesday that new programs to back mortgages with down payments as low as 3% had enough safeguards to make them as safe as loans with higher down payments.

Melvin L. Watt, director of the Federal Housing Finance Agency, faced sharp criticism from Republicans at a three-hour House hearing that he was risking the loss of taxpayer money by returning to the irresponsible lending practices that caused the subprime housing market bubble.

“You’re once again putting people into homes that they can’t afford,” said Rep. Jeb Hensarling (R-Texas), who chaired the hearing by the House Financial Services Committee.

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FOR THE RECORD:
12:21 p.m.: In an earlier version of this article, Rep. Jeb Hensarling’s last name was misspelled as Hensaring.
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But Watt, a former longtime House Democrat, said the agency had taken steps to make sure that a loan with a 3% down payment “is just as safe” as a loan with a 10% down payment.

“When the down payment is lower, there’s the potential it can be a riskier loan,” Watt said. “But when you pair that with other compensating factors … you offset that additional risk. That’s exactly what we’ve done.”

The programs from Fannie and Freddie require full documentation, strong credit scores, housing counseling and private mortgage insurance, Watt said.

Also, the loans will make up only “a very small percentage” of the mortgages in the portfolios of Fannie and Freddie, he said. Fannie began its program in December and Freddie’s will start in March.

Their goal is to expand the opportunity for homeownership to people who can afford a mortgage but haven’t been able to save enough for a larger down payment, Watt said.

“If somebody can’t pay a loan, they shouldn’t be given a loan,” he said. “It would be irresponsible to say we should be making those loans or that Fannie and Freddie should be backing those loans.”

Fannie and Freddie purchase about half of all new home loans from banks and package them into securities for investors.

The collapse of the housing market that began in 2007 pushed the government-sponsored companies to the brink of bankruptcy because of the bad mortgages they backed.

The federal government seized them in 2008 and pumped $187.5 billion into them to keep them afloat. The firms returned to profitability as the housing market rebounded and have more than offset the bailout money with dividend payments to the government.

Democrats praised Watt for the low down payment programs.

“When FHFA lowered the down payment requirements, it appropriately balanced safeguards to protect the taxpayer with expanding credit for eligible borrowers,” said Rep. Maxine Waters (D-Los Angeles). She said some Americans can afford mortgage payments “but are not fortunate to come from wealthy families.”

…I do not absolve the private sector, although that will be the claim of some, but put the errors of the private sector in the context of the government policies that dominated the housing finance market for the fifteen years before the crisis, including the government regulations that induced banks to load up on assets that ultimately made them appear unstable or insolvent.”, Peter J. Wallison, Hidden in Plain Sight: What Really Caused The World’s Worst Financial Crisis And Why It Could Happen Again

Excerpt from the Preface, Hidden in Plain Sight: What Really Caused The World’s Worst Financial Crisis And Why It Could Happen Again, Peter J. Wallison, January 2015:

“During the Depression era, it was widely believed that the extreme level of unemployment was caused by excessive competition. This, it was thought, drove down prices and wages and forced companies out of business, causing the loss of jobs. Accordingly, some of the most far-reaching and hastily adopted legislation…..such as the National Industrial Recovery Act and the Agricultural Adjustment Act (both ultimately declared unconstitutional)….was designed to protect competitors from price competition. Raising prices in the midst of a depression seems wildly misguided now, but it was the result of a mistaken view about what caused the high level of unemployment that characterized the era.

In the 1960s, Milton Friedman and Anna Schwartz produced a compelling argument that the Great Depression was an ordinary cyclical downturn that was unduly prolonged by the mistaken monetary policies of the Federal Reserve. Their view and the evidence that they adduced gradually gained traction among economists and policy makers. Freed of its association with unemployment and depression, competition came to be seen as a benefit to consumers and a source of innovation and economic growth rather than a threat to jobs.

