Michael, you are misled.
Countrywide's CEO Angelo Murillo called Fannie's CEO in 2005 to lambast him: "you are becoming irrelevant" and "you need us more than we need you". Why? Wall Street's dicey slicing and dicing had given
Countrywide an outlet for its junk. Wall Street created this. Fannie followed, but we'd have a mess even if Fannie hadn't. The average house price in CA was $550,000 (now $330,000). You want to blame the poor for that? Wow, the poor are suddenly very powerful.
Did the government create the dotcom bubble in 2000? The Cabbage Patch doll bubble one Christmas?
Fannie had been there for 40 years. What was new was Wall Street's magical slicing and dicing. And there is your primary culprit. Everyone else played along, but they called the bubble tune. And we are bailing them out -- just as Fannie and Freddie. There's no difference between Fannie and Freddie's government guarantees, and the end guarantee that Too-Big-To-Fail 'private' banks enjoy. To avoid depressions, large scale banking has a public backstop. They aren't wholly private. Listen to Dick Fuld whine that Lehman was allowed to fail. Look at the damage that failure caused.
Give your ideology a rest. Open your eyes to what's happening, not what just to what you want to happen. We'll all be the better for it.
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We Need a New Road Map
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What should be done about trading in complex derivatives?
The explosive growth of complex and nontransparent securities created a time bomb that has now blown up. Outlawing these kinds of securities, even if that were possible, would be far less preferable than making them easier to understand, standardizing their form and mandating their registration on a regulated exchange. The path from getting here to there will require a thoughtful but highly technically feasible road map that does not yet exist.
How should demand deposits in commercial banks, or various money-market funds, be insured?
In the heat of the crisis, different countries are taking different approaches. Washington has stepped in and guaranteed money-market mutual finds without limit, and banking deposits up to $250,000. Aside from the potential for sucking money out of banks, the U.S. approach is different from the one that Ireland, Greece and Germany have just instituted, where all bank deposits are insured. Eventually common standards would be better.
There are many other global issues that need thinking through. What exactly is the role of a central bank? Does being both an investor and regulator constitute too much responsibility and lead to conflicts of interest? How should credit agencies be reformed? How should "mark to market" accounting be handled? When is short selling appropriate? What are the right incentives for executive compensation? What procedures should be followed for reorganizing global institutions that fail?
Improving communication among key governments is a start, but on its own is woefully inadequate. There is a pressing need for more common rules and institutions within the global financial industry. Without a vision of what that environment might look like, officials could be setting up the world for another disaster down the road.
Garten is the Juan Trippe professor of international trade and finance at the Yale School of Management.
© 2008
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