Rolf Englund IntCom internetional
"Far from being disciplined in their risk-taking, lenders went wild"
What failed this time were markets.
The entire U.S. policy of promoting homeownership, which during the boom raised the ownership rate from 64 percent to 69 percent, now looks to be a case study in unintended consequences. Encourage more housing than markets will support and you get — voilà! — mortgages that fail. Fannie and Freddie were among the chief implements of the policy. Though judged by Standard & Poor’s to be only a Double A-minus credit, they were able, thanks to the widely held belief (since validated) that the United States would not allow them to fail, to borrow at lower than Triple A rates.
A good first step would be to draw a bright line between Fannie and Freddie’s outstanding obligations, which total $1.5 trillion, and the borrowings they undertake in the future as their current paper matures.
Banks with federally insured deposits, which are limited in the risks they’re allowed to take and the amount of leverage they can take on — have been pushed aside by unregulated financial players.
Far from being disciplined in their risk-taking, lenders went wild. Concerns about the ability of borrowers to repay were waved aside; so were questions about whether soaring house prices made sense.
Lenders ignored the warning signs because they were part of a system built around the principle of heads I win, tails someone else loses. Mortgage originators didn’t worry about the solvency of borrowers, because they quickly sold off the loans they made, generally to investors who had no idea what they were buying. Throughout the financial industry, executives received huge bonuses when they seemed to be earning big profits, but didn’t have to give the money back when those profits turned into even bigger losses.
If the government is going to stand behind financial institutions, those institutions had better be carefully regulated — because otherwise the game of heads I win, tails you lose will be played more furiously than ever, at taxpayers’ expense.
And as Upton Sinclair pointed out, it’s hard to get a man to understand something when his salary — or, we might add, his campaign war chest — depends on his not understanding it.
The biggest political story of 2008 is getting little coverage. It involves the collapse of assumptions that have dominated our economic debate for three decades.
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