Remember the Great Recession? It was in all of the papers. The editors of the Economist point out that with respect to the housing sector the reforms that have been undertaken in the wake of the collapse of the housing bubble may well have actually made things worse:
The banks have cut risk and costs and raised fees in order to grind out decent profits. Bosses and regulators point to chastened lenders and boast that the problem of banks “too big to fail†has been solved. Taxpayers, they say, are safe.
Only in their dreams. That trillion-dollar capital buffer exists to protect banks, but much risk lies elsewhere. That is because, since the 1980s, mortgage lending in America has been mainly the job of the bond market, not the banks as in many other countries. Loans are bundled into bonds, guaranteed and sold around the world. Investors on Wall Street, in Beijing and elsewhere own $7 trillion-worth.
When those investors panicked in 2008, the government stepped in and took over the bits of the mortgage-guarantee apparatus it did not already control. It was a temporary solution, but political gridlock has made it permanent. Now 65-80% of new mortgages are stamped with a guarantee from Uncle Sam that protects investors from the risk that homeowners default. In the heartland of free enterprise the mortgage system is worthy of Gosplan.
What could possibly go wrong? Let me suggest that with lax oversight and underwriting by the federal government it is practically inevitable that increasingly risky loans will be made and, eventually, the entire structure will collapse. Again.
Is there a word for reform that’s actually reform in the wrong direction? “Corruption” doesn’t quite cover it.
It’s already happening. Loan to value is way up. And asset prices are declining. Slowly, not in a crashing way.
Syndication per se is not the problem. It exists in other markets separate and apart from the mortgage market. The difference is that with mortgages the underwriters are not required to retain a sufficient portion of the risk on their own balance sheet, and they believe a bailout will follow trouble. With politicians motivated to encourage uncreditworthy borrowing in the name of home ownership and the illusion of economic performance. With politicians all too ready to heap sympathy on the defaulting borrower, and all too beholden to campaign contributing banks………..who could possibly be surprised at expectations?
Is there a word for reform that’s actually reform in the wrong direction? “Corruption†doesn’t quite cover it.
BOHICA is the word you’re looking for.
It’s two words, but I think “institutionalized looting” pretty much covers it.