More about the mortgage side of the crisis...

[elfs]

Andrew Sullivan had a recent question to his audience: Who Caused the Financial Collapse. His audience responds with a number of articles, the most significant of which comes from Mike Konical at Rortybom:

The GSEs had a serious corruption problem and were flawed in design - Jeff Madrick and Frank Partnoy had a good column about the GSEs in the NYRB recently that you should check out about all this – but they were not the culprits of the bubble.

Andrew originally reached this provisional conclusion:

By creating major incentives and pressure to sell homes to the poor, the feds prompted (but didn't force) the banks to sell and insure dodgy mortgages in ways that disseminated the risks across the entire global financial system via credit default swaps and the like. The banks somehow believed that this dissemination of risk removed risk, and structured the loans so they would only work in a real estate market that never faltered. When it did falter, the insurance mechanisms metastasized a real estate crisis in one country into a financial crises across the entire world economy. At some point, the bankers knew they were peddling crap and some tried to sell it deceptively to clients. ... I don't see how the government forced these practices into being. And I don't see how government encouragement of selling homes to the poor forces the kinds of reckless loans the bank made or the even more reckless and sometimes fraudulent ways in which those risks were made to look invisible.

It's a fairly strong provisional conclusion, and after listening to his audience respond to it, he emphasizes:

Fannie and Freddie played at best a marginal role in the crisis, largely by belatedly following the private sector's reckless innovations in the sub-prime market, from 2006 onwards.

This pretty much aligns itself with everything I've read about the crisis from both the Wall Street and "mortgage innovators" sides of the equation.

One thing I do disgree with Andrew on is the line "At some point..." As LJ user Candide pointed out earlier this week, from the very beginning the number-crunchers knew something was wrong, but the traders, who saw how awesome the money was, ordered them to keep quiet. There's a term for this: institutional corruption aka fraud.

This is why I reject the assertion that somehow the GSEs were to blame. To claim that congressmen who were in the minority from 1995 through 2006 are somehow not only to blame for what happened but are criminally liable is not only irresponsible but reprehensible. Newt Gingrich's call to have Barney Frank and Chris Dodd thrown in jail is an ass-naked power play on behalf of Gingrich's corporate owners that inadvertently slipped out of his big mouth. It is an attempt to distract from the issue at hand: the regulatory landscape is in the hands of those with short-sighted, profit-oriented goals detrimental to the general well-being of the American Republic and its citizens.

Comments

[shockwave77598.livejournal.com]

If the politicians won't reign in these robber barons, then the citizens have every right to do it on their own. Up until they robbed every taxpayer so they could still pay bonuses for screwing up, the argument could be made that you didn't have to do business with them. Now that they are robbing every taxpayer collectively, every US citizen has every right and obligation to stand up to their greed and abuse and scream "Enough", be they customers or not.

And I like the idea of a deck of cards with the CEOs and board members of these banks on them. Make it clear that there's another step past the peaceful protests, and it's up to them whether or not we go there; them and the cops who are hellbent on preventing people from exercising their first ammendment rights. If you make peaceful protest impossible, you guarantee violence will follow.

[http://users.livejournal.com/_candide_/]

…and another thing:

I've pointed out, to many propaganda-infected people, that George W. was very, very pro-business, and had control of both houses of Congress from 2000-2004. I then ask, "So, if the Poor Widdle Banks were being forced to give mortages to the Lazy Poor (read: non-white) People by the Eeeebil Guvvmint, why didn't W. and his friends in the House & Senate repeal all of those regulations?"

I get lots of talking-points in response, but never an actual answer.