S
Sid9
Guest
December 21, 2007
Op-Ed Columnist
Blindly Into the Bubble
By PAUL KRUGMAN
When announcing Japan's surrender in 1945, Emperor Hirohito famously
explained his decision as follows: "The war situation has developed not
necessarily to Japan's advantage."
There was a definite Hirohito feel to the explanation Ben Bernanke, the
Federal Reserve chairman, gave this week for the Fed's
locking-the-barn-door-after-the-horse-is-gone decision to modestly
strengthen regulation of the mortgage industry: "Market discipline has in
some cases broken down, and the incentives to follow prudent lending
procedures have, at times, eroded."
That's quite an understatement. In fact, the explosion of "innovative" home
lending that took place in the middle years of this decade was an
unmitigated disaster.
But maybe Mr. Bernanke was afraid to be blunt about just how badly things
went wrong. After all, straight talk would have amounted to a direct rebuke
of his predecessor, Alan Greenspan, who ignored pleas to lock the barn door
while the horse was still inside - that is, to regulate lending while it was
booming, rather than after it had already collapsed.
I use the words "unmitigated disaster" advisedly.
Apologists for the mortgage industry claim, as Mr. Greenspan does in his new
book, that "the benefits of broadened home ownership" justified the risks of
unregulated lending.
But homeownership didn't broaden. The great bulk of dubious subprime lending
took place from 2004 to 2006 - yet homeownership rates are already back down
to mid-2003 levels. With millions more foreclosures likely, it's a good bet
that homeownership will be lower at the Bush administration's end than it
was at the start.
Meanwhile, during the bubble years, the mortgage industry lured millions of
people into borrowing more than they could afford, and simultaneously duped
investors into investing vast sums in risky assets wrongly labeled AAA.
Reasonable estimates suggest that more than 10 million American families
will end up owing more than their homes are worth, and investors will suffer
$400 billion or more in losses.
So where were the regulators as one of the greatest financial disasters
since the Great Depression unfolded? They were blinded by ideology.
"Fed shrugged as subprime crisis spread," was the headline on a New York
Times report on the failure of regulators to regulate. This may have been a
discreet dig at Mr. Greenspan's history as a disciple of Ayn Rand, the high
priestess of unfettered capitalism known for her novel "Atlas Shrugged."
In a 1963 essay for Ms. Rand's newsletter, Mr. Greenspan dismissed as a
"collectivist" myth the idea that businessmen, left to their own devices,
"would attempt to sell unsafe food and drugs, fraudulent securities, and
shoddy buildings." On the contrary, he declared, "it is in the self-interest
of every businessman to have a reputation for honest dealings and a quality
product."
It's no wonder, then, that he brushed off warnings about deceptive lending
practices, including those of Edward M. Gramlich, a member of the Federal
Reserve board. In Mr. Greenspan's world, predatory lending - like attempts
to sell consumers poison toys and tainted seafood - just doesn't happen.
But Mr. Greenspan wasn't the only top official who put ideology above public
protection. Consider the press conference held on June 3, 2003 - just about
the time subprime lending was starting to go wild - to announce a new
initiative aimed at reducing the regulatory burden on banks. Representatives
of four of the five government agencies responsible for financial
supervision used tree shears to attack a stack of paper representing bank
regulations. The fifth representative, James Gilleran of the Office of
Thrift Supervision, wielded a chainsaw.
Also in attendance were representatives of financial industry trade
associations, which had been lobbying for deregulation. As far as I can tell
from press reports, there were no representatives of consumer interests on
the scene.
Two months after that event the Office of the Comptroller of the Currency,
one of the tree-shears-wielding agencies, moved to exempt national banks
from state regulations that protect consumers against predatory lending. If,
say, New York State wanted to protect its own residents - well, sorry, that
wasn't allowed.
Of course, now that it has all gone bad, people with ties to the financial
industry are rethinking their belief in the perfection of free markets. Mr.
Greenspan has come out in favor of, yes, a government bailout. "Cash is
available," he says - meaning taxpayer money - "and we should use that in
larger amounts, as is necessary, to solve the problems of the stress of
this."
Given the role of conservative ideology in the mortgage disaster, it's
puzzling that Democrats haven't been more aggressive about making the
disaster an issue for the 2008 election. They should be: It's hard to
imagine a more graphic demonstration of what's wrong with their opponents'
economic beliefs.
