More government won't solve this crisis
Commentator David Frum sees the point some are making about the credit crisis -- that what's needed to fix things is the strong hand of government. But he strongly disagrees.
David Frum (David Frum)
More on The Economy, Wall Street, Commentaries, America's Financial Crisis
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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From La Veta, CO, 10/07/2008
"extending mortgages to...more and more people with low and variable incomes"
How simplistic to blame low-income borrowers. I was browsing the foreclosure notices in a Colorado newspaper last month, and saw 80% of the foreclosures were for homes worth more than $500,000 and some worth >$700,000. This is in a county where the median home price is less than $300,000. Sure, blame the mortgage default problem solely on the poor. Meanwhile, some rich twit defaulted on a $705,000 second home -- enough to buy THREE homes for poor families.
From phoenix, AZ, 09/22/2008
This is turning out to be a Republican meme. Neil Cavuto said the same thing on 9/19. One thing they have learned: If you say it loudly and often enough, some people will believe it.
From NY, 09/22/2008
"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?"
This is some pretty flawed logic. I agree, certain policies of the government helped create the crisis. But is it really reasonable to conclude from this that there are no other policies the government can implement, or that none of those policies can be helpful?
From Ottawa, ON, 09/18/2008
David Frum is a master of parody and satire. The belly laugh I got from this hilarious piece almost made me forget that my retirement savings are going up in smoke. Thanks Dave!
From San Diego, CA, 09/18/2008
Eric from Utah states
"Free markets self-regulate, and free means that the government places neither a trough in front of them, nor shackles around them."
I don't think any economic system or any system that involves more then one person will ever be completely free, as eric states. Would you agree to drive on a road with no traffic lights, stop signs or driving lanes? I am sure people will drive but it wont be a very safe place to be. Your idea of a completely free market is as far from reality as Marxism's ideas of communism.
From Evanston, IL, 09/18/2008
So, the mechanism by which government is to blame is that they "encouraged" looser lending standards? Isn't that another way of saying they stood aside and let the market self-regulate? Perhaps when Putin "encourages", Russian companies bend to his "suggestions", but I am hard-pressed to find examples of U.S. businesses making bad decisions due to the iron fist of administration "encouragement".
From CA, 09/18/2008
"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."
Culminating in the biggest push for loose standards coming from the current President!! Something Frum fails to mention and possibly played a part in. He might be wise to start with acknowledging that first so that "Conservatism That Can Win Again." Neo-cons or pseudo-cons?
From Minneapolis, MN, 09/18/2008
"This crisis was enabled and intensified by government".
Now David, follow the money.
You bet - you win, you get the cash.
You bet - you loose, (the government pays) we pay.
I vote for more regulation.
Nice try.
09/18/2008
Frum does not excuse Wall St. in this commentary, but suggests that the government is complicit. And therefore, can’t truly be trusted to fix the problem it helped create.
Citizens also need to take a look in the mirror. How much credit card debt has been refinanced into home mortgages (hey, you can deduct it)? Wall St. didn’t make you buy a house you couldn’t afford or mortgage your existing home to 125% of its value so you could buy more lattes and a new plasma TV.
No one is without blame. Financial institutions, mortgage brokers, government and citizens have all played their respective roles in creating this crisis. Rushed, stop-gap legislation is the last thing the country needs. Fortunately, nothing will happen until after Jan of 2009. This is one case where the election is a good diversion that keeps Congress from doing something stupid in an effort to appear that it is addressing the problem. See Patriot Act and Sarbanes-Oxley.
