Archive for September 2008
The $1,000,000,000,000 Market Meltdown
I’m still learning about the recent melt down of the subprime market that has led to Congress considering a one trillion dollar commitment of tax payer money to stabilize markets. But I have a few impressions right now.
First, Americans are rightfully outraged by the regulatory foolishness that contributed to the problem. For example, I understand the two quasi-government agencies that played a major role in this catastrophe — Fanny Mae and Freddy Mac — offered NINJA loans. These are loans that required No Income, No Job, and No Assets. What kind of foolishness was this? Should we be surprised that many of the recipients of these loans have defaulted? Should we be surprised when healthy banks are required to buy these mortgages that they become financially sick too?
Second, some of the leaders of lending institutions profited enormously, some might say profanely. Some leaders are well connected within the Washington DC political class. They are members of both parties and have made monetary contributions to both parties. For example, Franklin Raines, now an advisor to Barack Obama, pocketed $50 million (see http://www.foxnews.com/story/0,2933,423701,00.html)
Third, this problem is of bi-partisan creation. Members of Congress in both parties pushed the legislation and regulations, which evolved during the administrations of President Bush and past Presidents. Some people trace the origin of our current regulation back to Bill Clinton’s administration, others as far back as Jimmy Carter. In any case, members of both parties thought the regulations were a good idea. For this reason, I doubt we will see Enron-type Congressional hearings into this fiasco because it would embarrass sitting members of Congress.
Finally, the mess was made possible by government leaders who acted out of good intentions. They wanted to make home ownership (‘the American Dream’) more accessible to low-income Americans. But their good intentions backfired when the system ran amok by offering NINJA loans and other ridiculous practices.
Regardless of where we pin blame, it seems clear that despite America’s enormous wealth our finances are not unlimited. We simply cannot afford to give everybody anything they want, whether it be cheap home ownership, free health care, free transportation, or whatever. The solution to poverty is education, not subsided loans or free housing or socialized risk.