With that intellectual backing, a gradual process of reducing government regulation began in the Carter administration. Air travel, trucking, rail, and securities trading were all deregulated, followed later by energy and telecommunications. We owe cell phones and the Internet to the deregulation of telecommunications, and a stock market in which billions of shares are traded every day….at a transaction cost of a penny a share…..to the deregulation of securities trading. Because of huge reductions in cost brought about by competition, families don’t think twice about making plane reservations for visits to Grandma, and we take it for granted that an item we bought over the Internet will be delivered to us, often free of a separate charge, the next day. These are the indirect benefits of a revised theory for the causes of the Depression that freed us to see the benefits of competition.

We have not yet had this epiphany about the financial crisis, but elements for it….as readers will see in this book….have hidden in plain sight. Accordingly, what follows is intended to be an entry in a political debate….a debate that was framed in the 2008 presidential contest but never actually joined. In these pages I argue that, but for the housing policies of the U.S. Government during the Clinton and George W. Bush administrations, there would not have been a financial crisis in 2008. Moreover, because of the government’s extraordinary role in bringing on the crisis, it is invalid to treat it as an inherent part of a capitalist or free market system, or to use it as a pretext for greater government control of the financial system.

I do not absolve the private sector, although that will be the claim of some, but put the errors of the private sector in the context of the government policies that dominated the housing finance market for the fifteen years before the crisis, including the government regulations that induced banks to load up on assets that ultimately made them appear unstable or insolvent. I hope the readers will find the data I have assembled informative and compelling. The future of the housing finance system and the health of the wider economy depend on a public that is fully informed about the cause of the 2008 financial crisis.”

…Peter Wallison’s Hidden in Plain Sight details the evidence in a totally convincing way.”, Eugene F. Fama, 2013 Nobel Laureate in Economic Sciences

“Peter Wallison exposes how the government’s push to weaken traditional mortgage underwriting standards proved to be a root cause of the financial crisis. Lawmakers reshaping federal housing policy today should take heed.”, Edward DeMarco, acting director of the Federal Housing Finance Agency from 2009 to 2014

“Government housing policies were a major cause of the financial crisis, and we are now repeating the same mistakes. Peter Wallison told the story better than anyone else and is sounding the warnings again.”, Martin Feldstein, professor of economics at Harvard University

“Those of us who have studied the financial crisis concluded years ago that Peter Wallison ‘wrote the book’ on the subject. Now he has actually done so. For years he warned of misguided federal housing policies, but his warnings were ignored. For the sake of our economy, this time Washington must listen.”, Jeb Hensarling, chairman of the House Financial Services Committee

“Peter Wallison unequivocally proves that government policy, not deregulation, caused the recent financial crisis and the related Great Recession. The massive regulatory expansion under Dodd-Frank has stifled economic growth and increases the risk of future crisis.”, John A. Allison, president of the Cato Institute and former CEO of BB&T

“I don’t remember any period in modern history when the analysis of historic economic events has been more dominated by the clear thinking of one person. That person’s name is Peter Wallison. He has dispelled more myths and provided more insights than all other scholars and commentators combined.”, Phil Gramm, former Chairman of the Senate Banking Committee

“In this must-read book, Wallison thoroughly documents that bad government housing policies are a too-little acknowledged cause of the crisis. He makes a convincing case that policymakers simply misdiagnosed what went wrong in 2008, without taking the actions that would prevent another financial crisis.”, James R. Barth, Lowder Eminent Scholar in Finance at Auburn University

(Attributions on the jacket cover of Peter Wallison’s, the American Enterprise Institute’s co-head of Financial Policy Studies, January 2015 book: Hidden in Plain Sight: What Really Caused The World’s Worst Financial Crisis And Why It Could Happen Again.)

