True, but the best future protection against this happening again would have been to let the firms that screwed up their risk assessment suffer from that screw up, right?
If the Govt--we, the taxpayers--are going to act as a backstop against insolvency and loss for those Big Banks, capping downside risk, why can't we ask them to cap their upside on loan %(here, to help the middle class because the upper class don't need it and the lower class probably can't afford that home anyway) or via increased default rates for the lower classes? Have better monitoring of those risky assets and the % of them being carried to avoid the same thing happening again.
Well, of course.
But you're never going to catch me advocating Uncle Sam acting as a backstop -- with any conditions placed on that. The fact that this was there, either explicitly or implicitly, absolutely encouraged greater risk-taking than ever would've existed without it. And, sure enough, most of the failed institutions were bailed out as they expected they would be -- the excuse being that to not have done so would've resulted in contagion and a general meltdown.
I've posted this on the WC before, many years ago. But it's worth putting it up again.
The subprime crisis was predicted - 9 years before it happened -- in a 1999 New York Times story. The nature of the admonition was barriers to home lending being lowered at the behest of the federal government (in this case, by leaning on a wary Fannie Mae). The prediction came from Peter Wallison of the AEI.
In moving, even tentatively, into this new area of lending, Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980's.
''From the perspective of many people, including me, this is another thrift industry growing up around us,'' said Peter Wallison a resident fellow at the American Enterprise Institute. ''If they fail, the government will have to step up and bail them out the way it stepped up and bailed out the thrift industry.''
Is it any wonder this fell on deaf ears? It isn't to me -- because our policies are so driven by what sounds good, not by what is good.
www.benzinga.com
