The titans of Wall Street gathered this morning at the NYSE to discuss the ongoing crisis. The writeup of the gathering in the WSJ Deal Journal blog is well worth reading, once you get past the inexplicable opening links to poetry and “Error 404”. (Blogging famously involves publishing without an editor, and here we see the downside.)
I liked this bit from the Q&A:
The first question is a great one: the questioner notes that the four candidates for president and vice president rarely say â€œWall Streetâ€ without also saying â€œgreed and corruption.â€ Which is funny because, you know, itâ€™s Washington.
Now, I’m as opposed to Wall Street corruption as the next fella, but Wall Street greed has gotten a bad rap. Whenever I hear the word greed, my mind substitutes “self-actualization.” “Greed” is too often conflated with simply acting in one’s own self-interest — the wonderfully relentless force of nature that underpins capitalism and makes it possible. (I’m a big fan of capitalism — one of God’s greatest gifts to humanity, and the only truly moral economic system — but more about that another time.)
The present unpleasantness is the result of a bursting bubble of housing prices. The prices were driven up because over the years, more and more capital was allocated to housing stock. If society is going to build more housing, it needs people to live in that housing, so the joys of homeownership were extended well beyond the pool of people who could actually, you know, afford to own a home.
The mechanism for this was the securitization of mortgages, through which Wall Street took risky loans off the books of banks and sold them to investors around the world — thereby seemingly making the risk disappear by distributing it widely. The housing bubble would not have been possible without the existence of mortgage-backed securities, an invention that served as a cash cow for Wall Street for many years.
So greedy Wall Street is at fault, right? Well, no. Wall Street did what Wall Street does, which is to find a way to distribute risk, while raking a little off the top of each transaction, thank you very much. But Wall Street didn’t create the risk. The gummint did — with the best of intentions. Roger Kimball describes the process as well as I’ve seen it described. An excerpt:
* The original Community Reinvestment Act was signed into law in 1977 by Jimmy Carter. Its purpose, in a nutshell, was to require banks to provide credit to â€œunder-served populations,â€ i.e., those with poor credit.
The buzz word was â€œaffordable mortgages,â€ e.g., mortgages with low teaser-rates, which required the borrower to put no money down, which required the borrower to pay only the interest for a set number of years, etc.
* In 1995, Bill Clintonâ€™s administration made various changes to the CRA, increasing â€œaccess to mortgage credit for inner city and distressed rural communities,â€ i.e., it provided for the securitization, i.e. public underwriting, of what everyone now calls â€œsub-prime mortgages.â€
Bottom line? It forced banks to issue $1 trillion in sub-prime mortgages. $1 trillion, i.e., a thousand billion dollars in sub-prime, i.e., risky, mortgages, in order to push this latest example of social engineering.
But wait: how did it force banks to do this? Easy. Introduce a federal requirement that banks make the loans or face penalties.
All of this explains why it’s deeply ironic that the crisis apparently is benefiting the Democrats. Maybe it’s only natural to blame the incumbent party for any economic debacle. But in this case, as Kimball documents, the Bush administration and John McCain are on record as having raised alarm bells years ago about the gathering mortgage crisis, while Democrats in Congress stifled attempts to do anything that would cut off the flow of capital to provide home ownership for people who could not afford it.
Good luck, President Obama. And I mean that sincerely. For all of our sakes.