Thursday, September 18, 2008

Government Is The Problem: Doug Ross on The Mortgage Crisis

The always-enlightening Doug Ross (h/t Larwyn) blogs convincingly that the roots of the current mortgage crisis are in government regulation. While I was at the health club this afternoon, someone mentioned to me that only if there were more regulation there would have been no problem of this kind. But, of course, Enron cleared the mark-to-market accounting method directly with the Securities and Exchange Commission, so regulation did not work then. Nor is there reason to believe that greed can be regulated or that government lawyers can outsmart private sector ones. What regulation would accomplish, of course, is to squelch innovation in the future.

Fannie Mae and Freddie Mac were the product of government regulation. Further regulation will not solve a problem that regulation created. The concept of business regulation originated in New York State's regulation of the insurance business, which forced Equitable Life to stop selling a colorful product of the late nineteenth century, Tontine Insurance. Insurance in New York is already heavily regulated. Why on earth would anyone believe the old wives' tale that more regulation would solve problems like this?

The excessive risk taking came from financial subsidies that emanated from the Federal Reserve Bank. The entire subprime crisis is a product of government intervention. Only fools would argue that the solution is more government regulation. Government regulation caused the problem.

Doug asks: "But why would anyone underwrite obviously risky mortgages?" and notes that:

"Fannie Mae executives, aided and abetted by Congressional Democrats and the Clinton administration, went hog wild promoting low-quality loans. After all, their stock options and "earnings-per-share challenge grant awards" were at stake. A press release from 1999 -- announcing a $1 billion taxpayer-funded giveaway -- epitomized the era."

The debate in America has become insipid enough that I tune it out. It is refreshing to hear intelligent voices like those of Doug Ross.

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