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The real-estate industry is using this week's Republican convention to flex its political muscles, defending the tax deduction for mortgage interest and calling for changes to the qualified residential mortgage exception.
August 29 -
Financial institutions that do the same things should have the same oversight. Unfortunately, we're a long way from regulatory parity, even after Dodd-Frank.
September 5 -
Designating certain companies as systemically important accomplishes nothing more than putting them into a closer relationship with the government, making the designation itself a self-fulfilling prophecy.
September 5
Maybe the silly season has been brought on way before April 1 by the recent stock market highs.
For instance, here's what we get from a former employee of Long-Term Capital Management: "
According to him, the failure of the Kreditanstalt in 1931 did not "threaten an entire nation's economy" (Austria's)—much less Europe's, much less the world's. Nor, more recently, did the failure of Anglo Irish Bank threaten the Irish economy. Nor the three big banks in Iceland. That's contrary to the accepted wisdom trickling down from the Fed and foreign counterparts, which warn about decimation of GDP and astronomical unemployment if big banks and hence the financial system fails.
But, even a stopped clock is right twice a day. The same professor says that although banks are not critically (systemically) important, the police are critically important.
Many highly civilized societies have flourished without anything resembling police. Still, maybe he's right. After all, the absence of police actually caused the Great Depression, indirectly. Here's how:
The Boston Police went on strike in 1919. Calvin Coolidge, Governor of Massachusetts, proclaimed there was no right to strike against the public safety. He took extreme measures, such as anointing Harvard undergraduates as replacement policemen. (Sorry, I arrived at Harvard a bit too late to participate.) As a result of this firmness (as with Reagan and the Air Traffic Controllers) he defeated the union, gained national standing and then became president. Unfortunately, as President he pursued questionable economic policies. And PRESTO: The Great Depression.
That's how lack of police caused the Great Depression: Lack of police gave us Coolidge, who
But, was LTCM systemically important because of its holdings of derivatives, as the Fed alleged? Maybe not. Still, if I had worked there, I wouldn't mention it. Though I even see resumes touting people's achievements at IndyMac or at First USA. No shame.
Was AIG, with its enormous credit default swap obligations, and were Fannie Mae and Freddie Mac, with their huge sale of bonds to foreign institutions, systemically important—because if they had failed the Chinese, for instance, would have sold their large holdings of U.S. bonds and reduced us to beggary? Should we have bet that they wouldn't?
Then, we have another commentator in these pages, whose silly contribution is that nonbanks should be regulated similarly to banks—namely, more restrictively than they are now. "
That's false. Those "other firms" can't accept FDIC-insured deposits, so the range of their activities is drastically dissimilar to that of banks. And how about state usury laws applicable to nonbanks but not to most big banks?
Should we regulate nonbanks the same as banks—and extend to them preemption and the power to accept insured deposits? If not, there is no parity, much less with the too-big-to-fail banks.
It's heartening to see that though U.S. manufacturing and incomes slip, our decrepit age can still at least produce silliness (not to mention financial services—the two go hand in glove) on so monumental a scale. Yet, our inherited and perpetuated silliness is far grander than all these recent innovations.
For instance, the silliness of asserting that, uniquely in America, the government (you and I, taxpayers) must
All this to raise the homeownership rate by three percentage points, reduce the cost of mortgages by less than 1%? We have the world's best securities markets, they tell us. We spawned banks and nonbanks that could attract and meet demand for mortgage securities far in excess of any legitimate supply. More power to them!
With the GSEs shrinking at 15% per year, stable home prices and record low interest rates, this is precisely the best time to let unsubsidized markets determine what new mortgages should cost.
Copious prior data show that big increases in either real estate prices or interest rates have little negative impact on consumers' propensity to buy and finance homes. Why worry? Phase out the role of the government in guaranteeing or buying new mortgages. Rapidly. Defeat the infernal, perpetual coalition (Democrats favoring more money for the poor and expanding the government; Republicans favoring enriching the housing and financial industries). They've caused one crisis too many.
Andrew Kahr is a principal in Credit Builders LLC, a financial product development company, and was the founding chief executive of First Deposit, later known as Providian.