Op-Ed Columnist
Blindly Into the Bubble
By PAUL KRUGMAN
When announcing Japan's surrender in 1945, Emperor Hirohito famously
explained his decision as follows: "The war situation has developed not
necessarily to Japan's advantage."
There was a definite Hirohito feel to the explanation Ben Bernanke, the
Federal Reserve chairman, gave this week for the Fed's
locking-the-barn-door-after-the-horse-is-gone decision to modestly
strengthen regulation of the mortgage industry: "Market discipline has in
some cases broken down, and the incentives to follow prudent lending
procedures have, at times, eroded."
That's quite an understatement. In fact, the explosion of "innovative" home
lending that took place in the middle years of this decade was an
unmitigated disaster.
But maybe Mr. Bernanke was afraid to be blunt about just how badly things
went wrong. After all, straight talk would have amounted to a direct rebuke
of his predecessor, Alan Greenspan, who ignored pleas to lock the barn door
while the horse was still inside - that is, to regulate lending while it was
booming, rather than after it had already collapsed.
I use the words "unmitigated disaster" advisedly.
Apologists for the mortgage industry claim, as Mr. Greenspan does in his new
book, that "the benefits of broadened home ownership" justified the risks of
unregulated lending.
But homeownership didn't broaden. The great bulk of dubious subprime lending
took place from 2004 to 2006 - yet homeownership rates are already back down
to mid-2003 levels. With millions more foreclosures likely, it's a good bet
that homeownership will be lower at the Bush administration's end than it
was at the start.
Meanwhile, during the bubble years, the mortgage industry lured millions of
people into borrowing more than they could afford, and simultaneously duped
investors into investing vast sums in risky assets wrongly labeled AAA.
Reasonable estimates suggest that more than 10 million American families
will end up owing more than their homes are worth, and investors will suffer
$400 billion or more in losses.
So where were the regulators as one of the greatest financial disasters
since the Great Depression unfolded? They were blinded by ideology.
"Fed shrugged as subprime crisis spread," was the headline on a New York
Times report on the failure of regulators to regulate. This may have been a
discreet dig at Mr. Greenspan's history as a disciple of Ayn Rand, the high
priestess of unfettered capitalism known for her novel "Atlas Shrugged."
In a 1963 essay for Ms. Rand's newsletter, Mr. Greenspan dismissed as a
"collectivist" myth the idea that businessmen, left to their own devices,
"would attempt to sell unsafe food and drugs, fraudulent securities, and
shoddy buildings." On the contrary, he declared, "it is in the self-interest
of every businessman to have a reputation for honest dealings and a quality
product."
It's no wonder, then, that he brushed off warnings about deceptive lending
practices, including those of Edward M. Gramlich, a member of the Federal
Reserve board. In Mr. Greenspan's world, predatory lending - like attempts
to sell consumers poison toys and tainted seafood - just doesn't happen.
But Mr. Greenspan wasn't the only top official who put ideology above public
protection. Consider the press conference held on June 3, 2003 - just about
the time subprime lending was starting to go wild - to announce a new
initiative aimed at reducing the regulatory burden on banks. Representatives
of four of the five government agencies responsible for financial
supervision used tree shears to attack a stack of paper representing bank
regulations. The fifth representative, James Gilleran of the Office of
Thrift Supervision, wielded a chainsaw.
Also in attendance were representatives of financial industry trade
associations, which had been lobbying for deregulation. As far as I can tell
from press reports, there were no representatives of consumer interests on
the scene.
Two months after that event the Office of the Comptroller of the Currency,
one of the tree-shears-wielding agencies, moved to exempt national banks
from state regulations that protect consumers against predatory lending. If,
say, New York State wanted to protect its own residents - well, sorry, that
wasn't allowed.
Of course, now that it has all gone bad, people with ties to the financial
industry are rethinking their belief in the perfection of free markets. Mr.
Greenspan has come out in favor of, yes, a government bailout. "Cash is
available," he says - meaning taxpayer money - "and we should use that in
larger amounts, as is necessary, to solve the problems of the stress of
this."
Given the role of conservative ideology in the mortgage disaster, it's
puzzling that Democrats haven't been more aggressive about making the
disaster an issue for the 2008 election. They should be: It's hard to
imagine a more graphic demonstration of what's wrong with their opponents'
economic beliefs.
