What he writes sounds quite plausible, e.g., the SEC allowing leverage to more than triple by securities firms. And here is what he says about the subprime boom:
A SUBPRIME SURGE The next error came in stages, from 2004 to 2007, as subprime lending grew from a small corner of the mortgage market into a large, dangerous one. Lending standards fell disgracefully, and dubious transactions became common.
Why wasn’t this insanity stopped? There are two answers, and each holds a lesson. One is that bank regulators were asleep at the switch. Entranced by laissez faire-y tales, they ignored warnings from those like Edward M. Gramlich, then a Fed governor, who saw the problem brewing years before the fall.
The other answer is that many of the worst subprime mortgages originated outside the banking system, beyond the reach of any federal regulator. That regulatory hole needs to be plugged.
What remains unmentioned is the role of the Congress, the previous two administrations, and Fannie Mae and Freddie Mac. It seems quite well established that there was a strong push to increase home ownership, especially among minority groups, and this compassionate impulse took the form of coercive legislation and regulation designed to force bankers to ease their lending standards. The gimlet-eyed Snidely Whiplash banker was to be replaced by the kinder, gentler fellow who did not inquire too closely into sources of income and ability to repay mortgage loans. Both the Clinton administration and the Bush administration that followed loved to "point with pride" to rising percentages of home ownership. Barney Frank led the charge in the House to compel Fannie Mae and Freddie Mac to buy these increasingly suspect mortgages, which got them off the originating lender's books, and in turn encouraged even more suspect lending. Far from a case of laissez-faire, this was a case of powerful governmental intrusion into the functioning of credit markets.
Predatory lenders and fraudsters got in the game, while the Congressional panjandrums enjoyed pushing the market in the direction they favored; they were on the side of the angels, after all. To add to the mix, highly placed officials in the Clinton administration landed nice jobs at the GSEs and took home enormous bonuses, thanks to cooking the books.
None of this can apparently be mentioned. Indeed, in the article Blinder quotes Barney Frank with a totally straight face, as an expert who "sounded alarms." I should say he is an expert, since he helped turbocharge the mess. Remember his famous quote about wanting to "roll the dice a little bit"?
This article seems to me an example of what James Lileks calls "noncontiguous information streams." The different sides of an argument cannot even agree on the facts that are starting points for disagreement. Those who promoted and facilitated lax lending standards simply do not acknowledge any complicity of the mess we are now in, and the analysts choose not to recognize any public fault. Nor is there the slightest criticism directed to those people who lied about their incomes or just got themselves into a pickle by being imprudent.
Yet I am sure that honesty and prudence figure prominently in the personal lives of these economists. But diagnoses and prescriptions for these ills cannot take those factors into account. They are beyond the pale of policy discussions.
