September 23, 2008

Fourth-Hand Opinions on a Complicated Topic

Justin Katz

The eye-opening thing is how many people believe that something as extensive as the current financial crisis can be analyzed simply and placed at the door of a particular political party — even a particular individual! By the time one gets to such specific and flatly stated explanations as Froma Harrop's, it is likely that readers are receiving a restatement of a paraphrase of a summary of a synopsis of a hypothesis:

McCain's former economic adviser is ex-Texas Sen. Phil Gramm. On Dec. 15, 2000, hours before Congress was to leave for Christmas recess, Gramm had a 262-page amendment slipped into the appropriations bill. It forbade federal agencies to regulate the financial derivatives that greased the skids for passing along risky mortgage-backed securities to investors.

And that, my friends, is why everything's falling apart. That is why the taxpayers are now on the hook for the follies of Fannie Mae, Freddie Mac, Bear Stearns and now the insurance giant AIG to the tune of $85 billion.

And politically motivated oversimplifications such as that, my friends, are why those on opposite ideological poles in this country often seem to be speaking about wholly different worlds. To partisans — which is a category whose siren call I hear from time to time, as I navigate the ideological waters — just about everything confirms their own view and proves competitors' to be nakedly fallacious. Such responses are natural, to be sure, and in many ways defensible. Pointing out the other side's culpability is wholly rational, and often hypocrisy-free, if it is in actual or preemptive response to one-sided accusations in the other direction.

More profoundly, though, the factors that point to one's own side don't appear as culpability so much as indication of an idea's corruption or misapplication. Harrop foists calamity on Gramm's shoulders on the grounds that he "greased the skids" of the financial industry. Well, skids need to be greased lest they stick; the key is in the choice of path, and conservatives, notably Jonah Goldberg, will point out such stearing:

The starting line for the parade of falling dominoes doesn't begin on Wall Street. Nor, alas, will the parade end there. But if you want to know where it really begins, look to the Capitol steps.

The self-proclaimed angels in Washington will tell you they've been working tirelessly to expand the American dream of homeownership by making mortgages available to people unable to plunk down 20 percent on a house. Franklin Raines, the Clinton-appointed former head of Fannie Mae from 1998 to 2004, made it his top priority to make mortgages easier to get for people with poor credit, few assets and little money for a down payment.

So, without getting into the mire of who's in bed with whom (no matter how instructive, even important, that may be), what went wrong? In summary, it appears that the federal government pushed lenders to expand their market into riskier ventures and that deregulation made it easier for those lenders to spread the risks, which is typically a good thing, a safeguard. The involvement of government-backed institutions (Fannie and Freddie) and the growing sense that the likelihood of government assistance in the face of collapse decreased the gamble, and the Federal Reserve Board's efforts to keep the economy moving by means of low interest rates enabled a broader field of players.

Meanwhile, an increasing market for low-end houses due to this opportunity, in concert with a generally growing economy, pushed prices up and expanded the range of consumers turning to new means of borrowing. In other words, those who might previously have saved up a few thousand dollars for down payment on a starter home found that houses meeting their minimum standards were no longer within reach by traditional methods. An entire market segment, replete with a new category of how-to television shows, emerged to change intolerable houses into tolerable ones, flipping them to capitalize on the market's updraft.

The pot further sweetened with the use of equity mortgages to bring homes up to standards that would previously have been sought at the outset, to supplement incomes strained by outsized housing and debt costs, and (yes) to monetize families' largest investments for toys and extravagances. The pool of loans, ostensibly with the promise of guaranteed cash flow, made for an attractive addition to portfolios across the spectrum from individual investors to massive pension funds. Finally, accounting regulations enacted in response to Enron minimized lenders' ability to calculate the value of their holdings on a longer (and therefore more stable) view.

Who — or what — in all of this deserves blame, as distinct from partial responsibility: those who greased the skids, those who loaded their aspirations, dreams, and desires into the sleigh, those who pushed it down a particular hill, or those who presumed to stear it through the thicket? Personally, I'd point out that three out of four of these categories are actually different faces of the government.

