Twisting (OR Whatever you want it to mean)

Today on Marketplace, David Frum tried to use the current financial mess as yet another example of failed government, claiming that the solution is not more government but less.

But in the excitement of scapegoat-hunting, something important is forgotten: Wall Street was doing exactly what the government wanted it to do.


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.


This crisis was enabled and intensified by government.

OK…  much of this is true, and is the sort of thing that Dean Baker and Paul Krugman have been talking about, but Frum manages to conflate the issue by tossing in this innocuous little phrase:

Over the past decades, administrations of both parties encouraged ever looser lending standards[.]

This might be technically true (I really don’t know), but when I look at graphs like this (courtesy Paul Krugman), I’m a bit skeptical about the “both” bit…

Case Shiller Home Price Index vs. BLS Rent Index

Case Shiller Home Price Index vs. BLS Rent Index

That significant runup is the housing bubble, for those who knew what to look for. It seems to me that there was an initial runup during Pres. HW Bush’s administration, that was immediately alleviated during the Clinton years.

And then the run up starts in 1999…  what happened then? [From March]

[F]ormer Sen. Phil Gramm (R-Texas), led the charge in 1999 to repeal a Depression-era banking regulation law that Democrat Barack Obama claimed on Thursday contributed significantly to today’s economic turmoil.

Does this really look like “both parties” to you? Doesn’t this look somewhat partisan to you? And isn’t it interesting that it’s the party that is ideologically bound to deregulation that was in power?

Knowing all that, can we seriously believe that the answer is less government?

This seems to be one more case arguing that government is bad and the solution is less government, not better government. The causality here (along with the nice low interest rates that Alan Greenspan maintained) seems pretty clear: less regulation leads to uncertainty and instability in the markets.

I’ve said before that the idea of a free market is great, in principle. But players in a free market have life cycles, they grow, some wither, some die. But the market isn’t isolated from us, the people who make the market go. It’s important to us that the market constantly grow, or at least be steady and relatively predictable. So, we look to the government to take steps to ensure that stability, for the common good.

And now that the markets are in distress, I think it’s telling that our instinctual reaction is to impose rules and regulations.


2 Responses to Twisting (OR Whatever you want it to mean)

  1. Oh, come on! You know full well that Clinton *signed* that bill. Clearly it’s all *his* fault!

    Well, OK, it’s at least a litlle bit his fault. Of course, it’s not like he wasn’t distracted by interns he couldn’t diddle anymore, or anything….

  2. Shane says:

    Sure, he signed it. From Wikipedia:

    The bills were introduced in the Senate by Phil Gramm (R-TX) and in the House of Representatives by James Leach (R-IA). The bills were passed by a 54-44 vote along party lines with Republican support in the Senate[1] and by a 343-86 vote in the House of Representatives[2]. Nov 4, 1999: After passing both the Senate and House the bill was moved to a conference committee to work out the differences between the Senate and House versions. The final bill resolving the differences was passed in the Senate 90-8-1 and in the House: 362-57-15. This veto proof legislation was signed into law by President Bill Clinton on November 12, 1999.

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