Quote:
Originally Posted by sterlingice
Mac summed it up really well in his post. Along with his suggestion that banks should be forced to hold some of the loan, there's a much bigger problem here. Sure, lost mortgage money would have hurt banks. But not like this. The bigger problem is that banks turned around and were allowed to leverage that money for a whole order of magnitude more of borrowing (10-15X!) and that's really why we're in the crapper.
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That's really along the same lines of what I was saying, though. Any regulation that restricts the number of loans you could make (compared to what you own) would have hurt the ability of poorer citizens (ie, worse credit) to get homes. Both sides were staunchly opposed to limiting the ability of any citizens to buy homes and any person that would have created a new regulation (be it to increase the amount of down payment, limit the number of loans made by institutions or require better credit scores) would have been shout down for limiting the ability of poor and minority communities to buy houses.
So, here were the possible solutions as I see it and (IMO) the reason they would not have flown if presented in 2000-2005:
1. Restrict the amount a bank can loan (compared to what they hold). The effort of this would essentially have been to make home loans tougher to get. Less cash available for loans means less accessible loans for poorer citizens (or poor credit citizens). Again, in retrospect, it is a good idea - but both republicans and democrats had this idea that everyone should have access to buying a house and any policy that restricted this was a political loser.
2. Increase the required downpayment or credit rating requirements. Same logic as #1. Not a terrible idea, but one that would have been demagogued pretty heavily by both sides. Bush and co had bought into this "ownership society" and would have criticized this. The democrats would have viewed it as being unfair to the middle class as it puts too much of a burden on middle income people to be able to afford to buy a house.
3. Change the accounting practices to allow more flexibility in holding loans that initially had lower value but would increase. After Enron, transparency was the name of the game and no one would have gone along with a change to allow this. So, the moment you got a "hot potato" loan, you had to move it quickly.
Again, I am not blaming democrats or republicans only here. The political climates were just not there to do any of the above 3 options. Bush and the republicans (esp in the senate) didn't want to restrict home-buying opportunities because of his "ownership society" goal. The democrats didn't want to allow accounting practices that could lead to another Enron or reduce the ability of lower to middle income families to buy houses. So, blaming capitalism for this is ignoring a significant elephant in the room. There were logical steps that could have been taken, but no one wanted the hit politically to take them. Capitalism can always be blamed for poor decisions in the industry as a business' base goal is usually to make more money. But, no one even tried these options above (outside of a few house republicans in 2005 - and they got rejected by both parties). So, I would put the blame on political will by both parties to correct a somewhat questionable situation, not simply capitalism.