Save Us From Ourselves

If people only had been able to borrow what they could afford, would we have had a housing bubble and the ensuing “Great Recession?”   Is the problem that banks are too big to fail?  Should we blame the Fed for keeping interest rates too low for too long?  Or is the problem that subprime, NINJA mortgages (No Income, No Job or Assets) were marketed with abandon to starry-eyed Americans addicted to “Flip This House?”

Paul Krugman (NY Times, Op-Ed, 2/1/2010) points out that there are only six major banks in Canada. Nevertheless, Canada weathered the financial storm quite well.  And yes, throughout the last decade, Canada’s interest rates tracked closely to ours.  But, what Canada has that we don’t is a financial consumer agency that blocked the industry’s slide towards irresponsible lending practices. In Canada, banks are required to maintain “skin in the game” – that is, to hold on to some portion of their loan portfolios rather than pass them on to be “securitized” by Wall Street.  If adopted by the US, this one requirement alone could be the keystone needed to prevent a future housing bubble and collapse. 

The seismic failure that caused the Great Recession was a failure to make prudent mortgage and commercial loan decisions. This was the quicksand upon which everything else rested and the entire economy got sucked under.  Establishing a financial consumer agency is the most important remedy we can adopt to ensure future stability and regain confidence in the markets. Yes, there are other things could and should be done, but let’s start at the foundation.  If the loans written over the last decade had been sound, would all the speculation have made any difference?  If you agree that the house of cards came tumbling down because it was erected on a seismic fault-line called imprudence, than we’re all to blame. Now let’s fix it.