Capitalism is a process, a strategy, and a very effective one. The danger comes with the pursuit of a "third way" that attempts to put it to work toward a particular cause that is chained to an immovable object like the government. Any private party attempting to push the market in one direction or another must weigh odds and calculate losses versus potential gains, which it will have to face as they arise. The government can dictate policies with consequences that can't possibly be known and — as we're seeing with the bailouts — wind up increasing its power when things go wrong. Until, that is, things go so terribly wrong that the whole system shakes itself apart.

Comments, although monitored, are not necessarily representative of the views Anchor Rising's contributors or approved by them. We reserve the right to delete or modify comments for any reason.

The older I get the more I realize that American Capitalism, such as it has become over the last 50 years or so, is just indentured servitude. We work ourselves to death for "The Corporation" for little or no recognition, annual 3% raises that don't keep up with the cost of living, two weeks of vacation a year, with no protections if our benevolent overlords drive "The Corporation" into the ground while they walk away with multi-million dollar 'golden parachutes'.

It almost makes you think that the Pat Crowley's of the world are on to something and I can't believe I'm saying that.

Posted by: Greg at September 23, 2008 1:20 PM

(Just remember, the bailout doesn't matter. This is simply a mental recession with no basis in facts, because Phil Gramm said so.)
(makeshift sarcasm font)

Posted by: rhody at September 23, 2008 1:54 PM

Nothing is preventing you from developing a good idea or product, forming a business and marketing your product.

Very few people in this world make millions of dollars without working hard for it.

Posted by: Anthony at September 23, 2008 2:24 PM

Nothing would give me more confidence in the future of American than if this bailout were defeated. Not by Pelosi, Reid, Whitehouse and Reed, but by DeMint, Hebsarling, Coburn and Pense.

The wall street bailout is, I think, the biggest commie move by the U.S. Government since the "New Deal".

Despite the failure of communism around the world, the United States of America is still flirting with it.

What the hell is wrong with us?

Posted by: George at September 23, 2008 5:46 PM

Rhody you A-hole:
Your beloved party has gone along with the fascist "Patriot" Act, approval and continued funding of a worlwide war on Islam, slavish support of apartheid Israel (very much against US interests), domestic spying, etc. Now they are about to "roll" for a minimum $700 billion corporate giveaway.
Are you proud?

Posted by: Mike at September 23, 2008 6:56 PM


Get ahold of yourself, good man.

To Anthony's point, nothing and noone is stopping you from starting your own business and becoming a big ole Corporation in which you can do things the "right way".

Pukes like Patrick "I struggle with basic math" Crowley and his boss are not interested in working, period. They are all about riding on the backs of those that do work and produce.

In simple terms, they are nothing more than slimy leeches, sucking off the public-tit. You couldn't sleep at night if you were that lazy and unproductive.

The "bail-out" sucks and is just another extension of the nanny-state advocated by the Crowley's of the world. It is being brought to us by the administration that has presided over the biggest expansion of the Federal Gov't since FDR. But always remember, two wrongs don't make a right.

Posted by: George Elbow at September 23, 2008 11:00 PM

You are doing in this post what you are accusing others of doing... shifting responsibility to one or the other political party for the finicial diaster on Wall St. Your reflexive protection of capitalism forces you to (big surprise) blame government.

"In summary, it appears that the federal government pushed lenders to expand their market into riskier ventures and that deregulation made it easier for those lenders to spread the risks, which is typically a good thing, a safeguard."

Those who made obscene amounts of money during the housing boom were pushed into doing so by the government. Bankers whose compensation was tied to the volume of the activity they generated and not to long term performance were forced by government unregulators into their risky business. I"m also sure that in your real world , Justin that government went out hunting lobbyists from Wall St and proceeded to arm twist them into paying for legislation and friendly or non existent oversight.

What is for certain is that the government through its people are going to be underwriting private finicial companies. Why could the people not pay in the same manner for its healthcare or for its roads and bridges and expanded public transit. Why is it acceptable to pay for capitalism's winners when they lose and not pay for people when they get sick.

By the way I love the fact that the conservatives have been struck with a brilliant idea about this current crisis....blame it on Clinton.

Posted by: Phil at September 24, 2008 6:22 AM
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