…“In the wake of the housing crisis and the collapse of the global economy, credit agencies like S.&P. promised not to contribute to another bubble by inflating the ratings on products they were paid to evaluate,” Mr. Schneiderman (Attorney General of New York) said in a statement. “Unfortunately, S.&P. broke that promise in 2011, lying to investors to increase their profits and market share.””, Ben Protess and Matthew Goldstein, “S.&P. to Pay Nearly $80 Million to Settle Fraud Cases”, New York Times

“Given the U.S. National Statistical Rating Agencies’ (anointed so by the federal government and regulated by the S.E.C.) enormous shortcomings, which were laid bare by the 2008 financial crisis and now more (similar and settled) allegations by the S.E.C. and New York and Massachusetts’ Attorney Generals, how in the world can our federal and state financial regulators allow (in fact require for investment and capital regulations) banks, insurers, and other investors to continue to use these ratings firms and their (allegedly) flawed ratings? It make no sense. Why don’t we just allow the free markets to work? If the market yield on a security, is very low…like U.S. Treasuries today, the risk is very low. If the market yield is very high…like Greek government bonds…..then the risk is very high. The higher the market risk, the more the investment should be restricted and the more capital that should be required (for institutions that utilize state or federal guarantees). Think about it, today’s market yields (determined by thousands of sophisticated investors around the world) for U.S. Treasuries have proven that S&P’s downgrade (a few years ago) of U.S. debt to AA from AAA was wrong (at least so far).”, Mike Perry, former Chairman and CEO, IndyMac Bank

S.&.P. to Pay Nearly $80 Million to Settle Fraud Cases

By Ben Protess and Matthew Goldstein

Offices of the ratings agency Standard and Poor’s in New York.Credit Justin Lane/European Pressphoto Agency

Standard & Poor’s, the credit rating agency blamed for helping inflate the subprime mortgage bubble, has settled accusations that it orchestrated a similar fraud years after the bubble burst.

S.&P. has agreed to settle an array of government investigations stemming from 2011, paying nearly $80 million and admitting some misdeeds, federal and state authorities announced on Wednesday. As part of the deals, reached with the Securities and Exchange Commission and the state attorneys general in New York and Massachusetts, S.&P. also agreed to take a one-year “timeout” from rating certain commercial mortgage investments at the heart of the case, an embarrassing blow to the rating agency.

“This was egregious behavior with significant consequences,” Andrew J. Ceresney, the S.E.C.’s enforcement director, said on a conference call with reporters. He added that the problems pointed to a “deep cultural failure at S.&P.” and a “failure to learn the lessons of the financial crisis.”

The settlement, which coincided with the filing of an S.E.C. action against a former S.&P. ratings executive, is the S.E.C.’s first action against a top ratings firm. Despite the central role that rating agencies played in the crisis — awarding inflated credit ratings to mortgage investments that spurred the debacle — they faced no S.E.C. penalties.

Yet the Justice Department and several state attorneys general did take action in a separate case, suing S.&P. in connection with the crisis. After fighting that case for two years, S.&P. reached a tentative settlement that would require it to pay $1.37 billion, people briefed on the matter said this week, a penalty large enough to wipe out its operating profit for a year.

In addition to the commercial mortgage settlement, S.&P. also resolved accusations on Wednesday of internal control “failures” in its surveillance of rating investments backed by home mortgages. The breakdowns, which echo the rating agency’s problems during the crisis, came from October 2012 to June 2014.

The settle-at-all-costs mentality from S.&P., which is owned by McGraw Hill, signifies an abrupt shift in its strategy. It also reflects a change atop McGraw Hill’s legal department, which recently installed a new general counsel, Lucy Fato, formerly a partner at the law firm Davis Polk.

In a statement on Wednesday about its settlement with the S.E.C. and the state attorneys general in New York and Massachusetts, S.&P. said it was “pleased to have concluded these matters.” It added that it “takes compliance with regulatory obligations very seriously and continues to make investments in people and technology to strengthen its controls and risk management throughout the organization.”

Photo

“Investors rely on credit rating agencies like Standard & Poor’s to play it straight when rating complex securities like C.M.B.S.,” Mr. Ceresney said, referring to commercial mortgage-backed securities.Credit Garrett James/CMediaUSA

In settling, S.&P. agreed to pay more than $58 million to the S.E.C., $12 million to New York State’s attorney general, Eric T. Schneiderman, and $7 million to the office of the Massachusetts attorney general, Martha Coakley. S.&P. previously announced that it expected to pay about $60 million to settle the investigations.

