The New York Times has a round table of authorities discussion the subject of whether the financial crisis was preventable. I agree with Yves Smith:
Follow the money is a simple rule, and it’s one the commission should have heeded. Failing to do so led the commissioners to produce a wandering, ponderous description of things in the capital markets they don’t like.
but the view that most closely resembles my own is expressed by William Black:
In 2008, after it was useless, the Fed finally, under Congressional pressure, used its Home Ownership and Equity Protection Act authority to ban liar’s loans. If it had used its regulatory authority in a manner similar to how we used our authority in 1991 there would have been no financial crisis in the U.S. and no Great Recession.
That would not have required preternatural prescience. It would only have required that regulators do their jobs with the authority they’d already been given.
Why, then, didn’t regulators do their jobs? In my view the fault resides in that regulators’ incentives are not properly aligned and the scale of the U. S. system. Bureaucracies scale worse than linearly and the threshold size at which bureaucracies take on lives of their own, unmoored from their putative responsibilities is too easily met at the federal level.
I guess the question is who was lying? I suspect the real reason for the lack of will to pursue liar’s loans is the same reason nobody writing about this wants to talk about the person writing his/her income in the blank. They want to talk about the possibility that someone told them what to write, or complain that the lender didn’t do due diligence to catch the lie.
No, nobody wants to go after the loan applicant, today or yesterday.
My understanding is that the Fed has some regulatory power under HOEPA, but enforcement is up to the states.
Yves Smith (with Tom Adams) goes more deeply into the “follow the money” theme in FCIC Report Misses Central Issue: Why Was There Demand for Bad Mortgage Loans?, or, as they say in the piece, who wanted all those crappy loans?
Short answer: Hedge funds, which made gazillions shorting the market. Moreover, Paulson, working with Goldman, seems to have been about rigging the market to fail. See, Abacus CDO Manager Cherry Picked RMBS to Fail
Not a pretty story.
I’ve really been reading Yves as the liberal outlier. I think she wants more revolution (and blame) than is strictly necessary.
All we need, for this not to happen again, is good lending requirements.
@PD:
There is a simple question of efficiency. Stopping one loan stops one loan. Stopping an operation putting out thousands of loans a year does much more.
Really, think about how stupid this concentration on the applicant is, in terms of simple enforcement. Banks process thousands of loans. Some banks might be large enough to hold millions.
Hold their feet to the fire and you’ve solved the systemic problem.
Shorter: Elizabeth Warren is not an ogre. Don’t be scared.
” In my view the fault resides in that regulators’ incentives are not properly aligned ”
Or maybe the regulators did not see the problems since they believed that the financial industry k=was better informed than government. Being better informed, they would not do anything that would harm the industry. You dont really have to be and Objectivist, just believe that you need to keep government out of the way, a common enough conservative/libertarian belief.
Steve
“Short answer: Hedge funds, which made gazillions shorting the market. Moreover, Paulson, working with Goldman, seems to have been about rigging the market to fail.”
Sigh…….
Yep, I can see it all unfolding at Sparks in a circa 1996 bachanalian steak, wine and who knows what blow off of monumental proportions: “first, we get CRA passed, then we get GS repealed, then we get the Congress to force Fannie and Freddie to finance and buy all those sub prime loans, then we get the Fed to give us EZ credit, then – when the animal spirits are unleashed – then we get every loan originator we can think of to buffalo home buyers, then we sell all thoe loans off and ……………………..THEN!!! A decade after we create the greatest asset bubble in memory……………….we SHORT IT!!!!!!!!!!
Clairvoyant. Brilliant.
Its just as wicked as it seems……
The only problem with your story Drew is that it relies on a twisted timeline. CRA went by, and did not make NINJA loans. NINJA loans rose, without Freddie and Fannie. Only after everything crashed did government send Freddie and Fannie in to buy up the crap paper. It was a back-door clean-up. It never should have happened that way.
But it was a clean-up error, not a bubble or crash error.