Here We Go Again -- Let the Government Fix It! In light of constant pleas for government-brilliance-and-intervention-once-again-as-solution-for-all-things-failed--even things government intervention and cronyism caused to fail in the first place--the following is important for the objective thinker. Many today still claim free-market as causal for the collapse of the global financial system--the unregulated free market. As such, they have justified massive interventionist policies over the last five plus years that are crippling, killing, the American and global economy (and, no, false recoveries based upon fiat money--trillions in fake currency added to the money supply, a.k.a. quantitative easing--doesnt a recovery make and isnt sustainable). Today, we still sit at record 23-24% real unemployment, 1 in 7 Americans on food stamps, and nearing $18T in debt. Uhhh... not working... whatever it is the interventionists are doing. Further, their justification for same, is errant. I shared this a few years back, but thought relevant given the latest round of Government-as-Savior pitches: The Subprime Lending Debacle, Competitive Private Markets Are the Solution, Not the Problem by Patric H. Hendershott and Kevin Villani* Cato Institute, June 20, 2011 The United States’ market-government hybrid mortgage system is unique in the world. No other nation has such heavy government intervention in housing finance. This hybrid system nurtured the excessively risky loans, financed with too much leverage, that fueled the U.S. housing bubble of the last decade and resulted in the systemic collapse of the global financial system. ...The responsibility for the massive failures of the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac, at the center of American housing finance and the private securitization system that supports housing finance, falls directly on regulators and indirectly on their political overseers. Private and GSE prudential regulators were given politically determined social lending goals that ultimately trumped prudential regulation, forcing the GSEs to fund subprime lending in competition with private label securitizers. ...The result was the extension of lower and lower quality loans, creating a race-to-the-bottom between the GSEs and private mortgage providers, all while regulators and politicians looked on approvingly. The financial crisis resulted when many of those loans turned sour in the latter part of the last decade. ...The subprime lending debacle occurred because politicians saw to it that mission regulation trumped prudential regulation, with the complicity of GSE CEOs conflicted by enormous payoffs. So why did the 662-page FCIC report conclude that the goals were not a cause, and instead devoted their attention to everything but politically induced distortions? Commissioner Wallison, who in dissent reached essentially the same conclusion we do, testified before Congress that—like the Pecora Commission it was modeled after—the FCIC was rigged to yield the conclusions that it reached, ignoring any evidence that conflicted with those conclusions. ...Politicians introduced the profit motive when they privatized Fannie and Freddie, imposing an enormous burden on prudential regulators to mitigate moral hazard because agency status trumps market discipline. The imposition of lending quotas imposed the additional burden of protecting safety and soundness when meeting the quotas. Shareholders historically understood the political risk of managing the costs of meeting affordable housing goals against the benefits of agency status, and they encouraged management to spend lavishly on politicians to mitigate the risk. Weicher’s housing goals would force purchases that fueled the bubble, the inevitable bursting of which caused the subsequent systemic collapse of the financial system, but even prior levels of goals would likely have produced the same result. The housing goals should have been suspended by mid-2004 and the GSEs seriously restrained until the market cooled off. *Kevin Villani -- consultant and former Freddie Mac chief economist Patric H. Hendershott -- taught economics and finance at Purdue University and Ohio State University from 1969 to 1999 and is a part-time chair in real estate economics and finance at the University of Aberdeen, Scotland DM Chaney Thoughts on Liberty (C) 2014 PS -- If you would like full report, please private message me. Dropbox file not working for some reason tonight. Thanks.
Posted on: Wed, 29 Jan 2014 08:07:02 +0000
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