In his column today (link here) George F. Will references the book of Gretchen Morgenson and Joshua Rosner (Reckless Endangerment) and summarizes the 2008 mortgage melt-down as a largely political phenomenon. He makes the point (I paraphrase) that Fannie Mae’s business model was designed by politicians in a way that would inevitably lead to a bubble, with profits on the way up being distributed to well-connected businesses and, upon bursting of said bubble, losses socialized among unsuspecting tax-payers.
Having yet to read the book, based solely on Will’s review, I gather that Reckless Endangerment will be among the first such treatments to actually address the topic analytically. In my view, neither of the two recent big-sellers on the topic, Too Big to Fail by Andrew Sorkin and On the Brink by Hank Paulson, come close. They focus on the “crisis” and the inside government view of how the government was forced to intervene with emergency actions to fix the problems that prior government intervention had caused. That approach leads to a circular analysis that answers none of the real questions, because it fails to recognize the role of government in the lead-up to the crisis.
Some months ago, I prepared this paper (Who Can We Blame? – 4 page PDF – give it a few seconds) for The Washington Business Journal which published an abbreviated version of the piece. In it I make the case that all of us – voters, developers, politicians, investment bankers . . . all of us did it to ourselves. Only one form of medicine will cure the problem – a dose of pain and loss, from which we learn the lesson that dividing risk assessment (credit rating agencies) from risk taking (investment principals and their advisers) ALWAYS leads to too much risk and the resulting pain of falling. Adding a government subsidy (Fannie/Freddie) and a political agenda to the mix elevates the problem to a systemic level, and ‘socializes’ the pain, producing the false impression that the government needs to ‘fix’ the problem, when in fact the government IS the problem.