Why did the mortgage-lending mess get so out of hand? One explanation, promoted by Treasury Secretary Henry Paulson last week, is that the system for regulating U.S. financial institutions is too antique to work. He seeks reforms, and some of them make sense. But he's also throwing sand in your eyes. The government had plenty of power to stop the frauds and financial pyramid schemes that brought home buyers down. It just didn't use it. You're looking at what amounts to a financial Katrina, brought to you by regulators who didn't do their jobs.
Apologists like to argue that, despite its eventual crash, flaky subprime lending did a lot of good. By 2004, a record 69.2 percent of the population owned their own homes. Now, however, the homeowners are being shoved back out. At the end of 2007, the rate of homeownership dropped by a record amount—to 67.8 percent. That's a level not seen since 2002 and 2001, and will probably sink lower still.
Losing a house is costlier, to your purse and future prospects, than never having owned one at all. By that standard, it's hard to call heedless subprime mortgage credit a social good. Not to mention the daisy chain of financial-instruments loans that almost caused a 1930s-style collapse. How were the regulators complicit? Let me count the ways.
The reforms Paulson offered last week were cheered by the investment community, which tells you something. I'd rather have had them screaming "overkill." There's a bit more oversight of financial firms, a bit more disclosure and much less scrutiny of the stock exchanges. You can't expect a strong hand from guys who don't want to regulate in the first place.
I've been thinking about the phrase "P.C." (politically correct), routinely used to deride the ideas of liberals. Today's P.C. turns the other way—to knee-jerk support of phrases like "free market" and "deregulate." Markets need clarity and regulation to keep from drowning in their own excess. They'll drag us down with them, if the cops give Wall Street a pass again.