Greed, Incentives and Liberals...oh my

With the holiday season in the rear view mirror, I’ve been mentally replaying some of the conversations I had in regard to the current state of the economy. It seems that most people I had the discussions with fell into one of two camps. One camp believed that much of the current economic turmoil was caused by greed and “Wall Street” while the other camp felt that government intervention created an atmosphere that led to the collapse.

Typically the “it’s the greedy bankers” crowd falls on the left side of the ideological isle while the “government intervention” crowd falls on the right. For the most part, it seems that regardless of the side that you land on, there is agreement that the housing bust really got the ball rolling.

I fall firmly in the “government intervention” camp. I believe that government did play a large role in the problem. Anyone who is applying logic and being intellectually honest could not believe otherwise. Let me explain.

Let’s assume for a moment that greed was the driving factor. If that’s the case, where has this greed been? Did it just rise up in recent years and cause people to behave in such a way that the risk associated with making these loans was no object? I have a difficult time believing that suddenly bankers, mortgage brokers, et al. decided that the population of “safe” mortgage shoppers was insufficient and chose to target “higher-risk”, lower income people and minorities. That theory simply doesn’t pass the smell test.

Now let’s assume there were incentives involved. What seems more plausible is that the institutions that were selling mortgages were given incentives to make loans that would not have been made otherwise. These “incentives” could be monetary/security based (i.e. don’t worry Freddie and Fannie will buy that paper so your bank doesn’t have to hold it to maturity) or perhaps coercion.

Many banks signed agreements stating that they would work to reach government defined quotas in regard to lending to low income and minority borrowers. The banks that didn’t sign on to that agreement, were “encouraged” to sign a “non-binding letter of intent” stating that they too would attempt to reach the quotas.

Maybe I’ve watched too many mafia movies, but the fact that the banks that did not explicitly sign the quota agreement were then “encouraged” to sign a “letter of intent”, smells a little coercive to me. After all, banking is not an industry lacking in government regulation. If one of the institutions that signed the aforementioned “letter of intent” didn’t produce good numbers for lending to low income and minority borrowers, their business could very well be held hostage for any number seemingly legitimate “legal” reasons.

Call me an evil, greedy Conservative Republican but when you have people like Barney Frank (D-MA) stating that companies should “roll the dice” on subsidies for affordable housing it tells me that he has a vested interest in “helping” the underprivileged. In reality, he is hurting the very people he professes to care about but in the liberal world, only good intentions matter.

Greed cannot be created by legislation but incentives most certainly can.

crossposted to The Ritz Report