Let’s see.
1. The Justice Department is suing a rating agency (Standard and Poor’s). The rating agencies are creatures of the SEC (which created their oligopoly and encouraged them to be paid by the raters rather than the customers of the ratings).
2. The SEC is suing Freddie and Fannie, which are creatures of the Department of Housing and Urban Development, under which the two firms were regulated and also given lending quotas for “affordable housing.”
So, when is HUD going to sue a company that is a creature of the Justice Department, just to complete the circle?
One way to view the period 2005-2009 is as a massive destruction of property rights by the government. First, they destroy the right of Freddie, Fannie, and commercial banks to maintain lending standards. Then they confiscate the property of holders of securities in GM and Chrysler to pay off the labor unions. Then they sell off AIG’s assets in order to bail out Goldman Sachs and several large foreign banks. And of course, the government has made every effort to keep banks from enforcing mortgage contracts, while extracting large fines from banks.
It’s beyond crony capitalism. It’s protection-racket capitalism.
No, I am not saying that the private firms did everything right. But whatever the problem with markets, government extortion is not likely to prove to be a good solution.
“1. The Justice Department is suing a rating agency (Standard and Poor’s). The rating agencies are creatures of the SEC (which created their oligopoly and encouraged them to be paid by the raters rather than the customers of the ratings).”
Don’t you mean that the SEC encouraged the rating agencies to be paid by the companies they rated? “Raters” sounds like you’re referring to the rating agencies themselves.
This entry was posted in Financial Crisis of 2008…
You categorize this as though you expect another…
Not everything right is a wee bit of an understatement. So outrageously badly that only government would save them from their demise for macro reasons would be much closer to the truth. Don’t forget there are plenty of companies that had no problem, from other insurers to Ford. Perhaps we should recognize they did something right.
“First, they destroy the right of …commercial banks to maintain lending standards.”
I don’t think that this is accurate unless I am neglecting something. Can you please clarify which commercial banks were mandated to lower lending standards for mortgage securities that they kept on their books? We do know that there were several banks that somehow avoided or were substantially shielded from the fiasco, including Wells Fargo, JP Morgan, CapitalOne and US Bank.
CRA was a factor. Risk-based capital regulations were a factor.
To clarify Arnold’s point, risk-based capital regulations (Basel II and the Recourse Rule) penalized banks that did not invest in AA or AAA mortgage-backed securities or Fannie/Freddie MBS.
See http://www.upenn.edu/pennpress/book/14917.html
and, for more recent data,
http://causesofthecrisis.blogspot.com/2011/10/new-data-on-bankers-risk-aversion.html