Friday, October 26, 2007

A Catastrophe Foretold

Paul Krugman's column in today's New York Times (http://www.nytimes.com/2007/10/26/opinion/26krugman.html?hp) says a lot about how the current US mortgage and housing melt down came about. Too bad that no one paid attention to the warning signs. It is par for the course with the current regime and its mind set of anything goes (unless it's gay marriage and equality):
“Increased subprime lending has been associated with higher levels of delinquency, foreclosure and, in some cases, abusive lending practices.” So declared Edward M. Gramlich, a Federal Reserve official. These days a lot of people are saying things like that about subprime loans — mortgages issued to buyers who don’t meet the normal financial criteria for a home loan. But here’s the thing: Mr. Gramlich said those words in May 2004. And it wasn’t his first warning. In his last book, Mr. Gramlich, who recently died of cancer, revealed that he tried to get Alan Greenspan to increase oversight of subprime lending as early as 2000, but got nowhere.
A new report from Congress’s Joint Economic Committee predicts that there will be two million foreclosures on subprime mortgages by the end of next year. That’s two million American families facing the humiliation and financial pain of losing their homes. At the same time, investors who bought assets backed by subprime loans are continuing to suffer severe losses. Everything suggests that there will be many more stories like that of Merrill Lynch, which has just announced an $8.4 billion write-down because of bad loans — $3 billion more than it had announced just a few weeks earlier. In fact, both borrowers and investors got scammed.
So, once again, why was nothing done to head off this disaster? The answer is ideology. In a paper presented just before his death, Mr. Gramlich wrote that “the subprime market was the Wild West. Over half the mortgage loans were made by independent lenders without any federal supervision.” What he didn’t mention was that this was the way the laissez-faire ideologues ruling Washington — a group that very much included Mr. Greenspan — wanted it. They were and are men who believe that government is always the problem, never the solution, that regulation is always a bad thing.
Mr. Frank is now trying to push through legislation that extends moderate regulation to the subprime market. Despite the scale of the disaster, he’s facing an uphill fight: money still talks in Washington, and the mortgage industry is a huge source of campaign finance. But maybe the subprime catastrophe will be enough to remind us why financial regulation was introduced in the first place.

No comments: