Blame game

An Investor's Business Daily editorial from Monday, September 15 lays the blame for the financial and housing sector meltdown at the Clinton Administration's doorstep. However, they stop short of laying out exactly how the market was motivated to offer high-risk products.

But it was the Clinton administration, obsessed with multiculturalism, that
dictated where mortgage lenders could lend, and originally helped create the
market for the high-risk subprime loans now infecting like a retrovirus the
balance sheets of many of Wall Street's most revered institutions.

Tough new regulations forced lenders into high-risk areas where they
had no choice but to lower lending standards to make the loans that sound
business practices had previously guarded against making. It was either that or
face stiff government penalties.

Unfortunately, the site has no comments at the bottom, so the normal user-content Q&A activity is absent.

Questions:

1) What rules made banks have no choice?
2) If they knew it was a bad decision, why did they still do it?
3) Since businesses operate on self-preservation, wouldn't it be up to the business to identify a losing prospect and not enter into that line of business, knowing how risky it could be?

To me, with no details or research, the IBD is saying that the Clinton Administration created a noose, and the market put their collective necks in it. Mixing metaphors, if we're to understand profit motive, there must have been some huge carrot on the other side of the noose.

The IBD is saying that it's the government's fault for even allowing the option in the first place, which cannot be reconciled with smart business decisions.

**UPDATE**

I didn't address the "stiff government penalties".

1) Did the banks and lenders do an assessment to decide whether high-risk loans carried a higher risk for loss than the goverment fines?

2) Did they think about not offering the products, and taking the hit from the goverment, while they were wallowing in the derivative benefits from the high-risk products?

3) Which was the harsher result: being fined by the government, or not being in existence 10 years later?

Biden Bye Bye

Going off my impression of Joe Biden yesterday at the AFL-CIO debate and his work on the bankruptcy bill, I have no respect for him. He is a blow-hard whose support for a morally bankrupt piece of legislation hurt more Americans than have been killed in Iraq.

On top of this, he was seemingly unable to show any type of mourning, sympathy or empathy for a woman whose husband was killed in the Sago mining accident in West Virginia a while ago.

I hope he doesn't have your vote.

R&D

I wonder how much research and development dollars collectively are being spent on the new Viagra or Propecia or other boutique drug compared to the money being spent on researching alternative fuels. In other words:

"Great, you get an erection at the snap of a finger for exactly one hour! However, a terrorist just blew up your apartment building with money you spent in Saudi Arabia for that unleaded that filled your SUV take your date to the restaurant."

Free-market solutions

A while ago I was listening to a story on NPR regarding the safety testing of infant car seats. Kim Klemen, an editor from Consumer Reports was interviewed and called for federal regulations on the seats to ensure safety.

I remember thinking that Klemen was basically advocating for "bigger government".

The free-market solution to a situation, in which tests on infant car seats shows that one or more are dangerous, would be that consumers would just not by the dangerous ones. Obvious. However, when the company that produces a "faulty" infant car seat slashes the price by 25 or 50 percent, it's a much more viable option for families who may already be on a tight budget.

There is nothing to deter parents from picking a car seat that appears sturdy and indistinguishable from other car seats on the market. The determining factor is the price. They would have to seek out the research on product in say, Consumer Reports, and purchase the ideal seat. How many people do that?

I believe that most "free-market solutions" depend on highly informed consumers making educated choices. However, most consumers don't refer to product reviews. Their purchasing decision in a consumer society are based mostly on price. The free-market solution would assume that the manufacturers of unsafe infant car seats would eventually go out of business because no one would buy their products with the knowledge they were unsafe. Obviously, that isn't true.

The flip side is people like Klemen arguing for more (or better) regulation. These have their own downsides (additional government responsibility, bureuacracy, etc). Assuming the car seats are made in the U.S., providing Americans with jobs and sustaining a market, higher compliance costs can affect the ability to pay labor, off-shoring, etc.

In the end, the highly localized and extreme choices are possibly dozens of injured infants or possible economic downturn.

We must pick and the price is steep. The brings me to a Ben Franklin quote via The Moderate Voice:

“Friends,” says he, “and neighbors, the taxes are indeed very heavy, and if those laid on by the government were the only ones we had to pay, we might more easily discharge them; but we have many others, and much more grievous to some of us. We are taxed twice as much by our idleness, three times as much by our pride, and four times as much by our folly; and from these taxes the commissioners cannot ease or deliver us by allowing an abatement.”