It’s probably fair to say we’ve been inundated with “news” and “information” relating to the current economic situation, and the proposed “bailout/rescue”. My problem with with this deluge is that it has not been very informative as to the causes, possible actions, or the action undertaken as a remedy. To be informed these days, you really have to try to dig and research the issues yourself; it’s not enough to watch, listen and read the traditional sources.

This is not another attempt to address the issue of why or who’s to blame for this morphing of our traditional sources of news and information to what they’ve become. It is what it is, and it’s increasingly obvious. The result is that we must be responsible for informing ourselves in this age. “By the people, for the people” fails when the people’s money can be used to manipulate the people’s will. Thus, my purpose in writing is to inform, not blame.

Once again we are hearing that the current “crisis” is due to rampant Wall Street and/or corporate greed, unregulated or deregulated banks/markets, and essentially (sometimes explicitly) a failure of capitalism. There is also a resounding chorus that it’s due to the economic policies of the last eight years. You might expect one party to espouse such a view, but for the other not to challenge it is puzzling. It leads to the perception that the allegation must be true. These charges, though oft repeated, are rarely questioned or examined. It’s widely understood that they will not be challenged either, therefore it’s also customary to level the charge with no evidence to back it up. Any analysis of the situation should be focused on the evidence, wherever it leads.

As I understand it, this situation is once again the result of government intervention in, and manipulation (a.k.a. regulation) of the market. As such, that’s the main problem I have with the “bailout” our nation is currently undertaking; we’re putting the fox in charge of our hen-house. When has that ever worked? An argument can be made that all major “market failures” we’ve experienced were in fact precipitated and/or exacerbated by government meddling. Exhaustive research has been done, and I don’t intend to repeat it due to the time required. See the following:

• Uncommon Knowledge: What Caused the Loan Crisis?
• What Now? Controlling the Narrative
• Dispelling the ‘Deregulation’ Myth
• The Real Culprits In This Meltdown
• The Lamps Are Going Out
• Government Intervention Is Needed to Solve the Housing Crisis? It Just Ain’t So
• The Goal Is Freedom: Government Failure
• Economic Depressions: Their Cause and Cure
• The Great Bank Robbery of 2008
• What Should Be Done About the Financial Markets?
• How the government stoked the mania
• Economists Raise Concerns About Bailout Plan

My conclusion from the research I’ve done is that the ball really got rolling when government and the media pressured lower level lending institutions to be “more fair” and lower lending standards. Late 60’s radicals (a.k.a. Community activists) in Chicago coined the term “redlining” to decry lending practices they deemed discriminatory. Is it discriminatory to refuse credit to bad risks? Perhaps if the determination was purely geographic or racial, as they allege, but that was not demonstrated (again the charge was leveled without evidence). It’s smart to deny credit to those without jobs or income. Eventually protesters like ACORN, paid with a significant percentage of tax dollars through government grants, hired layers like Obama to sue banks on behalf of “disenfranchised” potential borrowers. The media again fed the frenzy and ultimately the government required lenders to view unemployment and welfare payments as “income” and write more subprime loans (by beefing up the CRA). Government later turns on them for “predatory lending practices” to avoid culpability.

Market forces were already creating more capital and more lending in the subprime market through debt securitization instruments, but government would never get “credit” for that (so to speak). The innovation of debt securitization preceded the Clinton administration turbo-charging of the CRA, seems to be a good thing, a market force, and in itself served to spread risk and create the results the government was after.

The success of the securitization industry has helped many individuals with subprime credit histories obtain credit. Securitization allows more subprime loans to be made because it provides lenders an efficient way to manage credit risk. Efforts to curb “predatory” lending that inhibit the legitimate use of securitization by assigning liability to the purchaser of a loan or some other means, threaten the success of the beneficial subprime market. Secondary market purchasers of loans, traders of securitized bonds and investors are not in a position to control origination practices loan-by-loan. Regulation that seeks to place disproportionate responsibilities on the secondary market will only succeed in driving away the capital loan purchasers provide in the subprime market.

I urge Congress to move with great care as it addresses the problem of predatory lending. The secondary markets are a tremendous success story that has helped democratize credit in this country. Well intended, but overly restrictive, regulation in this area could easily do more harm than good.

