The policies that created the feeding frenzy, run-up, and crash in the mortgage market—that have now rippled into our fundamental commercial credit market—were created during the Clinton administration. I believe that President Bush and the congress should have fixed them long before now. Sadly, we caught ourselves in a common trap when we attempt to achieve social aims through market manipulation. Cheap mortgages felt great; no one wanted to be seen as being against so-called "affordable" housing for all. The Clinton administration broke down the regulatory and cultural "firewalls" between investment houses and banks. They not only permitted, but also incentivized banks to reduce loan oversight, and encourage the securitization of mortgages. This was all in an attempt to put more money into the mortgage market. While it is popular to blame the incumbent--especially when he and his cronies already have a lot to answer for to the American People--we do ourselves a disservice if we allow ourselves to forget that the Clinton administration created the frenzy and run-up that has finally come to ruin in the past couple of years
Sadly, many people in foreclosure now probably could have afforded their homes if they had spent another year saving for a bigger down-payment [or any down-payment] or spent a little bit less than the “most mortgage they could afford.” Frankly, some probably probably could not have afforded a substantial mortgage—and yet “no doc” and “low doc” rules let them get risky loans, regardless. Underwriters don’t like “no documentation” loans: they aren’t rational; there’s no reasonable way to price a mortgage without a basis for doing so. Low and no-documentation loans are purely a creation of government edicts. Regardless of whether these millions should have been offered—or accepted—the mortgages they did, all of them are now facing the personal tragedy and financial catastrophe of foreclosure. .
In addition to blaming the current administration, as opposed to the original authors of these failed policies, people want to blame the “invisible hand” that guides our market. The problem is that market isn’t truly free to begin with. There are governmental strings attached to that invisible hand that pull it in sometimes conflicting, and oftimes irrational ways. It was, in fact, artificial meddling in the market by the government in the name of a social--rather than economic--agenda that brought us to this crisis.
Hear me well on this--I don't care that Clinton was labeled a Democrat and Bush a Republican. My point is that there are extensive phase delays, non-linearities, and "unknown unknowns" that drive complex national and global economic systems. We meddle in them to achieve purely social aims in any direction at our peril.
I like what I heard yesterday about what the FDIC is doing. Instead of hand-wringing or “one-size-fits-all” politically expedient solutions, they are reportedly taking a rational, loan-by-loan review of distressed mortgages. They are employing an empirical formula to determine—as best they can—who could afford their home if given a little help, and who is simply not going to be able to pay.
I believe that we should restrict our interference in markets to the role of an umpire or referee: Ensure transparency and trust. Harshly punish fraud. Make people pay for their own choices—good or bad—as the only true way to encourage over the long term that people think—and think hard—about the choices they are making before they are committed.