I’ve been hearing more and more about how de-regulation is the root problem of the mortgage mess. Democrats have been making it the focal-point of their latest policy push to exercise greater government oversight on yet another sector of our economy. The latest instance of this mantra came from a blog my constitutional law instructor writes for titled “essentially contested America”. HERE is the basic argument:
The problem with unregulated capitalism is that greed (so sorry profitability) will always find ways to game the economic system. Had the mortgage market been regulated this crisis might have been averted. In financial markets, one either pays now (with regulations) or pays later with massive bailouts. Which is preferable?
Due to technical problems on THAT blog… I thought I would just post my response here…
(*start response*)
I find your ‘matter-of-fact’ conclusion that the problem with this crisis was this vague, amorphous concept of ‘Capitalism-gone-awry’ to be highly unpersuasive. Furthermore, your syllogism of “we must pay now or pay later” is simply a naked assertion, not a matter of fact. There is no inherent reason why this must be the case.
In fact, I would suggest that REGULATION (bad regulation, but regulation nonetheless) is at the root of this financial mess we are in. No rational market actor would make loans to people who couldn’t pay them back. You wouldn’t, I wouldn’t… so then one must ask… WHY would banks agree to these mortgages in the first place? Well, CONGRESS by by encouraging F&F to BUY UP sub-prime mortgages FROM banks in the name of “affordable housing” (i.e. REGULATING those institutions) … created a situation in where Regulatory Perversion of the market lead to bad business decisions. To quote the latest Investor’s Business Daily article:
Despite warnings from GOP members of Congress in 1992, Clinton pushed extensive changes to the rules requiring lenders to make questionable loans.
Lenders who refused would find themselves castigated publicly as racists. As noted this week in an IBD editorial, no fewer than four federal bank regulators scrutinized financial firms’ books to make sure they were in compliance.
Failure to comply meant your bank might not be allowed to expand lending, add new branches or merge with other companies. Banks were given a so-called “CRA rating” that graded how diverse their lending portfolio was…
“We have to use every means at our disposal to end discrimination and to end it as quickly as possible,” Clinton’s comptroller of the currency, Eugene Ludwig, told the Senate Banking Committee in 1993…
In the name of diversity [Dictated by Congress' REGULATIONS-- my aside there], banks began making huge numbers of loans that they previously would not have. They opened branches in poor areas to lift their CRA ratings.
Meanwhile, Congress gave Fannie and Freddie the go-ahead to finance it all by buying loans from banks, then repackaging and securitizing them for resale on the open market.
I call what congress did “REGULATING”… and BUT FOR this “regulation”, this crisis could have been averted. Market actors were not making these risky decisions before government “oversight” so I think it is reasonable to assume that I’m not opposed to regulation itself… (perhaps greater capital requirements could have helped without billions of dollars of “oversight”) but if you are going to go making such broad claims about the failure of the “Market” (as if the personal failures of Franklin Reins or Jamie Gorellic backdating financial statements to meet bonus goals was a “market problem” as opposed to a personal one)… at least back that up with facts instead of blanket assertions.
I think one only needs to look at Congress’ current refusal to DEMAND investigations into the leadership at F&F (as they so QUICKLY did with the ENRON scandal) to conclude that they are trying to cover their own a**es in this mess… which should lend even greater credibility to the conclusions of the IBD article. This crisis was a problem of the Washington Elite trying to use F&F as welfare offices… providing houses to people who couldn’t pay for them… putting their own people in leadership positions at both institutions, using them as campaign slush funds, and then conveniently letting them off the hook when things went bad — using the “market” as a scapegoat for their own stupid policies.
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