Statement of Cameron L. Cowan Partner Orrick, Herrington, and Sutcliffe, LLP On behalf of the American Securitization Forum
Before the Subcommittee on Housing and Community Opportunity Subcommittee on Financial Institutions and Consumer Credit United States House of Representatives
Hearing on Protecting Homeowners: Preventing Abusive Lending While Preserving Access to Credit November 5, 2003

What I’m starting to see and question is the government instigation and subsequent corruption in debt securitization. The previously cited statement points out:

The first mortgage-backed securities arose from the secondary mortgage market in 1970. Investors had traded whole loans, or unsecuritized mortgages, for some time before the Government National Mortgage Association (GNMA), also called Ginnie Mae, guaranteed the first mortgage pass-through securities that pass the principal and interest payments on mortgages through to investors. (Ginnie Mae is a government agency that guarantees securities backed by HUD- and Veterans Administration-guaranteed mortgages.) Ginnie Mae was soon followed by Fannie Mae, a private corporation chartered by the federal government—along with Freddie Mac—to promote homeownership by fostering a secondary market in home mortgages.

In and of itself I think the securitization trend was a good thing. However it was the Government Secured Enterprises (GSEs) that initiated it, and that gives me pause. With the well documented, but rarely reported cozy relationship the GSEs had with their congressional overseers (FNM and the Democrats in particular) they stoked the machine by encouraging the government to force more & more subprime lending thinking they could soak up the additional risk with the layers and layers of abstraction that the derivatives provided. It was a corrupt relationship that stoked the housing bubble out of control. There were attempts to rein it in, but those who set it up successfully blocked those attempts. The greed was not in the capitalist mechanisms or the market, it was in the government and those that feed at their trough. Much was made of the handcuffing, trial & jailing of Enron & Worldcom CEOs for their culpability in the corruption that caused the collapse of their companies. The accounting practices at Fannie Mae were identical, requiring a year and a half to restate earnings afterwards, but the CEO becomes an adviser to prominent democrats? Note that in the former cases, corruption & greed resulted in collapse…the market at work?

There was a statement in the Fox News special report (10/4/08), ‘Saving Our Economy: What’$ Next?’ that mortgage securitization has been tried six other times in American history between the civil war & WWII, and each time it blew up with major economical consequences. If true, we would have to seriously question the level of market involvement in securitization, and it’s possibility to be a force for good. If you’ve seen the evidence, please comment…I’m still looking.

Don’t overlook the effect of the liberal doctrine of “fairness” in setting this fire either. Why force more subprime lending in the first place? Because it’s only fair that everyone own a home? Is it just as fair to burden those who can afford their payments and keep them up, with the defaults of those who can’t or don’t? Fairness can only be legitimately found in opportunity, not results. Individual will, fortitude and integrity must be added for opportunities to produce results. With unemployment at record lows throughout the period in question, was the opportunity to earn enough to legitimately qualify for a loan lacking? Doubtful. Clearly the self-discipline of living within one’s means is not part of the government “fairness” equation.

The government often intervenes supposedly to make the markets behave “fairly“. Where imbalance exists, there is usually a way for someone to benefit from correcting the condition; this is far more efficient and known as the root market force of the profit incentive. Debt securitization was providing a means for the market to take on more subprime risk. Government intervened anyway to mandate more risk taking. Again, regulation was a problem, not a solution. With the increased availability of easy credit and rapidly rising demand speculators & investors entered in a big way. To me that’s a good thing, as it concentrates the risk on the risk-takers. Most of the 2007 mortgage defaults were indeed in this segment of the market. As the market self-corrects, those incurring the most damage first are those seeking the greatest gain; that’s as it should be. The damage typically spreads when government intervenes on behalf of those not yet affected, thereby ensuring they are also damaged.

Markets encourage and incentivize fair behavior (evidence supports this truth, some simply refuse to believe it), whereas government can only require fair-sounding results. By setting the requirements they presume to know more/better, and quench the creativity that is best unleashed by the ability to personally gain.

This entry was posted on Monday, October 6th, 2008 at 9:39 am and is filed under News. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.