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• W326783320 abstract "It is popular around the world to blame the financial crisis on the United States. But before we identify this as the usual anti-Americanism, we should perhaps look more seriously at our country's housing policies. Unfortunately, there is a strong argument that the financial crisis is indeed the fault of the United States--an artifact of the housing policies that this country has followed since the early 1990s. These policies produced an unprecedented number of subprime and other nonprime mortgages (known as Alt-A), and when the housing bubble topped out in late 2006 and early 2007, these loans began to default at unprecedented rates. In my view, the severe losses associated with these defaults caused weakness of Bear Steams and AIC--resulting in their rescue--the failure of Lehman Brothers, the severe recession we are experiencing in the United States today, and ultimately the financial crisis itself. Before proceeding, I should define some terms. A subprime loan is generally one in which the borrower has blemished credit, usually measured by a FICO credit score. The traditional dividing line between a subprime and a prime loan is a 660 FICO. An Alt-A loan is not a prime loan, even if the FICO score is above 660, because there is some deficiency in the loan itself. Alt-A loans, for example, have low downpayments (i.e., high loan-to-value ratios), low or no documentation concerning income or employment, negative amortization features, and other deficiencies that make them more likely to default than prime loans. In the current crisis, indeed, Alt-A loans are defaulting at rates roughly equivalent to subprime loans. The Obama Administration's Narrative The idea that weak or junk mortgages might be the source of the financial crisis is not widely understood. The Obama administration and most of the media have blamed the crisis on the usual suspects--lack of regulation or inadequate regulation, particularly at the mortgage origination level, but also the result of greed on Wall Street. In this narrative, unregulated mortgage brokers produced some undefined number of subprime loans through predatory lending to unwitting homebuyers. The president himself has said that this kind of lending was in part the cause of the financial crisis. This focus on the lack or insufficiency of regulation has produced the predictable response: the administration has recommended, and the Democrats in Congress have largely endorsed, a regulatory reform program that would extend bank-like regulation to the entire financial market. Large nonbank financial institutions--securities firms, insurance companies, holding companies of various kinds, hedge funds, finance companies and others--designated as significant--would in the administration's plan be subjected to special regulation by the Federal Reserve and, if they fail, to a special government resolution regime, outside the bankruptcy system. The consequences of this for our economy will be dire. Designating firms ha advance and regulating them in special ways will be a signal to the market that they are too big to fail. This will give these firms advantages in raising capital and borrowing in the credit markets. Like Fannie Mae and Freddie Mac, they will be seen as government-backed. This will not only create moral hazard, but will 'also have serious anti-competitive effects in any of the markets in which these systemically significant firms compete. Like Fannie and Freddie, with their perceived government backing, these firms will be able to drive their smaller rivals out of any market they enter, or force consolidations so that the large companies that result will also be seen as too big to fail. The special resolution system that the administration has proposed will also have severe adverse consequences. Since there is no way to know whether the failure of a particular firm will bring about the systemic breakdown that is implied by the term significant, giving the government the authority to take over and unwind or stabilize any firm that might cause a systemic breakdown will be a license to interfere in the creative destruction by which our economy progresses. …" @default.
• W326783320 created "2016-06-24" @default.
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• W326783320 date "2010-03-22" @default.
• W326783320 modified "2023-09-24" @default.
• W326783320 title "Government Housing Policy and the Financial Crisis" @default.
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