I was forwarded a copy of their Op-Ed piece this morning and was given the caveat, "this will get [my] blood going." The caveat is appreciated, and I think it's true: I am stirred-up by what passes for quality argumentation by two (seemingly) accomplished research fellows. I now have a lower opinion of the work being conducted by the American Enterprise Institute, thanks to Messrs Calomiris and Wallison.
If I may I will briefly quote the problematic text:
Many monumental errors ... contributed to the ... financial turmoil in which we ... find ourselves.... the vast accumulation of toxic mortgage debt ... was driven by the aggressive buying of subprime and Alt-A mortgages, and mortgage-backed securities, by Fannie Mae and Freddie Mac.... these two government-sponsored enterprises (GSEs) ...are largely to blame for our current mess.
The role of government in this situation is to ensure that mortgages are backed and to relieve the pressure that banks (who make these terrible loans in the first place) experience when they have loan portfolios that are tanking.
To suggest that it was government ineptitude that created these loans that needed to be backed is putting the cart before the horse.
After tracing out an alternative history where Freddie and Fannie are the originators of subprime and Alt-A loans (they weren't), the authors then try to rewrite the history of deregulation. They out-right-lie that it wasn't deregulation that created the ability to invest in these subprime and Alt-A loans (Special Investment Vehicles, gentlemen, please). They even claim that it's because investment banks were able to engage in this madness that these banks are safe today(!!!!), the very banks that are melting down and are begging for hundreds of billions of your money!
As a result, U.S. commercial banks have been able to attract more than $100 billion of new capital in the past year to replace most of their subprime-related write-downs. Deregulation of branching restrictions and limitations on bank product offerings also made possible bank acquisition of Bear Stearns and Merrill Lynch, saving billions in likely resolution costs for taxpayers.
This is ridiculous. One, $100bn attracted to all U.S. banks over one year is a drop in the bucket. It's like me saying that I saved $50 in one year.
We, the people, are not saving money in this situation: Bear Sterns and Merrill Lynch went caput because they owed more money than they could afford. Why did they owe all this money? Because the deregulation of banks allowed them to say that debts owed to them in the form of subprime mortgages (another doozy created in deregulation) were deemed to be assets and so treated like money.
The authors then say that if legislation (and here they even say it, Democrats) had been passed in 2005 there would not have been this subprime mess today. But this too is obsenely untrue because adjustable rate mortgages work like this:
For the first 5 years you pay this little bit of interest, then more interest rates go up for the next 15-25 years. If you got a loan like this in 2005, that means 5 years from then you will be paying (a lot) more interest:
2005 + 5 years = 2010
The subprime mortgages began to really tank in 2007, by the way.
And besides, this is still only the year 2008, so by the authors' own reasoning we shouldn't experience this "credit mess" for another 2 years!
Thus simple, elementary school mathematics shows you that the growth in subprime loans that the authors blame for all this mess have actually yet to come due.
Ultimately this argument doesn't stand up for the same reason that people today don't think that gun makers should be held responsible for the deaths caused by their products.
If investment banks had not been allowed to invest in in these loans in the first place, we would not be in this situation. They wouldn't have invested in these loans if the dot.com bubble hadn't burst. The dot.com bubble wouldn't have "burst" if those viewed as leading our economy (the Treasury, the Fed, the Senate committees, etc.) had not so aggressively pushed for the deregulation that neoliberal economists had been fever-preaching ("NAFTA's gonna create all the jobs, Capital is gonna rise, like Lazarus, and we will all be awash in the holy fire that is the power of Capital as it circles the globe"). We wouldn't have pushed for globalization in this manner if... the list goes on.
Shame on you, Calomiris and Wallison. The end times is nigh, chumps; why don't you spend time offering solutions rather than creating schism on this sinking ship?
The problem we are in now is the same problem we've had during all the financial scandals of the past 20 years: accountability is not being insisted upon. No one wants to be the adult here.
Instead we have a bailout plan in excess of $700bn and the full knowledge that this is not only NOT going to correct the problem, but no one in a position to effect change has a pair and willing to midwife the solution.
Their shame-fest can be found here, hold your nose.