Necessary, but hardly sufficient

Joe Nocera, writing in the New York Times yesterday, explains why Wall Street is to blame for the financial crisis: A Wall Street Invention Let the Crisis Mutate

Every time you pick up another rock along the winding path that led to the financial crisis, something else crawls out. Subprime mortgages were sold as a way to give low-income people a chance at homeownership and the American Dream. Instead, the mortgages turned out to be an excuse for predatory lending and fraud, enriching the lenders and Wall Street at the expense of subprime borrowers, many of whom ended up in foreclosure.

The ratings agencies, which rated the complex investments that were built with subprime mortgages, turned out to be only too happy to be gamed by firms that paid their fees — slapping AAA ratings on mortgage bonds doomed to fail. Lehman Brothers turned out to be disguising the full reality of its horrid balance sheet by playing accounting games. All over Wall Street, firms pushed mortgage originators to churn out more loans that were doomed the moment they were made.

In the immediate aftermath, the conventional wisdom was that Wall Street had simply lost its head. It was terrible, to be sure, but on some level understandable: Dutch tulips, the South Sea bubble, that sort of thing.

“…that sort of thing.” Mr. Nocera must think the Dutch government was subsidizing tulip buyers who couldn’t afford the flowers, because one sort of thing he fails to mention is government regulation. It’s the main “sort of thing,” and I do not mean there was too little. Without the government policies structured to punish banks if they did not lend to people who could not pay, synthetic C.D.O.’s would never have existed. Compounding that was the direct Federal intervention via Fannie and Freddie, as well as the lying about their stability:

“These two entities — Fannie Mae and Freddie Mac — are not facing any kind of financial crisis. The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing.”
-Rep. Barney Frank, D-MA

When Mr. Frank said this, George Bush was President. Frank was the ranking Democrat on the Financial Services Committee. He was not alone in defending the sub-prime debacle.

“I don’t see much other than a shell game going on here, moving something from one agency to another and in the process weakening the bargaining power of poorer families and their ability to get affordable housing.”
-Rep. Melvin Watt, D-NC

Mr. Watt was reacting to a Bush Administration proposal to increase oversight on Fannie & Freddie. It might well have affected the “ability” of some to buy houses they couldn’t afford and which have been repossessed since.

It wasn’t just Wall Street urging the Fed to keep the housing bubble going, either:

Among the groups denouncing the proposal today were the National Association of Home Builders and Congressional Democrats who fear that tighter regulation of the companies could sharply reduce their commitment to financing low-income and affordable housing.

The corporatist whores and the vote buyers all asked for Federal intervention on top of Federal intervention – and they got it. Mr. Nocera could have written a complete article if he had acknowledged this.

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