Late September in the Shrillblog
Publius of Obsidian Wings Awards David Ignatius a Prize: Worst Op-Ed of 2007

Pointing the Finger of Blame in Mortgages

Alan Blinder points in six directions as he attributes blame in the mortgage mess:

Six Fingers of Blame in the Mortgage Mess: Finger-pointing is often decried both as mean-spirited and as a distraction from the more important task of finding remedies. I beg to differ. Until we diagnose what went wrong with subprime, we cannot even begin to devise policy changes that might protect us from a repeat....

The first finger points at households who borrowed recklessly to buy homes, often saddling themselves with mortgages that were all too likely to default. They should have known better. But what can we do...? Not much, I’m afraid.... Greater financial literacy might help, but I’m dubious about our ability to deliver it.... Fewer words, and in plainer English, might help.... But... people don’t read those documents anyway.

It seems more promising to point a finger directly at lenders. Some lenders sold mortgage products that were plainly inappropriate.... Under current law, a stockbroker who persuades Granny to use her last $5,000 to buy a speculative stock on margin is in legal peril because the investment is “unsuitable” for her (though perfectly suitable for Warren Buffett). Knowing that, the broker usually doesn’t do it. But who will create and enforce such a standard for mortgages?... We should place all mortgage lenders under federal regulation.

That said, bank regulators deserve the next finger of blame... the regulators know they underperformed....

Securitization is a marvelous thing.... But securitization sharply reduces the originator’s incentive to scrutinize the creditworthiness of borrowers.... Don’t the ultimate investors have every incentive to scrutinize the credits? If they buy riskier mortgage-backed securities in search of higher yields, isn’t that their business? The answer is yes — which leads me to point a fourth finger of blame. By now, it is abundantly clear that many investors, swept up in the euphoria of the moment, failed to pay close attention to what they were buying... a fifth finger, this one at the investment bankers who dreamed them up and marketed them aggressively. Another part of the answer merits a sixth finger of blame. Investors placed too much faith in the rating agencies — which, to put it mildly, failed to get it right.... Under the current system, the rating agencies are hired and paid by the issuers... an obvious potential conflict of interest....

SO that’s my list of men (and a few women) behaving badly. But as we point all these fingers, let’s remember the sage advice of the late and dearly missed Ned Gramlich, the former Fed governor who saw the emerging subprime problems sooner and clearer than anyone. Yes, the subprime market failed us. But before it blew up, it placed a few million families of modest means in homes they otherwise could not have financed. That accomplishment is worth something — in fact, quite a lot.

We don’t have to destroy the subprime market in order to save it.