In a free market, financiers who take stupid risks lose money, and cease to be financiers. The core of the Obama Bush interventions is to ensure that financiers who take stupid risks continue in business and continue in charge of other people’s money.
In the Washington Post, Obama’s chief financial advisers explain their program:
In theory, securitization should serve to reduce credit risk by spreading it more widely. But by breaking the direct link between borrowers and lenders, securitization led to an erosion of lending standards, resulting in a market failure that fed the housing boom and deepened the housing bust.The administration’s plan will impose robust reporting requirements on the issuers of asset-backed securities; reduce investors’ and regulators’ reliance on credit-rating agencies; and, perhaps most significant, require the originator, sponsor or broker of a securitization to retain a financial interest in its performance.
“How big a financial interest?” I hear you ask.
Summers is a little bit vague, about this, but if you dig, the answer is five percent – enough to make a difference, but not enough to make a significant difference, not enough to deter banks from making irresponsible loans.
The fundamental problem is that the government wants banks to continue make loans to irresponsible borrowers in important voting blocks, borrowers who should not be able to borrow money, and therefore must maintain a regulatory structure that enables bad loans. A transfer of wealth from a concentrated interest group (financiers) to an important voting block (hispanics) is not politically feasible. So instead, such dud loans must ultimately wind up being financed by the government.
The government issues regulations that require financiers to refrain from “discriminating against” a voting block – which seeming benefits the voting block at no cost to the government. But there is no such thing as free lunch. Who will pay?
You can be sure a concentrated interest group is not going to pay.