The settlements largely center on S.&P.’s ratings of eight commercial mortgage-backed securities deals. Although S.&P. publicly claimed it used a conservative approach for rating certain commercial mortgage investments, it actually used a different methodology that lowered its standards.

To reinforce the impression that the new criteria were still relatively conservative, S.&P. “published a false and misleading article purporting to show that its new credit enhancement levels could withstand Great Depression-era levels of economic stress,” according to the S.E.C. That article “relied on flawed and inappropriate assumptions,” according to the S.E.C., which noted that the original author of the article complained that the S.&P. had turned the article into a “sales pitch” for the new criteria. The author said it could lead to his facing the “Department of Justice or the S.E.C.”

“Investors rely on credit rating agencies like Standard & Poor’s to play it straight when rating complex securities like C.M.B.S.,” Mr. Ceresney said, referring to commercial mortgage-backed securities. “But Standard & Poor’s elevated its own financial interests above investors by loosening its rating criteria to obtain business and then obscuring these changes from investors.”

The behavior detailed in the S.E.C.’s complaint seems ripped from the same playbook that led S.&P. to help enable the mortgage crisis of 2008. It lowered ratings criteria after losing market share. It ignored or stifled red flags, the S.E.C. said, including internal dissent and an anonymous email complaint. And it misled the public about the rigor of its methodology.

“In the wake of the housing crisis and the collapse of the global economy, credit agencies like S.&P. promised not to contribute to another bubble by inflating the ratings on products they were paid to evaluate,” Mr. Schneiderman said in a statement. “Unfortunately, S.&P. broke that promise in 2011, lying to investors to increase their profits and market share.”

The S.E.C. also filed an administrative proceeding against Barbara Duka, the former co-head of S.&P.’s commercial mortgage group, contending that she “fraudulently misrepresented the manner in which the firm calculated a critical aspect” of ratings. Ms. Duka, the S.E.C. said, “allegedly instituted the shift to more issuer-friendly ratings criteria, and the firm failed to properly disclose the less rigorous methodology.”

Ms. Duka jumped the gun on the S.E.C., filing a lawsuit in federal court last week that seeks to have any enforcement action against her heard before a federal judge as opposed to an administrative law judge. The S.E.C. has increasingly filed enforcement cases before administrative law judges, and some critics say this gives the S.E.C. an unfair home-court advantage.

In her federal lawsuit, Ms. Duka said she began cooperating with the S.E.C. investigation in August 2013, providing documents and testimony, and telling the S.E.C. throughout that she thought the change in the methodology used by S.&P. to analyze some commercial mortgage bond deals was appropriate and not done to further the rating agency’s commercial goals.

Ms. Duka’s lawyer, Guy Petrillo of Petrillo Klein & Boxer, released a statement on Wednesday, saying that “Barbara did not act wrongfully and always performed her duties at S.&P. in the utmost good faith.”

…Pre-crisis, Greece’s membership in the European Union and its ability to issue debt denominated in Euros, deluded sophisticated institutional investors into lending them billions of dollars, at rates not much higher than Germany or France, so Greece could spend beyond its means and its politicians could delude its people into thinking their failed system was working. That delusion (like many others) was laid bare in the aftermath of the financial crisis. After learning this lesson (through losses), no private party in the world would lend Greece a Euro today, at least until they reform their political and economic systems and real results are seen. That’s why the Troica demanded austerity and reform Mr. Krugman. Greece’s election basically confirms that many of its citizens are still deluded and much like drug addicts are opposed to the tough medicine they need to get well. That’s fine….then they should leave the European Union and the Euro and default on their debts (and see where that gets them)….not cajole the Troica for more “free stuff”….the Germans and French and other responsible members of the Euro are not the guarantors of less (financially) responsible members. Unfortunately, we in the U.S. are also living beyond our means, given our unsustainable government debts and other obligations.”, Mike Perry, former Chairman and CEO, IndyMac Bank

The Opinion Pages

Ending Greece’s Nightmare

Paul Krugman

Alexis Tsipras, leader of the left-wing Syriza coalition, is about to become prime minister of Greece. He will be the first European leader elected on an explicit promise to challenge the austerity policies that have prevailed since 2010. And there will, of course, be many people warning him to abandon that promise, to behave “responsibly.”

