Sub-prime Mortgages Made Executives Rich
The New York Times [reg. req.] wrote about mortgage companies that became extremely profitable as the federal government pumped more and more money into the marketplace, allowing the executives to reap huge bonuses.
Just as the technology boom of the late 1990s turned twenty-something programmers into dot-com billionaires, and leveraged buyouts a decade earlier turned Wall Street bankers into Masters of the Universe, the explosive growth in subprime lending turned mortgage bankers and brokers into multimillionaires seemingly overnight.
Now an escalating crisis in the market, which seemed to reach a new crescendo late last week, is threatening a wide band of people. Foremost are the poor and minority homeowners who used easy credit to buy houses that are turning out to be too expensive for them now that mortgage rates are going up, but the pain is also being felt widely throughout the business world.
Now that the bubble has burst many of those sub-prime loans are going into foreclosure and threatening the stability of financial markets in general. Federal Reserve Chairman Ben Bernanke put on a good show by suggesting that reforms are needed at Fannie Mae and Freddie Mac, the two government-sponsored entities (GSEs) that pump money into the housing market by buying mortgages.
WASHINGTON – Federal Reserve Chairman Ben Bernanke urged Congress on Tuesday to bolster regulation of mortgage giants Fannie Mae and Freddie Mac, and suggested limiting their massive holdings to guard against any danger their debt poses to the overall economy.
Bernanke has previously supported efforts to pare the two mortgage companies’ huge portfolios. This time, however, he was a bit more specific and recommended that their holdings might be linked to a “measurable public purpose, such as the promotion of affordable housing.”
Don’t hold your breath.
Artificially inflating markets that would otherwise decline is obviously designed to protect the assets of property owners and makes housing less affordable, but the government has a long history of doing it and many methods, including the mortgage interest deduction. But Fannie Mae and Freddie Mac have played a big role in pumping up the cost of housing.
Fannie Mae is the No. 1 U.S. buyer of home mortgages; its rival, Freddie Mac, ranks as the second-largest buyer.
Fannie Mae and Freddie Mac — also referred to as government-sponsored enterprises, or GSEs, — were created by Congress to inject money into the mortgage market by buying home loans from banks and other lenders. They bundle the mortgages into securities for sale on Wall Street. Both companies have been scarred by accounting scandals.
There are those who believe that the enormous bonuses and profits from the housing bubble are evidence of the evils of laissez-faire capitalism, when in fact they are the result of the absence of laissez-faire capitalism. They are the result of massive government intervention in the marketplace which is the opposite of laissez-faire.
From Wikipedia:
The laissez-faire means that the neoclassical school of economic thought holds a pure or economically liberal market view: that the free market is best left to its own devices, and that it will dispense with inefficiencies in a more deliberate and quick manner than any legislating body could. The basic idea is that less government interference in private economic decisions such as pricing, production, consumption, and distribution of goods and services makes for a better (more efficient) economy.
In plain English that means that an overvalued housing market would more quickly drop in value making housing more affordable and putting reckless lenders out of business rather than making them rich at the expense of the most vulnerable and naive borrowers.
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