Posted by
Andrews on Sunday, October 05, 2008 10:50:55 AM
I earlier asked why politicians were blaming "Wall Street" for a problem the politicians created. Well, after watching Sunday talking heads, I now understand the soft-headed thought process that blames "
Wall Street" and "
greed" for a situation which was purely a politically created problem.
The problem is that banking regulations were loosened (by "
evil Phil Gramm", along with a few hundred others in congress, who go unmentioned), and banks were allowed to diversify into other financial areas, including direct investment. And... um, something... And they bought bad mortgages. So the bank reform bill is to blame.
This, of course, completely ignores the fact that the problem is
BAD MORTGAGES.
Allow me to point out a few facts:
Banks create mortgages, so with or without the reform, banks would be holding mortgages.
Banks bought and sold mortgages before the reforms. No, they may not have bought the specific types of bundled mortgages prior to the reforms, but they could still have bought the same bad mortgages, just via a different route. Nothing prior to the reforms prevented banks from buying mortgages. And I have no doubt, were banks still restricted from "investment", that some of these mortgages would have been packaged for sale to banks while others would have been bundled into instruments for sale to investors.
If banks were prevented from buying all mortgages, or some specific subcategory of mortgages including the bad mortgages, then these mortgages would not have been sold, and would have remained at the originating banks, creating just as great a crisis, but locating the failures at different banks. Do we really care which specific banks fail, provided the scope of the failure is as great?
Or, if banks could not buy such mortgages, but brokers could, then banks would not have bought such loans, but either their parent corporation, or an associated brokerage or investment bank would have (eg. Citibank would not have bought them, but parent Citigroup would have). The failure of either would have threatened the banks just as much, but as the relationship is more distant, it would have been harder for investors to anticipate. Allowing banks to directly invest did not create any more harm, it just made such bad investments more obvious to outsiders.
Sorry, I still don't see what Wall Street has to do with this. The brokers and investors bought bundled mortgages imagining that no bank would be so foolish as to originate loans based on insufficient documentation or assets. They knew high returns meant some risk, but they did not know the return was inadequate to represent the absurd level of risk that government policies forced the originating banks to accept.
Instead of "Wall Street greed", all I see are foolish politicians trying to ignore economic laws to carry out social engineering. They are to blame, and that's it. It is simplistic, but sometimes the truth is simple.
POSTSCRIPT
Again, to avoid any mention of the handful of specific frauds that took place at the same time, I admit there were some criminal who used escalating housing prices as cover for their fraud. For example, house flipping schemes which sold houses back and forth to fraudulently inflate house values before defaulting on excessive loans. But such fraud is not the cause of our problems. Fraud always makes use of current circumstances, so whatever is happening in the economy will be reflected in how frauds are carried out. But those fraudulent transactions have as little to with the current crisis as bank robbery has to do with banking policy.
POSTSCRIPT II
There is one matter I should clarify. I say that Wall Street is not to blame for the crisis, and they are not. On the other hand, Wall Street is largely to blame for pushing this foolish bailout idea. In that case, Wall Street greed is a perfectly acceptable target for criticism. Rather than taking the losses on risky investments, or even making the effort to recover what they can from shaky loans, they are running to Washington to get bailed out. That is the fault of the businesses which bought the loan.
So, if you want to bash business, feel free to do so concerning the bailout itself. Just don't blame them for the original problem.
UPDATE
Actually, my Citibank/Citigroup example is a bit unfair, as they seem to be largely untouched by this crisis. So, as both a former employee (back when they were Citicorp) and current investor, I should point out that I used them as an example only because it was the one case where the owner and subsidiary are both known, not because they were actually involved in this crisis. Just wanted to clear that up.