Bernie Sanders's Short Memory

During his interview with the New York Daily News, Bernie Sanders was asked to specify the fraud committed by Wall Street banks. He replied:

What kind of fraudulent activity? Fraudulent activity that brought this country into the worst economic decline in its history by selling packages of fraudulent, fraudulent, worthless subprime mortgages. How's that for a start? 

Selling products to people who you knew could not repay them. Lying to people without allowing them to know that in a year, their interest rates would be off the charts. They would not repay that. Bundling these things. Putting them into packages with good mortgages. That's fraudulent activity.

Does Sanders really forget that it was progressives like him who demanded that banks lower lending standards so that low-income people with no, weak, or bad credit histories could get mortgages with low teaser interest rates that would later balloon? Is he ignorant of the fact that these banks had every reason to believe the government would bail them out if they failed? Does he not recall Fannie Mae and Freddie Mac, the government-sponsored enterprises championed by Barney Frank and other progressives, that were right in the middle of this action, knowing they'd be saved if they failed? Has Sanders no memory of mortgage lenders like Countrywide, which were celebrated by progressives for aggressively pushing mortgages on people who could not afford them? Is he unaware that HUD, under Bill Clinton (and Secretary Andrew Cuomo) as well as George W. Bush, enabled people with poor credit and low incomes to "buy" houses with little or no down payment? And finally, is he oblivious of the fact that it was all these government-pushed shaky mortgages that were bundled into the exotic investment instruments Sanders now decries?

I'm pretty sure Sanders is aware of all this. But it doesn't fit his narrative that the Great Recession was entirely the result of private-sector greed, so he can't acknowledge it. Wall Street is properly viewed with suspicion, but what makes that reasonable is that it has long been in cahoots with the national government, notably with federal deposit insurance, which rewards irresponsibility by relieving depositors of the need to judge banks' sobriety or lack thereof.

In other words, Sen. Sanders, Wall Street couldn't have done it alone. It needed people like you.

(For details see Peter Boettke and Steven Horwitz, "The House that Uncle Sam Built.")

Sheldon Richman, author of America's Counter-Revolution: The Constitution Revisited, keeps the blog Free Association and is a senior fellow and chair of the trustees of the Center for a Stateless Society, and a contributing editor at Antiwar.com. Become a Free Association patron today!

An Answer for Hillary Clinton

When Hillary Clinton refers to her husband's presidency, she likes to ask: Which part didn't you like, the peace or the prosperity?

Well, I didn't like his murderous bombing in the Balkans and Iraq, and his child-killing sanctions on Iraq (which helped lead to 9/11). I didn't like his screwing over of the Palestinians and unswerving support for the brutal Israeli occupation of Palestine. I also didn't like his housing-bubble-inflating HUD policies.

What say you, Mrs. Clinton? Do you support those policies?

More Hypocrisy

Funny to hear the Obamians blame the Great Recession on "the policies of the past." They approve of what caused the financial and housing debacle: easy money and easy housing.

TGIF: Destroying Value

In case anyone missed it, here's a link to last week's TGIF: "Destroying Value."

Thoughts on Goldman Sachs

See addendum below.

Goldman Sachs is taking a beating in the press because a Senate committee and the SEC are investing whether it engaged in wrongdoing by betting against the shaky mortgages fueling the housing boom and allegedly failing to disclose that fact to buyers of its "synthetic collateralized debt obligations."

The allegation of wrongdoing is an empirical question, of course, but a few things occur to me at this point:

Financial firms have been roundly criticized for their "herd mentality," that is, their incentive to run headlong into too-risky mortgage-backed instruments because everyone else was doing it. No firm wanted to be on the sidelines having to explain to its clients why everyone was making tons of money but them. Yet here Goldman went against the herd and it's coming under fire precisely for that reason. By betting against the sustainability of the boom on the basis of hedge-fund trader John Paulson's analysis, it injected needed information into the market. More information is always better than less, and there would be no social good from restrictions on short selling. Whether fraud was in the picture, I can't say, but I am confident that Goldman's hedge strategy -- and its delight over making money when mortgage-backed securities started losing value -- would have drawn criticism in any event. It's a no-win situation.

Second, the absolutely worst place to get to the bottom of things is in Congress. Every member of the committee has an overriding incentive to engage in demagoguery. Goldman Sachs is not exactly a positive household name, so which congressman will resist the temptation to denounce the company in public? If there is evidence of criminal activity, there are agencies for such investigations. This is not to say that those agencies are above demagoguery -- politically ambitious U.S. attorneys are notorious for it -- but at least we should be spared the spectacle of self-righteous congressmen pontificating on matters for which the Congress itself is heavily responsible. We already must suffer the obscenity of Chris Dodd and Barney Frank rewriting the financial rules to prevent, so they say, a repeat of the debacle that they themselves did so much to bring about. These people are the systemic risk. Enough is enough.

Finally, we must not lose sight of the fact that whatever Goldman did, it was in the context of a corporatist State, a banking cartel, and loose fiat money, in which Big Finance exercises extra-market power derived from the rules written by Congress and the regulatory agencies. These are hardly free-market enterprises, and it is no coincidence that former Goldman principals have their fingerprints all over the government's bailout response to the meltdown and the firm was a major beneficiary.

In an actual free market—without inflationary fiat money, implicit guarantees behind underwriters of dubious mortgages, and regulatory protection against open competition—a financial debacle such as we’ve seen is unlikely to have occurred. Even so, that doesn’t mean that everything that went on constitutes a crime.

Addendum, April 29: Rather than have the SEC or a criminal-justice agency pursue this case, the alleged victims -- if that's how they see themselves -- ought to sue Goldman Sachs and John Paulson and at least front the costs of adjudication, saving the taxpayers the money. It is noteworthy that at the Senate hearing, no "victim" testified. Do they not see themselves as victims? Perhaps not. These are sophisticated institutional investors, one of which had a hand in creating the bundle of mortgage-backed securities (MBS) that underlay the synthetic CDO. (It rejected some MBS in favor of others.) The other investor would have been able to examine the contents. Clearly, they knew they had a different outlook on the future of those MBS from those who bet against them. For every buyer, there's a seller, for every bull, a bear. One does not become a victim simply because one's outlook proved to be wrong.

Nevertheless, this is worth reading. Other links worth following that case doubt on the SEC case:

Sebastian Mallaby

Richard Epstein

U.S. Housing/Finance Policy

From the ridiculous to the subprime.

What Is to Be Done?

From FEE on Vimeo. Western New England College, March 2009