Thursday, January 27, 2011

The GSEs and The Financial Crisis

The Financial Crisis Inquiry Commission's proceedings and report are a really sad commentary about the low quality of inquiry and debate in our political and economic system. From the beginning of the mortgage meltdowns in the 2001-2006 Nodoc/Lowdoc mortgages until today, we have effectively been chloroformed into forgetting how we got here.

In his testimony before the Senate Banking Committee, Professor John Coffee of Columbia University expanded upon a presentation I heard in Minneapolis:


"The evidence is clear that, between 2001 and 2006, an extraordinary increase occurred in the supply of mortgage funds, with much of this increased supply being channeled into poorer communities in which previously there had been a high denial rate on mortgage loan applications. With an increased supply of mortgage credit, housing prices rose rapidly, as new buyers entered the market. But at the same time, a corresponding increase in mortgage debt relative to income in these communities made these loans precarious. A study by University of Chicago Business School professors has found that two years after this period of increased mortgage availability began, a corresponding increase started in mortgage defaults--in exactly the same zip code areas where there had been a high previous rate of mortgage loan denials."


Professor Coffee's testimony is clear, factual and follows the chain of events. To conclude that the Fannie Mae had no part, or was a minor player in the meltdown would require a Soviet-style inquiry process populated by our own government and quasi-government apparatchiks. That's exactly what we got. Wall Street continued to securitize this junk with AAA ratings, given by agencies interested in nothing more than market share. To paraphrase Charles Prince, "As long as the music's playing, you've got to dance." The shadow banking system did so, until the music stopped. Here we are years later: in denial, still searching for the guilty, and still dealing with the wreckage.

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