From Walkertown, NC, 09/18/2008
The current meltdown of our economy is the result of imprudent, greedy, voracious behavior that was made possible by the governmental deregulation that Frum and his ilk brought about. Yes, millions of “the little people” took the bait and overextended themselves on subprime mortgages – while he and his cronies declared Greenspan to be a genius. In the meantime Frum’s cohort was inventing a fantasy “economy,” placing bets on each others’ debts, and laundering them through farcical financial instruments that no one claims to be able to understand today – hence their present worthlessness. These things, recall, were not permitted until they got the deregulation they asked for. Now millions of people who generate legitimate wealth by providing actual services and producing actual goods are circling the drain, along with fools like Frum who wrought this mess. All along the freemarketers have claimed that they should be permitted to do whatever they want, because their self-interest, which is to say avarice, would assure that they acted wisely. And now, Frum whines on Marketplace about the possibility of reregulation and claim that “the government made them do it!” What loathsome hypocrisy – from the guy whose speechwriting helped bring us the Bush Administration.
From Orlando, FL, 09/18/2008
FTA: "And over a decade, politicians and regulators prodded and pulled mortgage writers to do just that.
"The mortgage writers happily obliged. ...
"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?"
Isn't one of the basic tenets of conservativism personal responsibility? If so, conservatives should not believe that "enabling" any behavior is possible, as that requires a personal choice in whether to pursue an endeavor, no matter how tempting. (Analogy: People should not complain about obesity, as it's a personal choice whether to buy that Big Mac, no matter how many tempting advertisements they see.)
The author's argument seems hypocritical to his economic philosophy.
From Washington, DC, 09/18/2008
Mr. Frum's comments remind me of an old English parable about King Canute. Just like King Canute's advisers, Frum whispers in the people's ears that the market will decide, the market will discipline us, the market will make us rich and the market will make the world free. The people sit in their chairs facing an angry ocean that is violent, gray and turbulent. As the waves roll in, he tells us not to move.
But the waves do not heed his advice and swamp the poor, soak the middle class and lap at the toes of the rich. As Frum continues to chant his mantra, the question is what will the people do? Will the people rise up from their chair and demand a more rational policy and a more vigilant government? Or will they return to their chair and await the next wave?
09/18/2008
Following Frum's logic, I suppose I should blame my local highway construction firm when I'm pulled over for a speeding ticket.
From Brooklyn, NY, 09/18/2008
If "you don't have to be a Wall Street wizard to predict what comes next", then why did the wizards do it?
The premise that Government somehow "pushed" them into it is ridiculous, bordering on bizarre. The Government can not, in any way shape or form, push capitalists into knowingly losing money. Big business, as far as I know, has never, ever done anything for the greater good, or as a social experiment or to "help" the rest of the great citizens of America do anything, without a profit attached.
They seek profit. That's it. Period. No further analysis needed.
I have no idea what the connection can be between "loose" standards as dictated by a Government policy and a private, profit seeking entity. Said entity, regardless of "standards" loans money to those from which they can make a profit. If they have no money or credit etc, then that is a BAD place to look for profit. Unless you come up with a plan. Like say, packaging them into securities.
Additionally, "enabler" implies that business is somehow inherently irrational, and will do illogical things against it's best interest if given the chance. Like say, lose all of it's money and profit.
Is he kidding?
09/18/2008
I don't think this guy knows what regulartion means...
check out this interview with Michael Greenberger on FreshAire on NPR...
he has excellent perspective on cause and consequence of this credit debacle run wild...and ties the can to the tail of the Gramm ammendment in 2000. He also explains why children should not be allowed to play with matches as the young people selling the credit derivatives were basically set free to wax their commission levels as high as they could go.
If there is no regulation, there is no safety in the market---it will happen again. DO WE NEVER LEARN FROM OUR MISTAKES?
From Denver, CO, 09/17/2008
The only thing David is correct about is that it was Government’s fault, but not for pushing “Innocent Wall Street”. It was Government’s fault for de-regulating and abolishing commonsense oversight. I speak of the (just one of many examples) a late Friday night bill passed at the end of the session in December 2000. The Commodities Futures Modernizations Act which apart of it barred oversight of a new financial product: "Credit Default Swaps". Hmmm? Who had control of congress for the past 8 years at that point? Ask David Frum, he should know, he entered the White House that year too. He became the Economic Spin-Master (speech writer) for the Bush Admin. Funny how he hasn’t lost his talent for writing / spinning, his commentary is another example of putting “lipstick on a pig”. It’s the Economy, let’s not be Stupid again.
