The American Spectator

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Another Perspective

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ON DOWN THE MORTGAGE FOOD CHAIN, lenders of all kinds, from banks to strip malls, were pouring money out the door, into ever weaker housing loans. Eventually, borrowers could get home loans without stating assets or without proving income. The lender didn't care. His company instantly bundled the loans and sold them up the chain, where they were bundled -- securitized -- by a giant money center bank on Wall Street. Wall Street sold the securities to eager investors.

The New York Times story from 1999 contained a warning:

"...Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980's."

Ultimately, Fannie Mae and Freddie Mac served as buyers and market-makers of last resort in the securitized mortgage market, all the way from strip malls up through Wall Street.

SO WHAT BROKE FIRST, AND WHAT BROKE WORST? When the "economic downturn" foreseen in the Times did come, where did the fault lie?

With interest rates steadily being lowered by the Fed, and with housing prices rising, private sector mortgage players could have created a crisis all by themselves. Most significantly, at the Wall Street level, people got fooled by their software. The models all predicted that, even with defaults, mortgage backed securities should pay off just fine. No software envisioned defaults of 50 percent or more.

And, no mistake, Wall Street can get into trouble all by itself with no help from the government. (See AIG and credit default swaps.)

Would lenders have made such bad loans without government interference, indeed, without government pressure? Probably not nearly as many of them. When the break came -- when defaulting lenders could no longer clear their debts by selling their houses -- lenders probably would have tightened up their practices. Some lenders would have gone bust.

Wall Street would have adjusted their software models, and the whole thing would have pulled back. Some Wall Street firms might have failed.

But with the government pushing the whole process along, it became the train wreck of today.

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