Sunday, October 16, 2011

Finally, one of those false choices

At the Wall Street Journal this week, Peter Wallison had an interesting editorial on the financial collapse.  Wallison’s main point is that the anger being expressed towards Wall Street is the result of a false narrative which has blamed the meltdown on bankers rather than the government policies that produced the housing bubble that collapsed resulting in Wall Street’s losses.

Among the interesting items that Wallison brings out is a) the requirement from HUD that 55% of mortgage loan originations should be to borrowers below the median income and b) that according to Edward Pinto half of all mortgage loans by 2008 were either sub-prime or otherwise weak.  The 55% requirement is especially eye opening for as Wallison points out this requires a lowering of loan standards which is bad enough, but by artificially increasing demand it creates a bubble which accentuates the problem.  The particulars aside it shouldn’t surprise us that when government gets involved in financial decisions it is going to be political considerations not sound credit that will be in the lead.

But what I find truly interesting and perplexing about this opinion piece is the other or nature of the argument.  At one point Wallison remarks: “this bubble, which lasted from 1997 to 2007, also created a huge private market for mortgage-backed securities (MBS) based on pools of subprime loans.” And so, seemingly without Wallison’s acknowledgement we are back to looking at the banks and Wall Street, for you can’t have a huge market in mortgage backed securities without investors.  What Wallison doesn’t seem to want to ask is if government mandated requirements like 55% of loans below the median are so ill thought out—and they are—then why were supposedly savvy investors, the masters of the universe, backing them with their money instead of putting the brakes on by staying away from them?  HUD directives can’t explain AIG’s credit default swaps.

I agree that the narrative has been one-sided, that the government’s involvement in this debacle were deep and probably more decisive, at least as the proximate cause, than the failures of the banks.  But the liberal insistence that it was the banks and the conservative retort that it was government involvement via Fannie and Freddie is a false choice.  It was both.  However misguided government policy, it still required buyers to keep it going.  The cliché it takes two to tango is applicable here and for some reason missing from the story that both sides want and willing to tell.

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