Years ago, don’t ask me why, I was drawn into the moderatorship of a panel starring then-colleague Milton Friedman. His main point, iterated in the face of any criticisms or questions by panelists and audience members, was that markets succeed because, “unfettered,” they are the best expression of perfect freedom. They needed no watching or help from other spheres of life. Challenged: “Do you mean, Dr. Friedman, that there is no place where, say, the governments have a part to play in the market world?” “Roads!” The confident, one-word response sounded rehearsed. Roads have to run through private properties, subject to eminent domain. Anything else involving “others” with the “private” world? No, only “roads.”
Of course, not all advocates of “unfettered” and “unregulated” markets were as sure of themselves as Dr. Friedman, who was as informed and skillful a debater as I’ve ever known. Yet for most, governments were not to play any part in regulating or monitoring markets. Today we are hearing from many who are suddenly “born-again” advocates of some measure of regulating agencies and companies and transactions. The various sectors of society do have different interests and can mess each other up, but the headlines and prime time utterances this week indicate that, to give a secular translation of a “body of Christ” theme, “we are members one of another.” We re-learn it again, too late, during this “Worst Crisis Since 1930s,” and hope for healing.
Unfortunately for Mr. Marty, this is a perfect case study in government intervention in the market via the CRA, Fannie and Freddie. Or is he unaware of what the “G” in “GSE” stands for? It’s so easy to point to some gleaming, yet undefined “regulation” that would have short-circuited this crisis, but I’m certain that Mr. Marty would be loathe to explain to us which efforts were made to rein in this orgy at the GSEs, who made them, what those regulations might have done and, ultimately, who thwarted them.
And is he saying that Europe is under-regulated?
Ah, nothing is as bracing as the certitude of ideologues and academicians who every day reveal they live in Wonderland without a clue about the real problems in the real lives of real people.
In large part this was government created. The government pressured and guaranteed loans that no free market lender in his or her right mind would have made.
it is just an absolute CANARD that “de regulation” caused this – it was OVER regulation, i.e. telling FM/FM to guarantee (in the form of the Community Reinvestment Act and other government initiatives) any and all mortgages. then when the Republicans tried to put a stop to it, we all by now what the Dems did – they thwarted it.
The problem with Friedman’s and Marty’s phrasing as written here (Friedman may have included my point elsewhere which Marty omitted) is that truly free markets are not only “unfettered” and “unregulated” by anything except sanctions with teeth against outright fraud and predation, but they are also “unprotected” from the consequences of unwise choices. Companies or banks that invest or loan unwisely or overly speculatively or with an eye to passing on true cost and risk in financial hot potato sooner or later fail and dissolve, bearing most or all of the consequences themselves. Would that collectively and individually we had not believed promises that common sense and personal integrity and ethics would have told us were too good to be true.
“It is just an absolute CANARD that ‘de regulation’ caused this – it was OVER regulation, i.e. telling FM/FM to guarantee (in the form of the Community Reinvestment Act and other government initiatives) any and all mortgages†—Chris [#4]
I agree that deregulation is not a principle cause of this debacle (although it did, among other things, facilitate the growth of huge, secretive hedge funds).
But the reference to Fannie Mae and Freddie Mac is thoroughly fallacious. The Community Reinvestment Act has never applied to Fannie and Freddie. The affordable housing goals that do apply are not particularly constraining and did not force Fannie and Freddie to embark on their subprime binge. They did that of their own volition—to increase their market share and maximize their profits.
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The partisan political reference is exceedingly selective.
-1- The Bush Administration was asleep at the Fannie-Freddie switch for its first 30 months in office.
-2- The administration awoke in mid-2003 after Armando Falcon, Fannie and Freddie’s Clinton-appointed financial regulator, had exposed the two firms’ abusive accounting.
-3- The administration compiled a good record from fall 2003 to mid-2006. It made a sound set of reform recommendations. If enacted and vigorously implemented, those recommendations would have required Fannie and Freddie to increase their capital and could have increased market discipline on them. With the Democratic minority wrongly resisting two of those recommendations, the package did not become law.
