Holman Jenkins Explodes Some Myths Of The Crisis

If you read this blog often you know that I’m a pretty big fan of Holman Jenkins. I don’t always agree with him but I like the way he strips the veneer away from issues and makes you think about the essence of problems or the real motivation and direction of policy.

He has a huge piece up at Hoover.org that ranges far and wide on the recession, causes of it, myths about it, the Fed and its role, banks getting bigger and where he thinks all the fallout is taking us. I won’t attempt to reprise it all here, it’s just too big but let me give you a sense of what he has to say.  

On the meme that Wall Street was pumping out mortgage securities to unwitting buyers:

Economists and journalists and business professors have struggled to explain the rush of Wall Street firms in the years 2004–06 into creating securities backed by mortgages to marginal borrowers, now seen as the genesis of a global financial panic and possibly a second “Great Depression.” Yet so many stipulations of the standard view are questionable, if not mythical, that the mystery of why we are suffering globally will not be solved by figuring whom to blame for subprime mortgage lending.

For instance, it isn’t true that Wall Street made these mortgage securities just to dump them on them the proverbial greater fool, or that the disaster was wrought by Wall Street firms irresponsibly selling investment products they knew or should have known were destined to blow up. On the contrary, Merrill Lynch retained a great portion of the subprime mortgage securities for its own portfolio (it ended up selling some to a hedge fund for 22 cents on the dollar). Citigroup retained vast holdings in its so-called structured investment vehicles. Holdings of these securities, in funds in which their own employees personally participated, brought down Bear Stearns and Lehman Brothers. aig, once one of the world’s most admired corporations, made perhaps the biggest bet of all, writing insurance contracts against the potential default of these products.

So Wall Street can hardly be accused of failing to eat its own dog food. It did not peddle to others an investment product that it was unwilling to consume in vast quantities itself.

And on the need for a systemic regulator:

What Congress doesn’t want to admit is that it wants not a systemic regulator, but a systemic savior — an institution that can step forward and stop panic in its tracks. But we have one of those too — the Fed again. For all the arguments heard on Capitol Hill last fall that only a $700 billion appropriation stood between us and financial Armageddon, that $700 billion sum has proved a pittance compared to the resources the Fed, under Ben Bernanke, has deployed out of its hip pocket. The Fed has bought unwanted assets and issued guarantees to the tune of more than $1 trillion. It has created untold billions in excess bank liquidity through monetary policy. If we’re honest, the Fed’s ability to print money stands behind the fdic, which insures the nation’s bank deposits. It stands behind Fannie and Freddie, which are increasingly in the business of losing money on purpose to help the housing market. Even the U.S. Treasury has been edging sideways toward relying on the Federal Reserve to finance the exploding national debt.

We have a systemic savior — the Federal Reserve. And all that remains to be seen is how much its efforts this time will ultimately cost in the erosion of the purchasing power of the U.S. dollar.  

In the end he draws a conclusion that won’t sit well with many while at the same time being applauded by many:

In the 1980s, America flirted with industrial policy and protectionism to meet what was regarded as a Japanese economic threat. But our entrepreneurial bias prevailed in the end: While the Japanese bureaucracy was directing that country’s technology giants to dominate the manufacture of computer memory chips, perceived as the “strategic” resource of the 21st century, Silicon Valley was mostly left to its own chaotic, mercurial devices — and ended up focusing on microprocessors, software, multimedia, and networking. Given birth were the personal computer industry and, in due course, the internet. Try to imagine Microsoft or Google springing from the plan of a bureaucrat at Japan’s Ministry of International Trade and Industry.

That’s a nonmistake we apparently won’t make again. With its vast ambitions across broad swaths of the economy — from health care to energy to education — look for endless acts of industrial favoritism from Obamanomics. President Obama, with his confident judgment that the future is “green” energy, that government can deliver “affordable” health care, that everyone can and should go to college, has all the hubris of a miti bureaucrat of the mid-1980s and little apparent appreciation that America’s strength is the decentralized economic agenda thrown up by entrepreneurs and inventors and opportunists whose every impulse Washington doesn’t try to corral and control with mandates and incentives.

In sum, the global financial panic sparked by the behavior of subprime mortgage loans is probably best understood as an unforecastable accident of history. Another accident, brought on by the first, is the empowering of the Obama agenda, born in the inexperienced mind of a Chicago academic and state legislator. It is likely to end badly, as such dirigiste overreaching always does.

It’s about a ten or fifteen minute read. I recommend that you take the time. I’m only just beginning to digest it and I’m pretty sure I don’t agree with everything he says but I have to work to counter his arguments.

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