Who’s to Blame?

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Our economic disaster: last summer I was reading about it in Paul MuoIo and Matthew Padilla’s “Chain of Blame.” This year, my nose has been in Thomas E. Woods’ “Meltdown.” The two tales are very different. MuoIo and Padilla’s “chain of blame” runs through Wall Street. Woods blames the government.

Woods is a professional libertarian. He works for the Ludwig von Mises Institute and is author of several libertarian or Christian books, including “The Politically Incorrect Guide to American History.” MuoIo is from the trade press, having covered Fannie Mae, Freddie Mac, and the subprime lenders for National Mortgage News. Padilla wrote for the Orange County Register. The Register has a libertarian editorial page, but Padilla was on the business page. The Register covered the subprime lenders because they were based in Orange County, just south of Los Angeles.

“Chain of Blame” is a business story. It’s journalism about people and their business creations: Angelo Mozilo of Countrywide Finance, Roland Arnall of Long Beach Mortgage, and Lewis Ranieri, who at Salomon Brothers invented the mortgage-backed security. The authors know these men and describe them. They trace the genealogy of the collateralized debt obligation and the subprime mortgage, the zero-option adjustable-rate mortgage and the “liar loan” – all the stuff that became “toxic assets.”

Most of the book is descriptive. MuoIo and Padilla are saying to the reader, “This is what was going on.” If they had put it on a diagram, the boxes might have been labeled, “mortgage borrower,” “mortgage originator,” “mortgage wholesaler,” “mortgage securitizer,” “security rating service,” and”security buyers.” All of these were in the private sector.

MuoIo and Padilla argue that blame should be placed where the planning was, and where intelligence and foresight should have been. That was in the Wall Street investment houses. They invented the new securities and made them inscrutable. In the same vein, one might condemn the rating agencies, which pretended to evaluate them rationally, and institutional investors, such as the European banks, which pretended to understand what they were buying.

In MuoIo and Padilla’s mental diagram of all this, the Federal Reserve’s cheap-money policy of 2003-2004 is there, but it’s off on the edge. It’s a background condition, not an active cause. Now come to Woods’ book. He states his thesis on page 13:

“Blaming “greedy lenders” or even foolish borrowers for what happened merely begs the question. What institutional factors gave rise to all the foolish lending and borrowing in the first place? Why did the banks have so much money available to lend in the mortgage market – so much that they could throw it even at applicants who lacked jobs, income, down payment money and good credit? These phenomena, as well as the housing bubble and the economic crisis more generally, are consistently traceable to government intervention in the economy.”

In Woods’ view, the background condition is what’s important. Woods implicitly excuses everyone in MuoIo and Padilla’s “chain of blame.” He doesn’t say he excuses them; he just doesn’t focus on them. His implicit view is that if private-sector lenders are throwing money at applicants with no income, it’s Alan Greenspan’s fault because Greenspan has lowered short-term interest rates to 1%.

This is putting ideology before eyeballing. We have a theory, we find some facts that plug into our theory, and voila! Our theory is good. We are good. And maybe our theory does bring explanatory order to some of the facts. The Fed did lower short rates to 10/0, setting up a background condition for a mess. Congress did create Fannie and Freddie, pass the Community Reinvestment Act, and press bankers to make more loans to minorities, just as Woods says. He can legitimately trace a line to these things. But when he says that lithe housing bubble and the economic crisis more generally, are consistently traceable to government intervention in the economy,” he is saying more.

Think again of a diagram with lines and boxes. Woods is putting government at the center of it – and portraying those who put lenders at the center as leftists railing against “greed.” This is a straw man. The mainstream financial press, of which MuoIo and Padilla are a part, is not leftist. Woods habitually puts the private sector into the kind of phrases in which things just happen or become. Consider this, from page 21:

“Although the driving force behind abandoning traditional lending standards was the federal government’s political goal of increasing homeownership, particularly among preferred minority groups, lending innovations like 100% loans became institutionalized features of the industry, particularly when the Fed had made banks flush with reserves to lend.”

I am biased: I was a stockholder in one of the largest banks that failed. Unknown to me (because I wasn’t paying attention), my bank made bad loans – tens of billions worth of such grotesqueries as the zero-option ARM, a home loan in which the principal amount increases in the first five years. The CEO of my bank decided to make that kind of loan. The government didn’t order him to do it. Other CEOs didn’t do it. He did. His motivation was not to suck up to ACORN or the Federal Reserve Board. He was trying to make his bank big and successful. He knew he was violating the traditional rules of lending, but he had a theory of why he could do that, and his theory worked for a while. His bank did become big and successful. Then it was ruined – and so was I – in regard to my investment in it.

All that is the government’s fault? Woods seems to think it is. His very language excuses. Consider the paragraph quoted above. The government was the Iidriving force” behind the irresponsibility of bankers. The Fed “made banks” have too much money. Hundred-percent mortgages “became institutionalized.”

Mortgages became?

I do not excuse the central bankers. One-percent money is high-proof stuff. The Austrian economists are right about that. Now, under President Obama, 1% money is back again, and if the Fed keeps the bottle on the bar too long, eventually there will be another bacchanal. It probably won’t be in home mortgages, though. It will be in a different thing with different people making different mistakes. These differences will be important – economically important and also morally important, when it comes time to assign blame. Not all mistakes are government mistakes.

I have another bias. Though my views are generally libertarian and I am writing here for a libertarian magazine, I make my living in mainstream journalism. For almost 20 years I was a business reporter for a daily newspaper – the job Matthew Padilla had when he was working on “Chain of Blame.” Done right, newspaper reporting is a facts-first job, not an ideology-first job. You have to have some theory, of course, to know what facts to look for, but it’s fairly basic. There are few decisions of high doctrine to make when you’re telling of the rise and fall of a loan company.

MuoIo and Padilla focus on the mortgage lenders because that was the story of their daily journalism. One imagines that one of them said to the other, “You know, this would make a good book.” That approach helps”Chain of Blame” considerably, and also biases it. When I imagine the best possible book about the Crash of ’08, it has more about the Fed in it, and more about Fannie Mae and Freddie Mac. It also has more about the people who bought the securitized mortgages – what was the matter with the institutional investors, anyway? But my ideal book would be like MuoIo and Padilla’s book. It would not be like Woods’ book.

The story of the Crash of ’08 cannot absolve players in the private sector, as so many defenders of the market do. Consider a final example: the rating agencies. These companies repeatedly stamped investment-grade okays on products later discovered to be lethal. In my view, the raters should be condemned. Shunned. Tarred, feathered, and rolled in oyster shells, along with the CEO of the bank I had stock in.

In his book Woods gives the rating agencies two and a half paragraphs. There he quotes an assistant professor of economics from a college I’d never heard of – a libertarian who wrote his doctoral thesis on lynching and property rights – saying that the bond raters were just trying to please the Securities and Exchange Commission. The idea is that the SEC represents the interests of the liberal, ACORN-infected politicians who want mortgages for all. Then Woods says that the private rating agencies are “an SEC-created cartel,” with the unstated but obvious-to-a libertarian implication that no defender of the private sector is obliged to defend them. Problem solved! Everything that is bad is once again” consistently traceable to government intervention.”

It is possible to trace – and think what that means – every economic problem to government, if that is what you set out to do. But if you want an accurate explanation – an honest accounting of which causes are contributory, which are necessary and which, if any, are sufficient, you don’t set out to trace everything to one source. You immerse yourself in the facts, see what the connections are, and let the story itself tell you what the explanation is. This is what MuoIo and Padilla try to do, and to a great extent, succeed in doing. It is what many libertarians ought to learn how to do.

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