In the June 27, 2011 print U. S. edition of Time, Joe Klein, in the context of suggesting that Republicans are against regulating Wall Street, made the statement in quotes in the title. Did it really?
Wall Street is not a club of innocents. On the other hand, the strongest case that Wall Street caused the current economic downturn is that analysts in Wall Street exercised their contractual right, and their obligation to investors and, probably, the SEC to return mortgages to originating lenders that appeared under-collatealized. That action did squeeze lenders into liquidity crises and cause the houses of cards to collapse. Why is nobody willing to probe beyond Wall Street. Do reporters like Mr. Klein simply stop at the first and easiest answer?
Mr. Klein cites presidential candidate Mitt Romney as suggesting that President Obama caused home values to collapse. Really? What caused home values, or prices, to rise to, unrealistically high levels in some markets, in the first place?
Some time ago, home ownership became part of the so-called American dream. Fulfilling that part of the dream seems to have always been dependent on where one lives in the country. Home prices naturally vary based on supply and demand.
Durning the Clinton Administration, a decision was made to make home ownership more feasible by loosening credit, by making qualifying for a mortgage easier. With more people able to enter the home-buying market, home prices rose, at least in some areas and neighborhoods in the United States. Concurrently, with fewer restrictions placed on lenders, prospective buyers discovered that they qualified for larger mortgages, even “jumbo” mortgages. Some buyers, wanting to capitalize on rising home prices, accepted mortgages with low “teaser” rates in anticipation of
selling or refinancing before the ultimate mortgage payments became due. Some home buyers accepted mortgages for more than the appraised value of the house. In addition, some appraisers seemed willing to appraise the home for more than the then-current value. With low or no down payments required, an apparently large number of homes were over-valued and under-collateralized.
In order to increase the pool of money available to fund mortgages, Wall Street received encouragement from Washington to create securities,
collateralized debt obligations, to provide mortgage lenders with a source of fresh capital with which to make more mortgages. These new securities allowed Wall Street to return individual mortgages to the original issuer for specific reasons, including insufficient collateral. These returned mortgages required cash compensation to Wall Street.
In 2007, Wall Street began taking a closer look at the mortgages it was buying, and began returning some, but not all, to the mortgage lenders. Soon, some mortgage lenders began facing a cash and credit squeeze. The squeeze prevented the issuing of new mortgages by an increasing number of lenders. With credit tightening, the number of eligible home buyers reduced. With fewer buyers, the prices of homes dropped and the construction industry entered a tailspin.
The credit crunch was detrimental to other sectors of the economy. Financial institutions that have no funding for mortgages also have no money for commercial credit lines and other purposes. The economy in the United States and other economies tied closely to it entered a downturn, the result of greed by some, and not just Wall Street, the decision by Washington to not regulate these new debt instruments, and a well-intended, even if politically motivated, desire to stimulate home ownership and the pursuit of the American dream.
Wall Street played a part, to be sure, but Wall Street had plenty of help from lenders, appraisers, real estate agents, and home buyers, all anxious to make an easy windfall courtesy of loose credit and artificially-rising home prices. People all over the country made artificial commissions or artificial profits. Some simply got caught when the house of cards collapsed. Mr. Klein and others find it so much easier to blame Wall Street than to blame everybody else who bought into the “greed is good” mentality.