More government won’t solve this crisis
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TEXT OF COMMENTARY
KAI RYSSDAL: Wherever the money’s coming from, it’s not going to come without strings attached. Congress has already promised hearings. And you can pretty much bet on new rules and regulations for the financial industry once the election’s over.
Commentator David Frum sees the point — that what’s needed to fix things is the strong hand of government. He just disagrees.
DAVID FRUM: OK, this is audacity.
From every side we suddenly hear people calling for more regulation of financial markets. The calamity on Wall Street has brought to public attention the frightening risk-taking of firms like Lehman Brothers, which lent money against assets at a rate of 35 to 1.
Something must be done! The government must put a stop to this!
But in the excitement of scapegoat-hunting, something important is forgotten: Wall Street was doing exactly what the government wanted it to do. Almost all the exotic credit instruments now wreaking havoc trace back to the simplest of all assets: the single-family home.
Insurance giant AIG, for example, held almost $100 billion in mortgage-backed securities when the market began to fall last year — and almost one-third of those securities were based on subprime loans.
The United States takes pride in high home ownership rates. Over the past decades, administrations of both parties encouraged ever looser lending standards in order to push the home ownership rate higher and higher still.
You don’t have to be a Wall Street wizard to predict what comes next. When you are extending mortgages to the 65th, 66th, and 67th percentiles of credit-worthiness, you are going to encounter more and more people with low and variable incomes — no down payment — and uncertain credit history.
To serve this population, you are going to have to shift far away from the old-fashioned 30 percent down, 30-year fixed-rate amortizing loan. And over a decade, politicians and regulators prodded and pulled mortgage writers to do just that.
The mortgage writers happily obliged. After all, they weren’t going to keep those loans. Wall Street would repackage and resell the loans to investors worldwide. One loan might go bad. But multiply that loan by a million — and then subdivide it again into a million parts — and you had a bond that looked, well, as safe as houses, as the British say. And after all, there was a government guarantee. Wasn’t there?
This crisis was enabled and intensified by government. So how does it make sense to say that the solution to the crisis is still more government?
RYSSDAL: David Frum is a resident fellow at the American Enterprise Institute.
His latest book is called “Comeback: Conservatism That Can Win Again.”
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