This transcript of a public-radio interview with New York Times finance writer Gretchen Morgenson is long. I would have everyone read it anyway. Like the Great Depression before it, the Great Recession has put free markets on the defensive. It’s not quite clear to me how fair this is. It is surely fair at least to some trivial degree, in the sense that markets are ultimately made up of regrettably fallible humans, prone to superstitions and herd behaviour and poor judgments of risk. But everyone seems to have managed to take the lesson that is most convenient for himself from the crisis; for those on the left it has been “markets fail”, and for those in the muddled mixed-economy middle it has been “regulators fail to smack those nasty markets back into line”.
What I see when I look at the origins of the financial pandemic is the story “government-sponsored enterprises that subsidize crazy lending practices and puppetize legislators fail.” Mortgage-writing institutions did things throughout the late 1990s and early oh-ohs that weren’t just likely to turn out badly; they made enormous amounts of loans that were practically certain to go bust in the short-to-medium term, loans that your mother could have told you would go sour. It wasn’t a “free” market that relaxed mortgage underwriting standards to the point of annihilation; it wasn’t a “free” market that put unskilled workers in million-dollar homes in the Sand States, or that spent too long ignoring the rising default rates that resulted.
We know this, in part, because we know how slightly freer mortgage markets traditionally behaved; they “redlined” the living heck out of low-income neighbourhoods. Because redlining resulted in racial discrimination—critics would just say it is racial discrimination—there has been a concerted attempt among economists to absolve the major U.S. anti-redlining statute, the Community Reinvestment Act of 1977, from any role in creating the housing bubble. Obviously it won’t do to pin the crisis on a 1977 law, but there is such a thing as the straw that broke the camel’s back; the CRA was followed by an even more intense fusillade of statutory and regulatory measures consciously designed to increase home ownership in America without making homes less expensive and valuable per se.
If you just sit and think about this policy goal—“give everybody a thing while making sure the price of that thing continues to appreciate”—you realize that there could never be any way of accomplishing it without harm to credit markets, or indeed without serious distortions of the whole concept of “credit”. How that harm got spread throughout the world seems, by contrast, a niggling detail. Morgenson focuses on how the regulatory and political environment turned Fannie Mae into Godzilla, but I don’t think that’s the whole story either, as crucial (and as sordid) as it obviously is. Why was there even such a thing as the “Zero Down Payment Act”? Does that sound like something we should probably hop in a time machine and go back and undo?