16 Aug Reckless Endangerment is Rare Wisdom for those Wanting to Understand the Financial Crisis
When I first added Reckless Endangerment to my list of books to read in my series on the 2008 financial crisis, I saw that Gretchen Morgensen was a New York Times columnist, and assumed this book would be yet another carbon copy of the major myth that permeates discussion of the 2008 financial crisis (that myth being that a bunch of innocent homeowners were browbeat into taking mortgages they didn’t want by Wall Street, which was skating by totally unregulated, and that eventually the lack of regulation and evil of a few bankers caught up with them and almost ruined the world). Now, there are parts of that narrative that do fit into the overall story, but because the major orthodoxy coming out of the financial crisis never mentions government housing policy, never mentions Federal Reserve monetary policy, and certainly never mentions Main Street, that narrative is corrupted and flawed every which way you can imagine. Morgensen (with co-author Joshua Rosner) manages to craft a book that is not comprehensive, and does expand upon the “Wall Street was evil and unregulated” script that so many have honed in on, but manages to do what most books on the crisis have barely tried to do: Explain the economics, bad policy, and bad faith that Fannie Mae brought to the table in causing this crisis.
No one will read this book and decide that Morgensen had a partisan agenda. The authors are brutal in the lashing they give members of both parties, but no one receives more [justifiable] abuse from them than the former CEO of Fannie Mae and major power player in the Democratic Party, Jim Johnson. The book exposes exactly how ruthless Johnson and Fannie were in manipulating a system that allowed Fannie Mae to have the best of all worlds – what they called a “public/private partnership”, but really amounted to the privatization of profits and the socialization of losses (losses from Fannie and Freddie which, by the way, exceed anything else we have seen in the crisis, all put together, and then some). The story of this crisis absolutely can not be told without the story of Fannie Mae brutalizing the system by getting the unheard of advantage of interest rates far, far below the market norm (because of the “implicit guarantee from government”, a guarantee that proved to be not so implicit but rather very explicit in September of 2008). Fannie took these artificially low interest rates, and become the peddler of peddlers when it came to faulty home mortgages. Many have defended Fannie by saying they did very little “subprime”, and even what they did do was not a major part of things until 2004 or 2005. However, that misses the entire point of the financial crisis, as do most conversations about subprime: This crisis was not brought about by subprime mortgages, but rather the toxic garbage we call Alt-A, or one level ahead of subprime. Yes, subprime stories make for great reading, and there was enough of it going on to make one sick (the gardener with a 500 credit score and 30k of income buying a 500k house). But what Fannie did is force the government social policy of housing down the lender’s throats, and buy up every single “one notch above subprime” mortgage that they could. They did so with money raised in the credit markets at artifically low interest rates, and they did so with money that had been levered far more than Wall Street ever dreamed of leveraging. The advent of the negative amortization loan, the Alt-A loan, the interest-only loan, and all other such devices which became the tools used to create the financial crisis were not possible with Fannie Mae. They essentially did what all bad economics always comes down to: They disrupted the price mechanism.
America never needed a Fannie Mae that worked in conjunction with the government. The militant effort of corrupt politicians like Barney Frank and Maxine Waters to protect Fannie Mae was not altruistic; it was criminal. Morgensen, a reporter for the New York Times establishes these connections and insidious practices beyond any shadow of any doubt. The authors are unrelenting in exposing how the major power broker in the entire Democratic Party, Jim Johnson, directed this ship. And they are cogent, methodical, and inspiring in how they link various zealots like Angelo Mozilo of Countrywide to the corrupt practice.
The fact that they spend so much effort hammering Fannie Mae and government corruption, as well as a great deal of effort hammering the mortgage lenders like Countrywide and Fremont, is not to say that they give Wall Street a pass. Quite the contrary. They join in the standard pile-on of Goldman Sachs as a crony capitalistic bank, and once again assume that all Wall Street was doing was bonus-driven and evil, rather than looking at the alternative scenario (and frankly, the worse one), which is that they were just plain stupid. The book was focused on showing a thread of evil and corrupt people and institutions, so I can understand why the authors took that route, and they are fair and reasonable in how they present it. But at some point I do want to see a book that examines the extravagant contradiction in saying that all these huge banks were acting with malice and evil genius in 2006 and 2007, rather than with blind idiocy that almost decimated their own firms.
Thomas Sowell has already created a wonderful book that critiques the perils of the government using the housing market to implement [bad] social policy. What Morgensen and Posner have done is go beyond the bad political theory of Carter, Clinton, and Bush housing policy, and instead demonstrate the reckless endangerment of those like Johnson, Raines, and the Fannie/Freddie cartel that were more than willing to change the world via a “public-private partnership”, which ultimately meant nothing more than, “the public gets screwed, and we get to live private lives in afffluence”. Kudos to Morgensen and Posner for a wonderful treatment of the subject.