Who or what caused the global financial panic? Listening to Catholic pundits, you would blame either the Republicans or the Democrats.
Over at Inside Catholic, Brian Saint-Paul approvingly quotes a 1999 New York Times story about the Clinton administration's responsibility for the crisis:
Fannie Mae, the nation's biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people and felt pressure from stock holders to maintain its phenomenal growth in profits.
In addition, banks, thrift institutions and mortgage companies have been pressing Fannie Mae to help them make more loans to so-called subprime borrowers. These borrowers whose incomes, credit ratings and savings are not good enough to qualify for conventional loans, can only get loans from finance companies that charge much higher interest rates....
Over at In All Things, Jim McDermott, SJ faults the GOP for a laissez-faire economic philosophy:
even as the market has prospered over the last ten years, an ever-deepening outrage has been simmering beneath the surface. The idea that the government might be letting "fat cats" get away with it yet again has caused the pot finally to boil.
There is a certain paradox in all of this, as the party largely responsible for this mess was elected by a lot of those who are angry. As they say, you get what you pay for. (Unfortunately, so does the rest of the world.)
McDermott, SJ,is right to criticize the GOP for its coziness with Wall Street, and Saint-Paul is right to criticize the Clinton administration for pursuing unsound economic policies. But in truth, the two analyses tell only half the story. Partisan policies did not cause the global financial panic; unreasonable regulation did. Just read Catholic social teaching.
The Democrats’ capital sin was pride: They promoted easy credit to risky borrowers. As late as the early 1990s, qualifying for a prime home loan was difficult; you had to have not only a good credit score, but also put up tens of thousands of dollars. In the late 1990s, the regulation changed. In an effort to expand home ownership to minorities and the working class, Fannie Mae, under pressure from the Clinton administration, reduced down-payment requirements; instead of needing to put up around $20,000, a couple needed to put up far less. In addition, Fannie Mae’s policy allowed couples that made their monthly mortgage payments on time for two years to pay a regular interest rate.
The regulatory change was well-intentioned; who really opposes expanding home ownership for minorities and the working class? But the change was risky. Some would-be homeowners were bound to default on their mortgages; the attendant foreclosures were bound to harm banks and the real estate market, especially during a recession. As Steven A. Holmes, the author of that 1999 Times article, warned presciently,
In moving, even tentatively, into this new area of lending, Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980's.
The Republicans' capital sin was avarice: They allowed Wall Street pros to sell stocks without regard to the common good. As late as July 5, 2007, making a fast buck on the market was not automatic; if you wanted to short a stock, you could sell only when the stock’s price was higher than the previous trade. On July 6, 2007, the regulation changed. In an effort to appease Wall Street, SEC Chairman Chris Cox eliminated the uptick or plus-tick rule. Now you could sell a stock short whenever you wanted.
This regulatory change, too, was risky. The old rule had been created, by Joe Kennedy in 1934, to prevent the market from going down sharply or, as it is known on Wall Street, a bear raid. And going down sharply is what many companies’ stocks did. For example, consider the recent history of Fannie’s stock price. From the early 1990s to 2007, it rose from 12 to 70. In six months, it plunged from 70 to 2. Now you know why the government was forced to buy out Fannie Mae.
The importance of the uptick or plus-tick rule is not well known. I could not find information about it in the print MSM at all, although popular financial crazyman Jim Cramer has talked about it on his show a lot. But its significance was recognized by some. Larry Kudlow, a Catholic convert, warned presciently in August 2007, that
[i]n today’s context, is it purely a coincidence that Chris Cox’s new SEC “no uptick” rule made its debut at the same time that stock market volatility has gone gangbusters? Are hedge fund traders shorting stocks on down ticks? This could be adding huge momentum to downsized price movement. It could also be putting ordinary mom and pops investors on Main Street at great risk to the machinations of Wall Street professionals.
Maybe you want to understand the problems of Fannie Mae’s and the SEC’s regulations in detail. If so, research the issue on the Internet and avoid looking for partisan interpretations. But to those who are too busy, I advise picking up a copy of the Catechism and reading line 2425. It tells pretty much all you need to know: “Reasonable regulation of the marketplace and economic initiatives, in keeping with a just hierarchy of values and a view to the common good, is to be commended.” (2425)
Mark Stricherz
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