An Interesting Editorial
By Arnold Kling
when government favors a particular economic activity, however validly, it must seek countervailing control to ensure the sustainable use of public resources. This is why banks must meet capital requirements in return for federal deposit insurance. Congress did not apply this sound principle to Fannie Mae and Freddie Mac; they were allowed to engage in profitable but increasingly risky activities with an implicit government guarantee.
This is the first time I have seen “capital requirements” mentioned in the mainstream media. In my view, capital requirements are the number one reason that the convoluted process of mortgage securitization emerged in the first place. See more fantasy testimony.and the fantasy testimony continues.
The media needs a narrative of villains, victims, and heroes. That is why the dominant narrative has greedy executives and right-wing deregulators (villains), even though capital requirements were what drove securitization. That is why the dominant narrative has homeowners burdened by mortgages, when in fact more than 15 percent of mortgage loans in recent years were for non-own-occupied homes. Moreover, even the owner-occupants were speculators, in the sense that they put almost nothing down. Trying to paint as a victim someone who put nothing down and got a big house to live in as a result is really stretching things. Finally, the media wants Henry Paulson and Ben Bernanke to be heroes. In fact, they are increasing the discrepancy between concentrated power and dispersed knowledge.
Anyway, the Post editorial concludes:
Government-sponsored, upside-only capitalism is the kind that’s in crisis today, and we say: Good riddance.
That is what I would have said before Paulson came to the rescue. Now, I think that government-sponsored, upside-only capitalism is the only game in town for the foreseeable future.