As I take time from actually accomplishing work to think about the situation I can’t escape the feeling that this is a mistake. I’ve tried to shake it, I’ve tried for weeks. I thought fear would do it, and it came close. I thought research and gaining a better understanding of the problem would do it, and it almost did. However, try as I might, my reservations keep coming back to me.
As has been stated again and again, this problem traces its origins back to the GSEs and through them directly to governmental policy. I watched the debate last night and the unfettered populism almost made me nauseous. Populism, at least to some degree has its place. After all, the fate of this country rests upon the shoulders of its people, and the leaders would do well to remember that. It’s not a senator, a congressman, or a president that makes this country great; it’s the principles, dedication, and devotion of Americans that accomplish what no application of government can.
That being said, it causes me equal parts anger and regret when I hear a politician use populist rhetoric to absolve the people of their complicity and responsibility for the current crisis. Listening to both candidates last night, all fault for the current economic position of the country lies with ‘predatory lenders’ with absolute absolution given to both the people in general and the government. Let’s think about this for a moment.
No bank in its right mind would engage in ‘predatory lending practices’ if it didn’t have an outlet to unload the loan. What bank is going to lend you 200 thousand dollars that you can’t repay if their going to get stuck holding the bill? Enter the GSEs. As most informed readers know, on this site at least, these institutions reduced the quality of the loans they purchased. This, by it’s very nature, created a mass of bad loans. From a business perspective, if I can get someone to enter into a loan, and then turn around a sell it for a profit no matter what the quality of the loan is, I’m going to do it again and again. This is our root problem.
The people of America are complicit in this. We, on the average, like that that people could get a loan so easily. It’s part of our better natures to believe that once people get this little hand up they can achieve great things for themselves. Optimism without pragmatism is no way to live. We buried our heads in the sand in regards to this situation for so long that it finally caved in around us. Somehow we think throwing some money at the problem will get us back on our merry way, no changes, and this is where I have a problem.
A market only works when choices carry with them consequences both good and bad. We are quickly removing the consequences from choices made by lenders, investors, and people in general. The only way this will not create some massive moral hazard is to engage is over bearing regulation and government intervention in the mortgage market. Unfortunately for people that actually believe in markets, the mood of the country is ready to go down the path of miles of regulation.
Sadly I don’t think any amount of regulation will solve this issue long term since the people responsible for the regulatory framework are the original source of our troubles. No objective person can say that the Democratic Party did not like the activities of Fannie/Freddie. It was their brainchild after all. I truly believe that they think things went wrong because they didn’t have more control instead of seeing that the premise itself is flawed. Now we’re in a head long rush to give them a level of control of the mortgage industry not before seen. It seems to me that they will further compound the issue by doubling down on their support for subsidized home ownership in this country. They will take our current problems, re-brand them, and send them back out into the world. Only this time, instead of implicit government support, there will be explicit government support. This will return to us 10 times the problem it is now. What will be the verdict of the country then? Will it still be the lenders fault? Will the prevailing opinion be that the only solution is to roll base financial services into the government since obviously lenders can’t behave themselves even with the government babysitting their every action? Where will it end?
This is a can of worms I don’t we should want to open, but it’s looks we’ve already broken out the crow bar and are ready to dig in.