Friday, December 21, 2007

Reflecting on the failures of the Bubble Wonders

The real estate bubble of the last decade, fueled in the final years near its peak by a vast infusion of new suprime mortgage money, has collapsed as surely as if it fell into a sinkhole, leaving just a pale reflection of its former self floating near the surface.

The collapse of the subprime mortgage market was as predictable to some as it was surprising to others. Probably it was inevitable, since the bubble's expansion was presided over by some of the best financial minds of their generation, or at least people who thought they were the best financial minds of their generation. They were the geniuses I like to think of as the Bubble Wonders. First and foremost among them was Alan Greenspan, the free market ideologue and Ayn Rand acolyte who presided over the Fed during the bubble's emergence -- the Gray Eminence of the Bubble Wonders, as it were.

Paul Krugman reflected on the Bubble Wonders this morning. He took particular note of Greenspan's role as cheerleader for the bubble.
So where were the regulators as one of the greatest financial disasters since the Great Depression unfolded? They were blinded by ideology.

“Fed shrugged as subprime crisis spread,” was the headline on a New York Times report on the failure of regulators to regulate. This may have been a discreet dig at Mr. Greenspan’s history as a disciple of Ayn Rand, the high priestess of unfettered capitalism known for her novel “Atlas Shrugged.”

In a 1963 essay for Ms. Rand’s newsletter, Mr. Greenspan dismissed as a “collectivist” myth the idea that businessmen, left to their own devices, “would attempt to sell unsafe food and drugs, fraudulent securities, and shoddy buildings.” On the contrary, he declared, “it is in the self-interest of every businessman to have a reputation for honest dealings and a quality product.”

It’s no wonder, then, that he brushed off warnings about deceptive lending practices, including those of Edward M. Gramlich, a member of the Federal Reserve board. In Mr. Greenspan’s world, predatory lending — like attempts to sell consumers poison toys and tainted seafood — just doesn’t happen.
But some of Krugman's ire is bipartisan. If the Democrats didn't cause the bubble, they also didn't do much to stop it. And now that millions of families are in danger of losing their homes, are the Democratic presidential making an issue of it in their campaigns? Not that anyone can see.
Given the role of conservative ideology in the mortgage disaster, it’s puzzling that Democrats haven’t been more aggressive about making the disaster an issue for the 2008 election. They should be: It’s hard to imagine a more graphic demonstration of what’s wrong with their opponents’ economic beliefs.
Or a better example of how cautious the Democratic candidates all are being. Wouldn't want to be accused of "class war," I guess.

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