It should be easy to recognize that, for the past two years or so, overwhelmingly, the majority of mainstream mass media pundits and news reporters have placed the blame for the recent mortgage and credit crises squarely on Wall Street in particular and on capitalism in general. For many, profit equates to greed and nothing more; the “cure” can only be more federal government intervention in the free markets and “punishment” of Wall Street.
Occasionally, in the less-than-mainstream media, we can read or hear about the topics of “personal responsibility” or “personal risk” in mortgages and other financial products.
Nary a word is said about any Congressional or Federal culpability in the mortgage and credit crises.
Last week, before the Financial Crisis Inquiry Commission, Goldman Sachs’ Chief Executive Officer Lloyd C. Blankfein brought up the topic of Congressional responsibility in his very well-worded and insightful testimony.
Mr. Blankfein said Congress shared much of the blame because federal laws and policies helped create the conditions that led to the monumental housing and credit bubbles.
"Without trying to shed one bit of our industry's accountability, we would also further our collective interests by recognizing other contributing causes to the severity of the crisis," he said.
"The official policy of promoting, supporting and subsidizing homeownership in the United States" was a major contributor, the Goldman Sachs chief [Mr. Blankfein] argued, noting the extensive subsidies from mortgage and real estate tax deductions to mortgage insurance aid provided by Congress.
He also blamed low interest rates fostered by the Federal Reserve and lopsided trade deficits that had to be financed with enormous flows of capital from China and other countries that ended up in the housing market.
"This flood of foreign capital" directly financed the expansion of Fannie Mae and Freddie Mac mortgage lending and drove interest rates even lower, he said. That, in turn, spawned a search for higher-yielding assets by investors and their Wall Street brokers, which led to the creation of the risky mortgage-backed securities that spawned the crisis, he said. ( CEOs trade blame with Congress over finance crisis by Patrice Hill, The Washington Times, January 14, 2010)Reading Mr. Blankfein’s testimony, immediately brought to mind economist Thomas Sowell’s similar analysis nearly a year ago.
Under growing pressures from both the Clinton administration and later the George W. Bush administration, banks began to lower their lending standards.
Mortgage loans with no down payment, no income verification and other "creative" financial arrangements abounded. Although this was done under pressures begun in the name of the poor and minorities, people who were neither could also get these mortgage loans.
With mortgage loans widely available to people with questionable prospects of being able to keep up the payments, it was an open invitation to financial disaster. ( Upside Down Economics by Thomas Sowell, Jewish World Review, February 18, 2009)"Ideas have consequences" is a well-know saying. "Federal policies have consequences" should also become a well-know saying.