So how has that responsibility thing worked out so far?

To understand the political earthquake in Greece, it helps to look at Greece’s May 2010 “standby arrangement” with the International Monetary Fund, under which the so-called troika — the I.M.F., the European Central Bank and the European Commission — extended loans to the country in return for a combination of austerity and reform. It’s a remarkable document, in the worst way. The troika, while pretending to be hardheaded and realistic, was peddling an economic fantasy. And the Greek people have been paying the price for those elite delusions.

You see, the economic projections that accompanied the standby arrangement assumed that Greece could impose harsh austerity with little effect on growth and employment. Greece was already in recession when the deal was reached, but the projections assumed that this downturn would end soon — that there would be only a small contraction in 2011, and that by 2012 Greece would be recovering. Unemployment, the projections conceded, would rise substantially, from 9.4 percent in 2009 to almost 15 percent in 2012, but would then begin coming down fairly quickly.

What actually transpired was an economic and human nightmare. Far from ending in 2011, the Greek recession gathered momentum. Greece didn’t hit the bottom until 2014, and by that point it had experienced a full-fledged depression, with overall unemployment rising to 28 percent and youth unemployment rising to almost 60 percent. And the recovery now underway, such as it is, is barely visible, offering no prospect of returning to precrisis living standards for the foreseeable future.

What went wrong? I fairly often encounter assertions to the effect that Greece didn’t carry through on its promises, that it failed to deliver the promised spending cuts. Nothing could be further from the truth. In reality, Greece imposed savage cuts in public services, wages of government workers and social benefits. Thanks to repeated further waves of austerity, public spending was cut much more than the original program envisaged, and it’s currently about 20 percent lower than it was in 2010.

Yet Greek debt troubles are if anything worse than before the program started. One reason is that the economic plunge has reduced revenues: The Greek government is collecting a substantially higher share of G.D.P. in taxes than it used to, but G.D.P. has fallen so quickly that the overall tax take is down. Furthermore, the plunge in G.D.P. has caused a key fiscal indicator, the ratio of debt to G.D.P., to keep rising even though debt growth has slowed and Greece received some modest debt relief in 2012.

Why were the original projections so wildly overoptimistic? As I said, because supposedly hardheaded officials were in reality engaged in fantasy economics. Both the European Commission and the European Central Bank decided to believe in the confidence fairy — that is, to claim that the direct job-destroying effects of spending cuts would be more than made up for by a surge in private-sector optimism. The I.M.F. was more cautious, but it nonetheless grossly underestimated the damage austerity would do.

And here’s the thing: If the troika had been truly realistic, it would have acknowledged that it was demanding the impossible. Two years after the Greek program began, the I.M.F. looked for historical examples where Greek-type programs, attempts to pay down debt through austerity without major debt relief or inflation, had been successful. It didn’t find any.

So now that Mr. Tsipras has won, and won big, European officials would be well advised to skip the lectures calling on him to act responsibly and to go along with their program. The fact is they have no credibility; the program they imposed on Greece never made sense. It had no chance of working.

If anything, the problem with Syriza’s plans may be that they’re not radical enough. Debt relief and an easing of austerity would reduce the economic pain, but it’s doubtful whether they are sufficient to produce a strong recovery. On the other hand, it’s not clear what more any Greek government can do unless it’s prepared to abandon the euro, and the Greek public isn’t ready for that.

Still, in calling for a major change, Mr. Tsipras is being far more realistic than officials who want the beatings to continue until morale improves. The rest of Europe should give him a chance to end his country’s nightmare.

A version of this op-ed appears in print on January 26, 2015, on page A21 of the New York edition with the headline: Ending Greece’s Nightmare

…to 3% from 5%. The changes are driven by an Obama administration effort to make homeownership affordable to a wider group of buyers.” AnnaMaria Andriotis, “Down Payments Get Smaller”, Wall Street Journal

“This article (and many others) makes clear that it is the well-intended federal government, who first lowers home lending standards (to high-risk levels for lenders, investors and borrowers) and leads the private-sector banks and mortgage lenders down this same path.”, Mike Perry, former Chairman and CEO, IndyMac Bank

Weekend Investor

Down Payments Get Smaller

By AnnaMaria Andriotis

It is getting easier for some buyers to land a house with less money up front.

