mortgage graphic 88.
(photo credit: )
The last column, entitled "Mortgages as Toxic Waste," discussed the crisis in the sub-prime mortgage market in the US. Many commentators (including this one) warned for years that the US housing market was a bubble being fuelled by the provision of cheap credit to people who didn't know better, by financial institutions that ought to have known much better.
Many others now accept that view - including, intriguingly, Federal Reserve Chairman Ben Bernanke, who testified to Congress this Wednesday that "the recent rapid expansion of the subprime market was clearly accompanied by deterioration in underwriting standards and, in some cases, by abusive lending practices and outright fraud. In addition, some households took on mortgage obligations they could not meet, perhaps in some cases because they did not fully understand the terms."
Considering that the Fed (under Bernanke's predecessor, Alan Greenspan) should have ensured that lending standards did not deteriorate, and should certainly have acted against abuse and outright fraud, this is an extraordinary statement. However, even today, not everyone shares this view of what happened. One American reader put the alternative view succinctly and eloquently in an e-mail protesting against both the style and content of the column in question, which he found "to be at best overly sensationalist, and at worst fairly uninformed."
He went on to note that the mortgage business "was not 'driven by greed' as you claim but was rather driven by the desire for an increasing number of Americans to own the roof that is over their heads, and in the last decade of record home price appreciation, to make a smart and highly profitable investment. It is the behavior of efficient and liberal capitalist markets to accommodate the desires of consumers, indiscriminate of what these desires are, and indeed this did in fact occur.
"Through offering exotic mortgage products at higher interest rates such as interest-only loans, second liens, and option-ARMs, as well as lending to customers with lower credit scores or with little documentation, mortgage originators enabled a record 68.4% of Americans (2007 Q1) to own their home. Making this possible was the process of securitization in which these mortgages were financed by funds around the globe seeking to earn higher rates of return and knowingly taking on additional risk.
"If these funds are now underperforming due to the deterioration of the riskiest pieces of these securities it is the blame of those fund managers alone. This was not an Enron or WorldCom-like case of misrepresentation, fraud and deceit as you seem to insinuate throughout the tone of your article.
ather this predicament, the state of the current US mortgage market can be summed up by one sentence alone: Americans wanted to own homes and investors, in an effort to receive higher rates of return, drastically miscalculated the amount of risk that accompanied funding riskier mortgage products."
Therefore, "what is currently occurring is a healthy, albeit quite painful, correction to the state of the US residential mortgage market," so that "just as it is the responsibility of fund managers to be aware of the risks inherent in their investments, so too it is the responsibility of personal investors to be aware of the assets in which their money is being invested and in what distributions. For therein lies the essential underlying assumption people must understand should they wish to involve themselves in efficient capitalist markets, which is caveat emptor, or 'buyer beware.'"
This is as good a defense of the financial sector as I have seen, including in staunchly free-market publications and blogs. It is, nevertheless, as tendentious as it is detached from reality.
When people who present this argument buy a toy for their kids that proves to be dangerous, or a faulty appliance, or - especially - a medicine that has nasty side effects, do they say "Hell, caveat emptor, it's my fault?" Or do they hire a lawyer and sue - and write their Congressman to get after the relevant regulatory agency?
In short, the Western, liberal, capitalist world of today has long since dropped the caveat emptor approach - because economies are consumer-driven and consumers, for some reason, don't think caveat emptor is a good idea. It doesn't encourage them to spend, it even detracts from their "shopping experience." In some cases, it leads to pain or even death. That's why virtually everything from agricultural produce to airplanes are subject to the "meddling," "bureaucratic" oversight and intervention of government agencies.
But within these molly-coddled economies, the sector most heavily regulated is usually that offering financial services to the general public. The next column will ask why that is so and what the implications are.