The mantric chant "the greed of Wall Street, the greed of Wall Street" has poured forth from the lips of the elected high priests of Congress so vociferously of late one might conclude the current financial debacle consuming all of the world's securities markets this week began and ended on the slender slice of New York real estate that runs from Broadway to Water Street.
After all, the Capitol hierophants and their acolytes proclaim, it was the revered shining stars of Wall Street – Lehman Brothers, Goldman Sachs, Merrill Lynch, AIG et al, who through the unmitigated venality of their leaders first exploded in an unregulated expansionist orgy of intemperate lending only to quickly and inexorably implode in a credit sucking black hole of recession and oblivion.
Whilst the esteemed gentlemen from the House of Representatives and Senate address their fellow members in the stentorian tones of high moral indignation; whilst they hurl invective at the subpoenaed financial transgressors paraded before their committee hearings; and whilst these elected officials assume the theatrical posture of shocked surprise; it would be well to keep in mind, during this election year, the role these very same Washingtonians played in setting the stage for this financial crisis, which will most likely lead to the worst economic downturn since 1929.
The trope, "hundreds lent billions they had no business lending, to thousands who had no business borrowing, while dozens insured loans they had no business insuring, and now millions will have to pay trillions they never should have had to pay" encapsulates the broad outline of the events leading up to the present predicament, but it does not fully explain how it could happen, only how it happened. Avarice, Ambition, Hubris, Stupidity, Naivete and Deregulation are only the means by which the end was accomplished, they were not and are not the underlying issue which set the whole sorry mess in motion.
The financial fools who participated in the origination, securitization, sale, and insuring of the debt instruments which are behind the current credit meltdown deserve a special niche in one of the lower rings of Dante's Inferno, but the lowest most severe ring of misery and eternal damnation belongs to the elected officials of both parties in Congress, who for political ends used social engineering and the forced redistribution of wealth to overturn the most basic and fundamental of economic laws.
It is an unpleasant, perhaps even an inconvenient truth that those who are in most need of a loan are those whom Lenders should be most wary of, while those who are in the least need of a loan are those whom Lenders can extend credit to with relative equanimity.
It is this fundamental economic truth the politicians turned upon its head in the name of extending credit and home ownership to those they labeled "low income" and "disadvantaged".
Two quasi government entities, "Fannie Mae" and "Freddie Mac" were formed expressly for the purpose of making home ownership easier and more accessible to a broader spectrum of the American public. By buying mortgages from those originating the loans both institutions essentially freed up additional capital for even more loans, essentially providing a guarantee mechanism for the loan originators.
The fact that those who originated the loans no longer had to concern themselves with the ultimate performance of the loans planted the seeds of the eventual destruction of the entire credit industry. If the loan originator no longer had to worry about the chickens coming home to roost, there was no longer a meaningful incentive to carefully underwrite the loan in the first place – over time loan underwriting standards dropped precipitously and mortgage terms became exceedingly liberal.
At the same time politicians seeking more and more potential votes, especially among the "low income and disadvantaged" placed increasing pressure on both "Fannie Mae" and "Freddie Mac" to open their coffers to these constituents on ever more liberal terms in the name of making the American Dream of home ownership a reality for the "poor and disadvantaged".
At this point it is perhaps necessary to stop and reflect upon the difference between Finance and Charity. Voluntarily helping one's more unfortunate neighbor is very commendable and a salutary effort to be applauded, but confounding Charity with Finance as the populist politicians have done is, as everyone is finding out, not only disastrous, but ruinous.
It has been estimated that the recently passed government bailout package of $770 billion, (what many believe to be just the first of future larger bailouts) will cost the 300 million men, women and children in the United States $2,566.66 each in taxes. But if the loans provided to the disadvantaged and poor were made with no semblance of sound financial underwriting and without any realistic expectation or concern that they could be repaid, would not the funds dispersed to the "disadvantaged" be considered charitable contributions rather than defaulted loans? In which case, should not each taxpayer be entitled to deduct his or her portion of the Bailout package as a charitable contribution when they itemize their deductions at tax time? Perhaps the IRS should investigate and issue a ruling on this.
The pundits have observed that the first edition of the defeated Bailout package was not properly "sold" to the American public when it was initially presented to the House of Representatives. Indeed. Had Americans been informed that what really was occurring was an act of altruistic Christian Charity on a scale never before observed in history, surely they would have stood in awe of the magnanimity being demonstrated by their elected officials. The fact that the politicians had extracted these charitable contributions for the "disadvantaged" from the taxpayers pockets without their express permission or knowledge is of course a mere niggling detail. But unfortunately, the package wasn't "sold" properly and now the likely conclusion will be the bastards will be voted out of office.