More lenders are lowering down-payment requirements, allowing borrowers to commit 3%—or even less—of a home’s purchase price to get a mortgage. Many had been requiring down payments of at least 20% since the recession began.

Some lenders also are waiving mortgage-related fees, and more are allowing down payments to be made by other parties, such as the borrower’s family.

The deals are aimed at buyers with good credit scores and a steady income who have been unable to save enough for a sizable down payment. They are often targeted at buyers who live in expensive housing markets, where even a small down payment can equal tens of thousands of dollars.

Low-down-payment mortgages have long been available. The Federal Housing Administration insures mortgages with down payments as low as 3.5%, and it is lowering the annual mortgage-insurance premiums on new mortgages beginning on Monday.

The trend has picked up since mortgage-finance giants Fannie Mae and Freddie Mac , which buy most mortgages from lenders, recently lowered the minimum down payments they will accept to 3% from 5%. The changes are driven by an Obama administration effort to make homeownership affordable to a wider group of buyers.

Higher Costs

Borrowers should be aware that small down payments leave them more at risk of owing more on their mortgage than the property is worth should home values in their market decline, says Jack McCabe, an independent housing analyst in Deerfield Beach, Fla.

In addition, borrowers likely will incur higher costs over the life of the loan, including higher interest rates and, often, mortgage insurance.

The moves come as mortgage originations declined substantially last year. Lenders gave out an estimated $1.12 trillion in mortgages in 2014, down 39% from a year earlier and the lowest amount since 1997, according to the Mortgage Bankers Association, a Washington-based trade group.

Most mortgages have been going to existing homeowners who are refinancing into lower interest rates, as demand among home buyers has been low compared with historical norms.

Regions Bank, a unit of Regions Financial , launched a mortgage program in September that allows some borrowers to make a 5% down payment. The bank says it will lower that requirement in the next few weeks to 3%. Borrowers must not have owned a property or had a mortgage in the past three years, among other requirements.

TD Bank, the U.S. unit of Toronto-Dominion Bank , is allowing first-time buyers to put as little as 3% down through its “Right Step” loan program. The bank—which also is extending the offer to low- and moderate-income borrowers as well as those purchasing a home in some up-and-coming neighborhoods—lowered its cash-down requirement from 5% last year.

The banks allow borrowers’ down payments to be partially or fully funded by family, nonprofits or other sources.

Lenders also have been lowering the bar for larger mortgages, known as “jumbos,” which they typically hold on their books. Such loans exceed $417,000 in most parts of the country and $625,500 in pricier housing markets such as New York and San Francisco.

In November, PNC Financial Services Group began allowing exceptions to its down-payment requirements for jumbos, says Tyler Case, a loan officer at PNC’s Fords, N.J., branch. The lender, which has been requiring at least 20% down for jumbos up to $1.5 million, lowered that to 15% for borrowers whose income and assets go beyond what the bank generally requires.

To qualify, borrowers will need a higher credit score and less debt relative to their income than is usually required, as well as having savings after the home purchase equal to at least 12 months of mortgage payments.

PNC also is offering exceptions on down-payment amounts for larger loans up to $3 million.

Wells Fargo , meanwhile, began permitting down payments of as little as 10.1% last year on jumbo mortgages. Previously, its lowest down payment on jumbos was 15%.

Borrowers who want to get a mortgage with a particular lender could ask if it would allow a lower down payment than what is officially offered.

PNC, for example, isn’t advertising its 15% option, Mr. Case says. Instead, it is offering it to eligible borrowers who inquire or mention that they have been offered lower down-payment loans at competitors, he says.

The costs associated with these low-down-payment mortgages can vary significantly. The interest rate and fees borrowers pay often depends on whether the lender plans to sell their mortgage to Fannie or Freddie, or if it plans to hold the loan on its books, in addition to borrowers’ qualifications.