From kingston, NY, 09/17/2008
Frum is just playing his part in blaming government. The opponents to a good policy (regulation) spend years to ensure it's failure and then blame the policy not the fact it was never given a chance. The whole; home ownership through low interest rate was just another plutocrat scam ....instead of providing a decent wage to allow ownership it was all pretend ..like pay at he pump with your credit card ...David always says his lines so well doesn't he
09/17/2008
I can understand why several of the comments stress that more regulation is the answer to the current financial problems. After all, if the market was regulated to only allow 30 year, 30% down, fixed rate mortgages then we wouldn't be here. Wait, so all it would take is a law mandating that only one type of loan is allowed to finance a home purchase? That eliminates the need for multiple lenders, so why not have the government setup a bank that will lend you the money for your home loan. Citizens can just walk up to the counter, ask for some money, and the gov't can print some off for them at a very low rate. Why stop there? Since the loan is now offered (and thus backed) by The Full Faith and Credit of the United States government, we won't need mortgage insurance. We can now do away with all of those businesses. Now it is very easy to think of other great business ventures the government can take care of for us. Car loans, credit cards, any type of loan really. They could probably also handle manufacturing as well. I'll bet they would do a really good job too. We can have US gov't owned/run stores that sell everything we need and is produced right here in the USA...in gov't owned factories. Sounds like utopia. 99 times out of 100 private business will do a task better than the gov't. Gov't doesn't worry about losing money. The bottom line is that when the gov't can print whatever money they want, and loan it out to everyone in huge amounts at very low rates, we're going to have problems. The issue isn't that the gov't needs to regulate more, they just need to become less invovled in the entire system. If a company needs money to expand or get larger, they should find people who are willing to invest in them. It shouldn't be money from banks that just borrowed it from Uncle Sam's feed trough at 1%.
From Portland, OR, 09/17/2008
It ridiculous to blame the housing and stock market crashes on poor people getting loans. Why do smart people cling to such silly ideas?
From Providence, UT, 09/17/2008
"We need better government, smarter government."
What, in our past fifty or even one hundred years of history makes David Lauryn think that we're going to get better and smarter government? Our government is an unconstitutional cancer.
David Frum's conclusions are correct and sound. Regulation is the reactionary refuge of socialists, and the call of those lacking the foresight to recognize the myriad unintended consequences of State involvement.
Free markets self-regulate, and free means that the government places neither a trough in front of them, nor shackles around them.
From Seattle, WA, 09/17/2008
Genious argument David!
By your logic then we also should not have a "intelligence department" or the Pentagon since it gave us bad information on the Iraq war. Or perhaps we shouldn't have a presidency since there office encouraged the selective dissemination of "intelligence" information that campaigned for the war? I think we can all see where this argument leads us. In circles.
From San Diego, CA, 09/17/2008
I am no economist but even I can see the flaw in David's logic. To state that it is government's fault for the mortgage crisis is like saying it is government's fault for car accidents because they built the road where cars can drive over. I would argue we need more regulation such as speed limits on the road (continuing the analogy) to fix this mortgage fiasco.
From Chicago, IL, 09/17/2008
I agree completely with Mr. Frum's premises but I disagree completely with his conclusion. He is correct when he implies that we should never have strayed from the "...old-fashioned 30 percent down, 30-year fixed-rate amortizing loan." But he concludes, in error, that because government influence led us away from those safe mortgage-lending principles we need less government. In fact we need better government, smarter government.
From Daly City, CA, 09/17/2008
David Frum's simplistic view of government and its role in our society makes me think he's been hitting the ideological punch bowl too hard. Government did not give us the 'Credit Crunch,' it was the lack of proper regulation over mortgage backed securities. Now, arguing that regulation isn't the answer because it comes from government seems, at best, flimsy, and at worst, dogmatic.
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