-4- In 2006, after Henry Paulson became Treasury secretary in 2006, the administration lapsed into lassitude until this year.
-5- Even this year, the administration showed considerable lack of focus. The Treasury’s chief Fannie-Freddie policymaker, Under Secretary Robert Steel, had orders “to get commitments from the companies to raise more money as a cushion against all the new loans. But when he met with the firms, Mr. Steel made few demands and seemed unfamiliar with Fannie’s and Freddie’s operations.†http://new.kendallharmon.net/wp-content/uploads/index.php/t19/article/16752
-6- The administration had enormous leverage over Fannie and Freddie all along. Those firms need Treasury approval to issue bonds, and their business requires constant bond issuance. 12 U.S.C. §§ 1455(j) and 1719(b). The administration could have told Fannie and Freddie years ago that it would limit their bond issuance unless they started raising more capital. It did not.
-7- If the administration had disagreed with Clinton-era HUD policies regarding Fannie and Freddie, it could have changed them at any time, as it has full control of HUD and HUD in turn has considerable leeway in implementing Fannie-Freddie housing goals. The administration did not reverse those policies, probably because it did not regard them as problematic.
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Chris [#4]: In your comments on this and related issues, you have tended to offer flippant dismissals of views that differ from your preconceptions. If you disagree with the 7 points I’ve made here, say which ones and explain why you disagree.
[blockquote]The Community Reinvestment Act has never applied to Fannie and Freddie. [/blockquote]
Ah, but it did insofar as Fannie and Freddie were gobbling up the mortgages that primary lenders were making under the CRA. The CRA provided the club that activists used to bash banks and other lenders over the head to make these risky loans, then the lenders did so knowing they could sell the turkeys off.
#2 “vice, ignorance, weakness, and insecurity” yep, those only exist in the academy. There is no such thing in the real world ,where common sense rules.
Of course, who then needs Christ?
Jefferson, you make lots of accusations. But as any economist would tell you, numbers matter. Most F&F;loans were not subprime.
“Ah, but it did insofar as Fannie and Freddie were gobbling up the mortgages that primary lenders were making under the CRA. The CRA provided the club that activists used to bash banks and other lenders over the head to make these risky loans, then the lenders did so knowing they could sell the turkeys off”
—Jeffersonian [#7]
Nonsense. Nonbank mortgage firms—firms not subject to the Community Reinvestment Act—originated worse mortgages than FDIC-insured banks. Think Countrywide. Think predatory lenders. Think of all those scuzzy mortgage companies with their “Bad Credit? No Problem” advertisements. The CRA wasn’t clubbing them to lend like that, nor was anyone in the federal government.
In any event, the CRA is not the “club” you make it out to be. It contains essentially two rules, both of them squishy and process-oriented.
First, regulators must periodically “assess the institution’s record of meeting the credit needs of its entire community, including low- and moderate-income neighborhoods, consistent with the safe and sound operation of such institution.†12 U.S. Code § 2903(a)(1). This evaluation occurs annually for large banks and every four or five years for small banks.
Second, regulators must take account of that record—along with all other relevant factors—if the bank seeks certain kinds of regulatory approval: e.g., to acquire another bank or to establish a branch. §§ 2902(3), 2903(a)(2). Even when a bank has a problematic CRA record, the other factors usually prevail. On only a few occasions, during the entire 31-year history of the CRA, have regulators denied an application on CRA grounds.
Under a separate law, banks need to have a satisfactory CRA record in order for their corporate family to include an insurance company an investment bank. § 1841(l). Only the largest banks have those kinds of affiliates.
That’s basically it. The CRA hardly amounts to a “club that activists used to bash banks and other lenders over the head to make these risky loans.”
This article confirms that firms not subject to the Community Reinvestment Act (e.g., nonbank mortgage companies) accounted for most subprime lending:
http://www.mcclatchydc.com/251/story/53802.html