Blame for the Mortgage Mess

The Punch and Judy show being put on at the senate by executives from Goldman Sachs and various grandstanding politicians reminds one once again how much silliness, special pleading, and outright misrepresentation there has been in attempts to fix blame for the financial crisis. Leftists claim that a laissez faire (!) Bush administration allowed it to happen through insufficient regulation but cannot point to any significant regulation from former times that Bush had repealed or to any regulations that his administration failed to enforce or even to any new regulations that would have prevented it if they had been in force. One is left to suspect that all we are really seeing is their familiar cry that something has gone wrong in the world and they need more power to see that it never happens again.

Conservatives such as Rush Limbaugh and Sean Hannity fix the blame on Democrats for imposing de facto quotas for lending to members of favored racial groups, for generally driving lower underwriting standards in the mortgage industry, and for protecting the corrupt and irresponsible Fannie Mae and Freddie Mac, placing particular blame on Barney Frank and Chris Dodd. In the case of Frank, this is just silly. There is no filibuster in the House but rather simple majority rule. From 1995 until January 2007 the Republicans had a majority in the House, and neither Frank nor any other Democrat could have stopped them from fixing anything they thought needed fixing in the mortgage business. It is difficult to blame the Dems exclusively for a crisis that came to a head after four years during which the Republicans controlled both houses of congress and the presidency.

It is particularly unfortunate that some conservatives feel a need to defend the people on Wall Street who through enormous incompetence and occasional crookedness created much of the problem. It shows that they have failed to grasp an important principle. We defend freedom, not because it produces the best outcome every time, but because it is right that people should be free. Most people can see this with freedom of speech. We defend it even though it allows for the expression of the most vile, inane, and harmful opinions. The same is true with economic freedom. We defend it because people are free to live their lives and make their own decisions, not because we believe all those decision will be the right ones. (Certainly it is true that in the big picture and the long run, free economies produce far better results and far higher standards of living than do un-free ones. However, that is a benefit of respecting human rights, not the prime reason for doing so.)

People can screw up. Irresponsible borrowers can take on debt they cannot service. Lenders and investors can decide that credit worthiness does not matter in times of inflating prices of collateral. Insurers can take on too much risk. Credit rating analysts can forget that a diversified pool of junk is still junk. Wall Street players can tie themselves into knots of hedges and counter-hedges. Fools can decide that, since nothing has gone wrong for a while, nothing will ever go wrong. When they do, one should face the facts and blame them for it, while still defending their economic freedom, just as one should oppose the expressed opinions of a ranting fanatic while still defending his freedom of speech. There is a real need to defend economic (and every other sort of) freedom. There is no need to excuse the actions of incompetents and scoundrels.

As to the pragmatic specifics of reform, I think the real reform we need now is to define a very clear line between what is guaranteed by the taxpayers (such as the deposits of commercial banks) and what is not and to make it clear that that line will never again be crossed. Those organizations that have their liabilities guaranteed by taxpayers should have careful oversight from the government, acting as the taxpayers’ agent, to make sure they behave prudently. Those that do not should be free to go their own way, gambling – if they choose to do so – only with their own money. They and their customers should understand that there will be no more bailouts for them.