Fifth Greatest Libertarian: Government Blameless in Bubble/Bust/Bailouts


Glass Steagall dunnit.

Barry Ritholtz, whose Big Picture blog was ranked the number 5 libertarian site on Planet Earth by a recent DBKP Report, says it's all a "big lie" that Washington, DC played a major role in the economic mismanagement of the last ten years.

We begin the story nine paragraphs into Ritholtz's peripatetic pontification

The Big Lie made a surprise appearance Tuesday when New York Mayor Michael Bloomberg, responding to a question about Occupy Wall Street, stunned observers by exonerating Wall Street: "It was not the banks that created the mortgage crisis. It was, plain and simple, Congress who forced everybody to go and give mortgages to people who were on the cusp."

What made his comments so stunning is that he built Bloomberg Data Services on the notion that data are what matter most to investors. The terminals are found on nearly 400,000 trading desks around the world, at a cost of $1,500 a month. (Do the math — that's over half a billion dollars a month.) Perhaps the fact that Wall Street was the source of his vast wealth biased him. But the key principle of the business that made the mayor a billionaire is that fund managers, economists, researchers and traders should ignore the squishy narrative and, instead, focus on facts. Yet he ignored his own principles to repeat statements he should have known were false.

[snip four more paragraphs of throat-clearing] 

?Fed Chair Alan Greenspan dropped rates to 1 percent…. 

?Low rates meant asset managers could no longer get decent yields from municipal bonds or Treasurys…. 

?Fund managers made this error because they relied on the credit ratings agencies — Moody's, S&P and Fitch….

4 Derivatives had become a uniquely unregulated financial instrument….

5 The Securities and Exchange Commission changed the leverage rules for just five Wall Street banks in 2004. The "Bear Stearns exemption"….

6 Wall Street's compensation system was skewed toward short-term performance…

7 The demand for higher-yielding paper led Wall Street to begin bundling mortgages…

8 These mortgage originators' lend-to-sell-to-securitizers model had them holding mortgages for a very short period…

9 "Innovative" mortgage products were developed to reach more subprime borrowers…

? To keep up with these newfangled originators, traditional banks developed automated underwriting systems…

? Glass-Steagall legislation, which kept Wall Street and Main Street banks walled off from each other, was repealed in 1998…

? Many states had anti-predatory lending laws on their books (along with lower defaults and foreclosure rates). In 2004, the Office of the Comptroller of the Currency federally preempted state laws regulating mortgage credit and national banks…

The copydesk-embarrassing mishmash of bullet points and numbers is from the original story. 

Since Ritholtz doesn't even bother to put a number on his explanations, I'm not going to bother replying to all of them. But here's some history on Greenspan (who Ritholtz, possibly using the conspiracy theorist's observation that the central bank is theoretically not an official government entity, seems to classify as a private sector player). Here's a search for suspects in the real estate bubble – including the government-sponsored enterprises Fannie Mae and Freddie Mac, who repeatedly lied about the amount of garbage debt on their books. Here's a little something on the failure of government policies supporting loan modification to do anything other than stretch out pain. Here's something on the anti-deflationary madness that spurred many of the policies Ritholtz laments. Here's something on Bear Stearns. The fingerprints of HUD, FHA, Treasury, the Fed, the GSEs, and both 21st-century presidential administrations are all over this stuff. 

And Glass-Steagall? Someday I hope one of these people will explain how lifting a minor technical restriction on retail bank holding companies (in 1999, not 1998) led to a crisis that was directed at (and if not for massive federal intervention, limited to) investment banks and mortgage-only lenders. But I'm sure one day one of these people will explain it. Maybe. (And by "these people" I of course mean libertarians like Barry Ritholtz.)