The Four Horsemen of the Financial Panic
From Americans for Tax Reform: No matter what one thinks of the financial bailout package, we ought to at least agree how we got here. Below are the real actors behind the mortgage panic of 2008:
1. Government-sponsored enterprises (GSEs). Fannie Mae, et al, bears a large share of the responsibility.
2. Easy money from the Federal Reserve. On January 3, 2001, the Federal Reserve cut the federal funds rate by 50 basis points, to 6.00%. They continued to do so until the rate hit a bottom of 1.00% on June 25, 2003.
3. Community Reinvestment Act (CRA). This legislation, first passed in 1977, gave federal regulators the power to encourage banks to issue loans to high-risk households and small businesses.
4. Mark-to-market accounting rules. This refers to an accounting practice that forces a balance sheet to value an asset at its current market price (that is, what it could be sold for at the time). Mark-to-market is an arbitrarily-restrictive accounting practice that should be scrapped for assets like securities which generate current income. Doing this alone would solve much of the problem.
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Posted @ 1:44 PM Permanent Link 29 Comments
29 Comments:
At 1:59 PM, Anonymous George said...
Dr. Perry,
You unfortunately left off number 5: Miscalculation of risk factors which led to high leveraging of mortgage backed securities investments on the part of the investment banks. I do agree with 1 through 4, but the investment banks completely got the risk calcs wrong.
mjperry.blogspot.com
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My comments
Mark to market rules certainly contributed to the problem, possibly in a big way, but they also serve a useful function. It would be good to at the very least continue to require a reporting of marked to market values, even if some more flexibility is allowed on the headline official value.
In addition to those 5 things I'd add effectively unlimited deductibility in capital gains on houses and only on houses (or primary residences of some sort). It distorts investment towards housing.
And then, like often happens before financial crashes, there where new types of financial instruments, which hadn't been through previous crashes and which investors and regulators didn't know how to deal with well, because they hadn't seen how they operate under such conditions. |
