Tuesday, November 04, 2008

Financial Crisis and Political Culpability

John Steele Gordon, writing in Commentary, on what was behind the financial crisis. An excerpt:

Since banks knew they could offload these sub-prime mortgages to Fannie and Freddie, they had no reason to be careful about issuing them. As for the firms that bought the mortgage-based securities issued by Fannie and Freddie, they thought they could rely on the government’s implicit guarantee. AIG, the world’s largest insurance firm, was happy to insure vast quantities of these securities against default; it must have seemed like insuring against the sun rising in the West.

Wall Street, politicians, and the press all acted as though one of the iron laws of economics, as unrepealable as Newton’s law of universal gravity, had been set aside. That law, simply put, is that potential reward always equals potential risk. In the real world, unfortunately, a high-yield, no-risk investment cannot exist.

1 comment:

Lord said...

This overstates Frannies role. In 2002, they were 50% of the subprime market which was less than 2% of the mortgage market, but by 2006 this had declined to about 25% of it when it constituted 30% of the mortgage market. Large players, but only a minority of the market. A lot of others also got burned.