Borrowers need to compare costs, including the interest rate, whether they have to pay any upfront fees to get that rate and what their total costs to get the loan will be. A lower interest rate might not be a good deal if it requires larger out-of-pocket payments.

Often, borrowers have to pay an extra fee for private mortgage insurance, which protects the lender from incurring significant losses if the borrower defaults, in exchange for a low down payment. In most cases, the fee is included in the monthly mortgage payment, though borrowers sometimes have the option to pay it as an upfront charge.

Mortgage Insurance

Mortgages purchased by Fannie Mae and Freddie Mac usually require private mortgage insurance if the down payment is less than 20%. Lenders generally decide which mortgage-insurance firm to work with.

Borrowers with higher credit scores, smaller loan amounts and fixed-rate mortgages pay less.

The size of the down payment also matters. Typically, someone with a FICO credit score of 760 or more—on a scale that tops out at 850—who is making a down payment of just under 5% and getting a $400,000, 30-year fixed-rate mortgage will incur at least a 0.57% fee, according to Radian Guaranty, a unit of Radian Group, and Mortgage Guaranty Insurance, a unit of MGIC Investment, two of the largest private mortgage insurers.

That comes out to $190 a month. The same borrower with a down payment of just under 10% would incur a fee of at least 0.43%, or $143 a month.

Before signing up, borrowers should find out if they will incur these costs, and for how long. They should consider asking their lender if they can stop paying this fee when they reach at least a 20% equity stake in the home through a mix of home-price appreciation and amortization, for example, says Keith Gumbinger, vice president at mortgage-information website HSH.com.

Lenders who hold low-down-payment mortgages on their books typically don’t require this insurance. But the loans may not be a bargain, he says, because they often charge interest rates that can be an eighth to a quarter of a percentage point higher.

“To put a fig leaf over the threat doesn’t make the problem go away, and doesn’t help us understand that the radical Islamist attacks are precisely about the House of Islam and who can speak for it. Joshua Mitchell, a professor of political philosophy at Georgetown University, says: “This is a battle about who is going to define Islam: the radical Islamists, who try to convince the world that someone can be assassinated if he dares draw a mocking cartoon representing the Prophet, or who ridicules fanatics of all sorts; or the democratically inclined Muslims who accept that religion cannot be an encompassing whole that dictates all the rules of everyday life in the earthly realm.” By denying that this is about Islam, “President Obama does us a disservice, because doing so deprives the Muslim community of its responsibility to fight this radical monster,” says Muslim democrat Naser Khader, a former member of the Danish Parliament, now at the Hudson Institute in Washington. “By doing that, the West fails to understand that the Muslims will be the most crucial soldiers to fight this Islamic terrorism.” Mr. Khader calls for a revolution in Islam that would reinterpret the sacred texts in a way that is “compatible with modernity.”, Laure Mandeville, “Obama and the Refusal to Call a Cat a Cat”, Wall Street Journal

Opinion

Obama and the Refusal to Call a Cat a Cat

For the French, it is almost surreal to see how the White House avoids using the phrase ‘radical Islam.’

By Laure Mandeville

In French, we have an expression: “Call a cat a cat.” Appeler un chat un chat. That is exactly what French Prime Minister Manuel Valls did after the horrific terrorist attacks that hit my country on Jan. 7, when he identified “radical Islam” as our enemy. In France, most rallied to this clear acknowledgment of the threat we are dealing with, because it is simply impossible to deny.

That is why it has sounded almost surreal when the Obama administration and many observers in the U.S., despite their heartening support for the French, go to great lengths to insist that the terrorist attack had nothing to do with Islam.

The intention is good: President Obama doesn’t want to mix Islamist terrorists and the wider community of Muslims around the world. He is trying to appeal to Muslims, to prevent them from feeling ostracized. More than ever, the world needs Muslims who wish to live in harmony with non-Muslims.

