Friday, March 13, 2009

Crash Nostalgia

Can anyone remember last September, when 700 billion dollars still seemed like a big bill for the financial bailout?
Way back then, just as the credit-default swaps were hitting the fan, I interviewed Dean Baker of the Center for Economic and Policy Research for Inter Press Service. For years, Baker has been one of the most prescient economists in calling attention to the housing bubble and criticizing the handling of it by the Fed and the Bush administration.
In the interview, he pointed to the need to insure that the creators of mortgage-backed securities retain some responsibility for them:

IPS: In the long term, what regulations need to be put in place to fix these markets?
DB: First let's back up a step. The Federal Reserve board allowed the housing bubble to grow. The bubble could have easily been attacked, but [Fed chief] Alan Greenspan made the decision not to. If he had, you wouldn't have had a lot of these problems.
Beyond that, he was totally derelict in enforcing a lot of regulations. Everyone knew that a lot of garbage loans were being made. They could have easily cracked down on that - that was incredible negligence.
As to the deeper structure of the markets, it makes sense to make sure that the issuers of mortgage-backed securities have a stake in them, so that they don't have an incentive just to issue garbage loans and sell them on the secondary market.
As a practical matter, though, I don't know if the regulators will have to do anything, because I don't think anyone's going to buy mortgages from people who don't have a stake in them. Wall Street might actually want the regulation because they want people to believe that they're selling good assets.
Read the full interview:
Q&A: Brother, Can You Spare 700 Billion Dollars?
Peter Costantini interviews DEAN BAKER
September 27, 2008

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