“Nobody expects the Spanish Inquisition nonsensical risks to not pay off!”:
The Bush administration backed off proposed crackdowns on no-money-down, interest-only mortgages years before the economy collapsed, buckling to pressure from some of the same banks that have now failed. It ignored remarkably prescient warnings that foretold the financial meltdown, according to an Associated Press review of regulatory documents. […]
Bowing to aggressive lobbying — along with assurances from banks that the troubled mortgages were OK — regulators delayed action for nearly one year. By the time new rules were released late in 2006, the toughest of the proposed provisions were gone and the meltdown was under way.
“These mortgages have been considered more safe and sound for portfolio lenders than many fixed rate mortgages,” David Schneider, home loan president of Washington Mutual, told federal regulators in early 2006. Two years later, WaMu became the largest bank failure in U.S. history.
The administration’s blind eye to the impending crisis is emblematic of a philosophy that trusted market forces and discounted the need for government intervention in the economy. Its belief ironically has ushered in the most massive government intervention since the 1930s. (emphasis mine)
Blaming lack of government action is pretty popular right now. I understand why, misguided as it may be. People have been effectivelly lulled to sleep for several years over this, rude awakenings can be a lot to swallow. Problem is, thanks to the nature of the transactions involved, the charge begs a question: why in the hell were such ridiculous deals accepted in the first place?
Much as the common wisdom sets this corpse at the feet of the Mythical Lasseiz-Faire Pony, the fact that the concept of “too big to fail” even exists, combined with the power of the Federal Reserve & Treasury to intervene and bailout, contradicts it. For the longest, these institutions have operated under an assumption that the government — taxpayers — would hold them up should the bill finally come due. Only with that kind of sponsorship do any of their actions make sense.
A market order would let every single one of these failed finance companies fail. A market order would not subsidize mortgages as a method of goosing consumption for decades. A market order would, more than likely, be impossible for these companies to exist in since they depend on state favoritism.
Of course there’s intervention now, yet note who that intervention is for. There comes a point when mere regulatory capture crosses into outright corporate-state collusion. If that line wasn’t crossed before (which some others would argue; I will not), it is undeniable it has been now.
BTW: my previous point on allowing mortgage holders to veto sales of their mortgage to 3rd parties still stands. Any fish want to bite?