1. Things did not get this way overnight. If one goes back to the modern (as in my lifetime) source for the problems which are specifically part of the sub-prime mortgage market, one simply needs to stop off in 1977 and look at the Community Reinvestment Act. Among other things, this law (as noted in the WSJ):
compels banks to make loans to poor borrowers who often cannot repay them. Banks that failed to make enough of these loans were often held hostage by activists when they next sought some regulatory approval.
According to the calendar which I use (yours may differ), that puts this problem right at 31 years in the making.
2. Not everyone was asleep while this problem approached critical mass. While I am not as familiar with changes in legislation which may have been proposed back in the 80s and 90s, it is eminently apparent that there were those who raised the alarm (particulary in reference to Freddie Mae and Fannie Mac) starting several years ago. Here’s a bit of what was known/happening in 2003:
January: Freddie Mac announces it has to restate financial results for the previous three years.
February: The Office of Federal Housing Enterprise Oversight (OFHEO) releases a report explaining that “although investors perceive an implicit Federal guarantee of [GSE] obligations,” “the government has provided no explicit legal backing for them.” As a consequence, unexpected problems at a GSE could immediately spread into financial sectors beyond the housing market. (“Systemic Risk: Fannie Mae, Freddie Mac and the Role of OFHEO,” OFHEO Report, 2/4/03)
September: Fannie Mae discloses SEC investigation and acknowledges OFHEO’s review found earnings manipulations.
September: Treasury Secretary John Snow testifies before the House Financial Services Committee to recommend that Congress enact “legislation to create a new Federal agency to regulate and supervise the financial activities of our housing-related government sponsored enterprises” and set prudent and appropriate minimum capital adequacy requirements.
October: Fannie Mae discloses $1.2 billion accounting error.
3. The SEC has some serious ‘splainin to do. This would be regarding giving Lehman Brothers, Merrill Lynch, Morgan Stanley, Goldman Sachs, and Bear Stearns permission to assume hugely risky debt-to-capital ratios:
This alternative approach, which all five broker-dealers that qualified — Bear Stearns, Lehman Brothers, Merrill Lynch, Goldman Sachs, and Morgan Stanley — voluntarily joined, altered the way the SEC measured their capital. Using computerized models, the SEC, under its new Consolidated Supervised Entities program, allowed the broker dealers to increase their debt-to-net-capital ratios, sometimes, as in the case of Merrill Lynch, to as high as 40-to-1.
Excuse me, did I just read 40 to 1? Everybody else had to stay within a 12 to 1 limit (and most did not even want to flirt with that limit as doing so brought additional scrutiny from the SEC).
4. Financial failure always hurts the innocent as much as (and often more than) the guilty. I did not, as far as I am able to ascertain, contribute in any manner to the current financial crisis. Therefore, I would be considered an innocent in this matter (as would my family members who also did not contribute). It doesn’t matter. According to estimates which are being bruited about, my immediate family will be on the hook for 15,000$ in additional liability (beyond our current share of the national debt, which I don’t even have the heart to calculate at present). Of course, I won’t mention the substantial percentage of the population which (for all intents and purposes) does not pay taxes since they receive more from the government via handouts than they pay in taxes.
5. The free market still works better than the alternatives. Lehman Brothers collapsed and (thankfully) did not receive a government bailout. It now appears that Barclays has purchased them (pending the full approval process) and will save some 10,000 jobs as a result. Of course, we are being told that letting AIG go the same way would have been too destructive to world markets. Who is to say that someone wouldn’t have been interested in them also? People tend to show up for fire sales, at least in my experience.
Postscript: I realize as I write this that the 700,000,000,000$ bailout plan is still in Congress. I hope and pray that it does not survive the passage and that cooler thinking prevails. However, this is an election year and I’ve reason to think that most politicians are more interested in winning the election than they are in remaining or (in the case of some) becoming ideological purists. As I am not running for anything, I suppose I do have that luxury.