Fridays the LA Progressive features a comment that was particularly noteworthy. This week we are featuring a comment submitted by Marshall commenting on, Why Obama Must Take on Wall Street, by Robert Reich.
Here’s Marshall’s comment:
The Unintended Consequences of Laws and Regulations, a Three Act Play of Greed
Act one. The government passed laws and regulations, at the request of their citizens, to try and increase the percent of Americans that are home owners. I wrote my representative and suggested why this would be a good for the country. Home ownership is a good thing but home owners should only buy what they are able to afford. The greed of buyers, sellers, and their agents, all acting in their best self interest are to blame for putting some people into homes they could not afford.
Act two. Lenders are in the business of lending money. They should do so only to people who can afford to repay the loan now and in the future if the interest rate and the payment amount could change in the future. Lenders used to hold mortgages on homes as bank assets. Then they began to package home mortgages into a bucket of loans and sell the bucket for cash and then lend out the cash for other home mortgages. Banks then repeated the bucket process over and over again. So instead of holding home mortgages as collateral, banks sold their collateral for cash and repeated the bucket process over and over again. Many of these buckets of mortgages contained some low value or subpar loans. The probability that some loans would fail was high. Banks bought financial insurance to insure these loans against failure and in many cases the insurance failed. The lending bubble grew slowly unnoticed as the greed of the lenders contributed their part of the mess.
Act three. Our elected representatives were the government entity that was supposed to oversee the activities of these lenders. Two of the major home mortgage lenders were Government Sponsored Entities or GSEs (Freddie and Fanny). I wonder how it is legal for a GSE to give campaign contributions to any federal employee and surely not to those appointed to oversee such GSEs. The regulators became the weak link in the long term forming of the bubble. The buyers, sellers, banks, and their agents were all expected to act in their own best interest but our elected officials were elected to act in OUR best interest and not in their best interest. In their greed for power, they failed to act for us and acted in their interest.
I will not name any bankers or politicians as my favorites in causing this credit crunch we are now having. I will say the politicians were the only people tasked with acting in our interest so as a group they are the most to blame. They developed and passed the laws that now haunt us and did not provide adequate over sight.