Bailout: Full text of Bush's address about economy : "The decline in the housing market set off a domino effect across our economy. When home values declined, borrowers defaulted on their mortgages, and investors holding mortgage-backed securities began to incur serious losses. Before long, these securities became so unreliable that they were not being bought or sold. Investment banks, such as Bear Stearns and Lehman Brothers, found themselves saddled with large amounts of assets they could not sell. They ran out of money needed to meet their immediate obligations, and they faced imminent collapse. Other banks found themselves in severe financial trouble. These banks began holding on to their money, and lending dried up, and the gears of the American financial system began grinding to a halt."
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I don't pretend to be an expert on the financial sector, but I wish Bush had gone further and explained a couple of things.
The speech laid out the basics. There was a tsunami of cheap and easy money being lent out, creating enormous risk to the financial institutions, and the GSEs were in terrible jeopardy. When housing prices began to fall, the wave began to crash.
But while he correctly pointed to the speculation in housing that occurred, he never mentioned two things, because to do so would set off the blame game and paralyze his efforts to get the bill passed:
1. The Clinton Administration's major initiative to force banks to give home loans to "first time home buyers," meaning people who couldn't afford home ownership. You could call this over-regulation. This got Fannie Mae and Freddie Mac involved in buying all kinds of bad loans, and they passed that on in what turned out to be bad (but guaranteed) securities.
2. The total lack of regulation over the huge array of bizarre derivatives that were spawned to deal with all the excess risk. Credit default swaps proliferated all over the place and led to demands for payment that could not possibly be met--even by a giant like AIG.
So it seems to me that there was both over and under regulation: over-regulation in housing finance to induce reckless lending to people with no money, and under-regulation in the financial sector where they bought and sold all that risk. He avoided mentioning either. That makes the whole thing sound like a big natural disaster instead of something that was created by human action. Maybe that helps get the bailout passed, but doesn't the public need a fuller explanation of how we got here? I can see a typically vapid finger-pointing election "debate" over this between Obama and McCain with nobody explaining why both explanations are part of the real story.
2 comments:
The other thing I wish he would have talked about is why all the $$ we've already given to Wall Street hasn't helped. All the tax breaks (e.g., capital gains tax) and incentives and so on were supposed to grow our economy and make all of us better off. But they didn't. And now we are supposed to give them more money?
If Bush (& congress, & Wall St) cannot speak candidly and clearly about WHY we are in this mess, it is hard to believe that they know how to get out of it.
Let's not forget what leads to such malinvestment. I feel it has less to do with regulation, and much more to do with government manipulation of interest rates. For the past eight years and beyond, it has been Federal Reserve and Treasury policy to keep interest rates excessively low. The easy credit and high liquidity don't just happen by themselves.
The greed of investment bankers and home buyers alike was simply a byproduct of an inflated housing market driven by easy money and insanely low interest rates. Some economists would argue (I'm not afraid to say I agree) that these booms followed by busts are natural cycles in a system where interest rates are not set by the market.
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