Friday, July 18, 2008

The Big Political Issue of Our Time

If the American sub-prime crisis has taught us anything, isn't it that the small government/less regulation brand of politics DOES NOT WORK?

That the basis of conservatism is dangerous destructive ideology?

That conservatives everywhere have some 'splaining to do?



Cliff said...

Difficult to understand the rational of this line of thinking...seems to be simply scaremongering...this happens when you have no policies or direction....

Yappa said...

Scaremongering... hmmm. Interesting line of debate. Irrelevant, but interesting. ;-)

Seriously though, shouldn't we all be disturbed that the drumbeat has not lessened at all - the drumbeat of Big Gov Bad, Small Gov Good; the drumbeat of No Regulations No Regulations; the drumbeat of No More Tax No More Tax? Shouldn't we call these people to account for policies that encourage a system where people like Sandy Weill can perpetrate a humongous fraud, take his millions and vanish quietly, leaving worldwide economic turmoil in his wake?

Ron said...

Actually your logic is completely twisted. The reason this problem was permitted to fester is because big government/liberal thought created this situation. Government created Fanny May - it then (in its wish to LOOK like there was not a monopoly), created Freddie Mac to "compete". Then it let it be known that big brother would protect everybody involved so real competition did not exist and there was no reason for the companies to be realistic, reliable or responsible. This entire structure owes itself to Big Government controlling (or trying to) the market place. Neither of these institutions were truly independant businesses - they started as government institutions and brought that mentality into their new incarnations -- that is why they subsidised people who did not deserve the credit and had not earned the right to borrow the monies they were requesting - a very Liberal philosophy.

Yappa said...

Hi Ron,

Thanks for the comment. Fannie Mae and Freddie Mac are the latest casualties of the subprime crisis, but they didn't cause it.

The cause was a new kind of mortgage that provided short-term profits to mortgage companies but resulted in high levels of default, combined with the ability for institutions to sell the shaky mortgages without investors realizing how risky they were (which resulted from a breakdown in the rating industry), in conjunction with a housing bubble, which was partly caused by the subprime mortgages and the overly low interest rates set by the Fed.

When these new predatory mortgages started to be issued, flags were raised - I even saw a primetime news show about how they were going to default en masse, and that was 3-4 years ago - but the regulatory agencies were too lax.

Fannie and Freddie did no subprime lending whatsoever. They're in the mortgage business so they're falling along with a bunch of fully private companies... and if they were fully private, they'd probably get the same bail-out.

Having said that, it is certainly a weird setup to have private profit-making companies that are sort-of guaranteed protection against losses. I can see why they were created in the 1930s, but I don't understand why they're still around.

Joseph said...

The problem exists because poor decisions were made on the availability and size of loans based on overly rosy and unrealistic expectations for the long-term housing market.

Just as with the internet bubble, some players / rule-makers from lenders in private industry to decision-makers in government who should have known better convinced themselves that basic business rules had "changed forever." And, as with the former bubble participants, they eventually discover they were wrong.

That is not a left of right problem per se. It just points to bad leadership. And Bush and gang have run the show for the past several years as the problem took shape, particularly in that he uses the veto pen like a mighty sword even during the past 18 months. However, I think ron's attempt to place the blame on the existence of Fannie Mae and Freddie Mac is almost facetious and certainly off the mark.

The primary problem in this situation, given 20/20 hindsight, is that lending standards were continually lowered to create a situation that would only thrive (as it did) in good times. As soon as housing prices stopped climbing by 10 to 20 to 30 percent (in some cases) annual increases - far above historic norms - the house of cards was bound to fail. You just can't create a situation where people with little or no down payment, little or no income assessment, and ever-lessening regulation and oversight can get new home loans above their means or rapidly erode existing equity on current homes at will, with the primary rationale being that prices continue to escalate at extreme rates forever.

So while you could argue that points to a conservative "less regulation is good" cause, the consistency and ubiquitous lending industry would never have existed without Fannie Mae and Freddie Mac there to help relieve banks of loans by creating a mechanism to package and offer them to a larger investment market (which sounds mighty republican market driven even as I type it.

But while you could rightly claim in some strange fashion that the existence of those entities exacerbated the problem by allowing mortgage loans to proliferate to a much larger portion of the population, it is a major stretch to claim their existence "caused" the problem.

It would be sort of like blaming the government for a dramatic increase in deadly car accidents - found to be caused by poor constuction, cheap substition of materials, and motorists driving far above the posted speed limits for road conditions - not for THOSE reasons but because the damn government built "too many" highways which "caused" the number of incidents to increase.