There has been a plethora of verbage about the market system for a couple of months and some have consisently stated that the problem was that there was not enough government regulation or that regulators were lax in their enforcement efforts and thus the markets ran wild and the subprime mess that started all these problems was the result of not enough regulation. I would argue that the problem was too much political regulation that caused our current difficulties. Markets thank goodness or not emotional or political. It is the collective wisdom of all us making a million different decisions a day. Business do the smart thing. An individual may make mistakes for sure but the system does not it rewards winners and punishes losers just like the real world from time immemorial.
The “market” would have required that borrowers for home purchases have money down into the purchase of the home. The lenders want the borrower to have an investment in the house. They want them to have something to lose if the mortgage isn’t paid, an incentive to make every effort to keep that house. The “market” would have done vetting for the potential homeowner to verify that there was some employment record and that the mortgage payments would never exceed 30% or less of gross income for the homeowner under any circumstances. Those were the standards for countless decades and as our economic health improved home ownership did increase–at a slower pace for sure but a steady one. You weren’t allowed to borrow for the down payment from one bank to make it to another one and the bank making you the loan would hold your mortgage and service it themselves.
Then along came those with grand ideas about social engineering and the scheme to allow those who didn’t qualify under market standards and vetting to acquire a home in any event because it was public policy and then public law and mandate. The community redevelopment act and its progeny was regulation and micromanaging the market system. The Regulators made clear to the banks exactly what was expected of them and that they damn well had better start making the questionable loans to uncredit worthy borrowers or they would face the wrath of the Federal government and it regulators which have the power to put them out of business or at a minimum severely damage their business. Sure enough those loans were made with the regulatory gun pointed at their head.
Yes, there was excess in the market place in the packaging of these and other loans. There is no question of that. But what did you expect to happen? Human nature being what it is people always try to figure out a way to make lemonade out of lemons. The banks didn’t like doing this kind of business and didn’t like the Feds telling them who they HAD to loan to but they and the mortgage brokers and then the investment houses decided to pyramid up these loans and sell them like they were legitimate market investments. The rating agencies went along with the scheme because they were making nice profits each time they approved a bundle of these loans. Fannie and Freddie were buying up the loans because they also had been given their marching orders by Congress. The government was getting what it wanted by manipulating the market until the house of cards mandated by the governnment had its inevitable crash. The fact that these were bad loans from the git go to non credit worthy borrowers became apparent as more and more of them began to default. You can hide the ugly pig in the living room only so long eventually it will be seen by all.
The fact of those future defaults would not have surprised the “market” because the market would never had made those loans in the first place. They were not market based loans but regulated loans. I have written before that I have no sympathy with those who gamed this whole system and lost their bet or job. That 27 year old mortgage broker making $500K a year was a sure sign that things were amiss. Nor should we feel badly for those investment bankers and others marketing these loony loans like they were real loans. Truth in advertising should have required them to disclose to the market place that these were “mandated” loans that were made only to satisfy the demands of Washington politicians and not because they met market standards. They did not do this.
The real irony now is that the very ones responsible for the debacle are the ones looking for scapegoats everywhere except in their own living room. The insult to hard working decent Americans is that we are asked to bail out the irresponsible behavoir of those favored borrowers and the banks and investment bankers who rode the program to its crash. Most sadly of all is that the politicos in Washington are so far doing an exactly job of making sure the finger of blame is directed everywhere but at themselves. It is the new speak of 1984 all over again.
The market works just fine thank you very much; it always does and always will; what does not work is social engineering to shoe horn the market into a political agenda. That is unless you want the Government to be in charge of everyone and everything. One man’s opionion. At least I can express it for the time being but I wonder how much longer that will be allowed. The Dems want to regulate the internet for “content” and this voice and many others much more profound and worthy may soon be lost because of a bureaucrat’s interpretation of content being deemed “hateful” or divisive or whatever other standard they decide to apply. Check the proposed now law for yourself. It didn’t get much play last year because it didn’t even make to the Senate but it will be back next year for sure.