Posted by
Always To The Right on Monday, December 14, 2009 8:46:53 PM
After the debacles of the overall housing bubble and the Ginnie Mae rerun
last week, one might think that government might reconsider the notion
of demanding that banks make marginal loans on a large scale. Last
night’s interview with Barack Obama on CBS shows that populists have a
particular problem in learning from experience. Obama blasted banks
for showing ingratitude for resisting further government intrusion into
their industry and refusing to increase loans to marginal borrowers
In fact, the entire instability of the financial system came from
government pressure and incentives to do what Obama is demanding now.
The government first used a beefed-up CRA to cajole bankers into making
marginal loans, then had Fannie Mae and Freddie Mac buy up paper from
these subprime loans and convert them into mortgage-backed securities.
Fannie and Freddie sold these bonds to banks and other investors, who
assumed (wrongly) that the government backing meant that they were safe
investments. Meanwhile, the explosion of cheap and unqualified lending
drove housing prices up artificially, and buyers bet that the Ponzi
scheme would go on forever. When the housing bubble collapsed, so did
the MBS market, neither of which would have happened if government
hadn’t interfered in the first place.