What if:
Sophisticated investment managers performed just enough due diligence to find that the values of mortgage securities were based on sham underwriting procedures, worthless documentation and no-equity loans? The money wouldn’t have been there.
Moody’s and S&P didn’t rubber stamp their approval on the same damaged goods and rated them as junk rather than AAA? The market size would have been much, much lower.
Fannie and Freddie held to their original mortgage underwriting standards and didn’t blind Congress and the public with slick advertising about homeownership for everyone while using the U.S. Government’s good faith endorsements of trillions of dollars in securities and insurance? Significantly less junk would have found its way to market.
The two chairmen of the Federal Reserve who succeeded Paul Volcker didn’t believe that the market would take care of itself and policing was necessary? The regulatory apparatus would have worked and Congress wouldn’t have gained comfort parsed in Greenspanish.
Wall Street’s underwriting staffs and directors were held accountable for long-term results and product performance rather than earning bonuses based on volume? We would now have confidence in public offerings.
Banking regulators and the SEC used their offices as intended to police the businesses they were accountable for keeping from dangerous practices? Warnings of unsafe and unsound would have been plastered on their front doors and bank directors would have known they were being pushed or driven like sheep.
We could even ask what might managers of banks, mortgage firms, realtors, and the sundry associated businesses have done to avoid excess development and building in their communities, and assured that home buyers were qualified? It is almost too much to be asked of people universally driven by the quick profit motive.
The lesson: If the key players on even one of the steps up this ladder had done their jobs we would not be suffering a long-term economic collapse. Instead they and Congress dug a hole that will make Japan’s economic malaise of the 1990’s look like a success story. After the S&L debacle of the 1980’s and much chest beating heard from Washington, the lessons weren’t learned and a bigger fiasco awaited because, after all, commercial and Wall Street bankers were wiser and understood how to manage risk!
Where to from here?
We now have new statutes that were compromises made with the same key players who brought the problem to our doorstep. The ball is in the hands of regulators to make what ever they will with this inadequate legislation while they use the “expertise” from the Wall Street, lawyers, consultants, academics, and accountants (many former legislators and their lobbyists) whose careers will continue to be paved by riding this gravy train.
In our succeeding Newlind entries, we will see how much can be sifted from the scramble and obfuscation surely to be generated in all of these quarters. RL/BN
August 11, 2010 at 12:16 am |
Welcome back. I had assumed that you were on vacation.
What if??
What if we had the wisdom of foreseeing unintended consequences? Fanny and Freddy got into trouble because Congress and the White House wanted to promote individual home ownership. This was a strategy of “a chicken in every pot” expanded beyond the principles of prudent investment. Now that this policy has become bankrupt, what does the future portend? Believe it not, I see a ray of optimism. Our politicians may not be any wiser, but the general public seems to have learned a lesson. Many Americans have pressed the “reset” button; they have started to live within their means; they are becoming debt shy. If this is a significant and permanent consumer change, there may be an eventual happy ending to our story.
August 11, 2010 at 9:09 pm |
Brad, thanks for your remarks. The aggressive effort to force home ownership as a means of elevating low income people has been government policy since Johnson era and gained momentum ever since. During George Romney’s stewartship of HUD in the 70′s he decided that placing welfare mothers and their children in foreclosed FHA houses in the neighborhoods would somehow raise their family standards, but no, it launched a massive move out of cities like Detroit to the suburbs.
During the Carter Administration the campaign was to force lenders to not “red line” low income districts. Again, a noble idea but it forced bad lending practices. So it isn’t surprising that this mentality gave us the eventual demise of good lending practices for “anything goes” in order to meet the demands of unqualified homebuyers who saw a good thing – no money down, and fabricated applications. Great Society and great dismay at its failure. Most of the eventual improvement in cities such as Chicago came from a dynamic core city with a gradual gentrification of the nearby neighborhoods. This is not to say that discrimination along racial lines should be tolerated, but stimulating via housing policy shouldn’t be the tool for changing either moral or social behavior.
Roger