Unleashing and Feeding the Predators

by Don Boudreaux on January 19, 2010

in Financial Markets, Frenetic Fiddling, Government intervention in housing, Intervention, Myths and Fallacies, Other People's Money, Politics, Regulation

Rick Belzer has this great letter in today’s Wall Street Journal:

Predators may have “roamed the financial landscape,” but it was government that set them loose. It was government-sponsored enterprises that packaged these loans into securities for sale. It was government-sanctioned ratings companies that certified them as triple-A so that responsible investors would buy them. Prof. Blinder seems to have no recollection of these horrible policy decisions. Interestingly, none of the “reforms” in the House financial regulation bill he touts would address any of these problems.

This bill follows the time-honored congressional practice of shifting blame to others, for Congress is never at fault when its foolish policies go haywire. It’s always the fault of those who respond rationally to the stupid incentives Congress sets in motion.

Richard B. Belzer

Alexandria, Va.

Rick’s letter contrasts nicely with this letter in today’s New York Times.

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  • Yossarian
    Most estimates have FNM/FRE costing the taxpayer in the neighborhood of $500B- is this loss not a $500B of lending not supported by cash flows not a distortion of the housing market? Add in the eventual cost of bad FHA loans and you get a significant distortion brought about by govt sponsored institutions.

    But the leverage in the banking sector, also known as the shadow financial sector, was an even larger cause of the crisis. But what cause the banks to lever up so much? The perception of steadily rising house prices? Did the free money (borrow short at a subsidized rate and lend long) from FNM/FRE contribute to this perception? Likely. Did the rating agencies enable the hot potato process? Most definitely? Did moral hazard (bank CEO's with heads I win tail someone else loses mentality) and career risk (e.g. pension fund managers forced into higher AAA yields) play a large part in the game? Perhaps. Was there substantial outright fraud emanating from both GSE and private sector mortgage originations? Most definitely. Bottom line: there is not just one cause- instead there is a confluence of events that worked together to bring about this crisis.
  • danielkuehn
    RE: "Bottom line: there is not just one cause- instead there is a confluence of events that worked together to bring about this crisis."

    Definitely. People have been far too willing to push their pet-theories.
  • danielkuehn
    Hadn't GSE securitization been going on for decades without a hitch? I don't know the history of all that very well - it's an honest question. I thought most of the problems occured with privately securitized mortgages, and the emergence of CDOs and CDSs (and then obviously it spread to GSE originated products when housing values plummeted).

    I agree labeling these institutions as "predators" is unhelpful and misleading... but could you provide more detail on what he means by "It was government-sponsored enterprises that packaged these loans into securities for sale"? That was not my understanding of the situation.
  • indianajim
    Bravo Belzer, Bravo!
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