Photo: Getty Images

But ask Flemming Rose how the Obama approach sounds to someone who knows too well the Islamist threat. Mr. Rose, now the foreign editor of the Danish newspaper Jyllands-Posten, was its cultural editor in 2005 when he had an idea for a series of cartoons lampooning the Prophet Muhammad. Their publication sparked deadly protests in several countries and has made him a marked man. “There is something nearly Orwellian in this refusal to call things by their names,” Mr. Rose tells me. “If we say that the terrorists are not radical Islamists, we might as well say that truth is lie, that right is wrong, that black is white.”

To put a fig leaf over the threat doesn’t make the problem go away, and doesn’t help us understand that the radical Islamist attacks are precisely about the House of Islam and who can speak for it.

Joshua Mitchell, a professor of political philosophy at Georgetown University, says: “This is a battle about who is going to define Islam: the radical Islamists, who try to convince the world that someone can be assassinated if he dares draw a mocking cartoon representing the Prophet, or who ridicules fanatics of all sorts; or the democratically inclined Muslims who accept that religion cannot be an encompassing whole that dictates all the rules of everyday life in the earthly realm.”

By denying that this is about Islam, “President Obama does us a disservice, because doing so deprives the Muslim community of its responsibility to fight this radical monster,” says Muslim democrat Naser Khader, a former member of the Danish Parliament, now at the Hudson Institute in Washington. “By doing that, the West fails to understand that the Muslims will be the most crucial soldiers to fight this Islamic terrorism.” Mr. Khader calls for a revolution in Islam that would reinterpret the sacred texts in a way that is “compatible with modernity.”

The same self-deceiving approach seems to be affecting the debate about the limits of free speech. Anxious not to offend Muslims, many in America and in France distanced themselves from Charlie Hebdo after its post-attack publication of an issue showing Muhammad in tears, wearing an “I am Charlie” T-shirt and saying, “All is forgiven.” The drawing seems hardly disparaging, but it alarmed those who think silence is preferable to the risk of offending. A fellow French journalist confided to me: “We should establish some kind of self-censorship, because we don’t want that a cartoon published in France leads to the burning of churches in Niger.”

That kind of thinking could jeopardize freedom of speech itself. Will this hard-won freedom, so precious to the West, be sacrificed because a village imam in the Middle East or Africa incites people to violence during Friday prayer? Many in the West seem tempted to capitulate, in the name of “peace.” They are allowing themselves to believe that it is our fault if the churches burn. That is what the radicals are betting on.

Where will we draw limits? Will we also give in when radical Islamists say they are offended to see European women wearing bikinis or going to swimming pools while men are present? The latter question is already being raised in some French cities.

The answer will define our future. Americans have some difficulty understanding the depth of the European challenge. Given the marginal size of the Muslim community in the U.S., Americans are not confronted by the same questions or urgency. In France, as in much of Europe, these daunting challenges are rapidly becoming existential, despite the fact that we have been promoting different models of integration, some as in Great Britain or the Netherlands much closer to those in the U.S. Only if we are sure of the values worth defending will we be able to convince our Muslim compatriots to fight for France, its liberal order and magnificent heritage.

That heritage includes Voltaire, our most cherished satirist and polemist, Montaigne, Montesquieu, Tocqueville and innumerable others to whom, in times of crisis, we turn for comfort and wisdom. They enumerated many of the freedoms that the modern world enjoys; and in this dark moment their lessons are worth remembering.

In France, or anywhere Islamism is taking root, we must renew our commitment to teach and inspire young people, particularly in the disenfranchised French suburbs, by explaining the complexity and beauty of freedom and tolerance. We must teach them to distinguish between the realm of God and the realm of Caesar, a distinction that has been one of France’s great achievements.

We must also instill pride in the French flag and anthem, much as Americans do. Otherwise, our children will be left to face the unbearable lightness of a postmodern and consumerist void, which could open the way to the most dangerous ideological attempts to “re-enchant the world,” as the saying goes. In the 20th century, the re-enchantment movements that nearly brought down the West were called fascism, National Socialism and Communism. In the 21st century, the re-enchantment movement that threatens us—from within and without—is called radical Islam.

Mrs. Mandeville is the U.S. bureau chief for the French newspaper Le Figaro.