These are important points. There was some predatory borrowing going on in addition to predatory lending. And the worst lending mistakes were made by the least regulated segment of the market. So you have inexperienced amateur real estate speculators getting financing from Rolex-wearing mortgage brokers who sell the loans to 24-year-old Beamer-driving Wall Street investment bankers. Why can't the rest of us just sit back and watch them all get what they deserve?Great points all. Government created the problem (the Community Reinvestment Act sounds great, but operationally has created more problems than itsolved) and now they are being called on to fix a problem they created. The problem of course is that the solution may very well end up being worse than the problem.
Instead, we get the Treasury and Congress coming up with "plans" to rewrite mortgages. These brilliant solutions contribute to making the mortgage securities market totally illiquid, because now nobody has any idea what the cash flows are going be under the (make them up as you go along) rules.
I approve of what the Fed is doing. But looking at government as whole, I would say it is like a 10-year-old boy rescuing an old woman from a fire that the boy started in the first place. For most of the past year, the goal of the political class has been to keep unqualified buyers in homes as long as possible.
This is morally dubious. The people who most deserve to be in homes now are the people who decided in 2005 and 2006 that they could not afford the then-prevailing house prices or who decided to at least wait to accumulate a down payment. If you can sort out the predatory borrowers from the victims of predatory lenders sufficiently well to identify the latter, then the best thing that you can do with taxpayer money is to write checks for those victims.
The way I see it, government has served primarily to prolong and exacerbate the problem. That Dionne, Blinder and I can view the same situation and not change our priors about the role of markets and government says something about confirmation bias.
Wednesday, March 19, 2008
Arnold Kling on the Financial Turmoil