The financial crisis: a reader's views

An MOJ reader sends in this, responding to Lisa's and Russ's posts on the financial crisis.  (At the time of this writing, for what it's worth, the Dow is back up 300 points after yesterday's drop.)

Elizabeth Schlitz's discussion of "stewardship" [seems to reflect primarily] her subjective feelings about the difference between "stewardship" and "securitization".  The point of both approaches, though, is to at least return the investor's money to him - and preferably with interest. That's why it's such a big deal when the money market funds "break the buck".  I understand her argument about the FDIC, but I (my subjective belief) doubt that it provides much of a psychological check on banks.

Furthermore, her statement that "it's difficult to retain a sense of "stewardship" for funding that is coming from a source based on speculation and risk-taking" [seems to reflect] discomfort with the stock market in general.  All investment is, by its nature, fraught with risk. When you invest in something, you're betting that it's going to make money. The question is whether you're making a prudent bet or an imprudent bet.

Russell Powell writes in "A Catholic Approach to the Financial Crisis?" that he is concerned that our policy choices in this crisis are likely to hurt the poor. That's very likely. However, the main reason we're in this mess in the first place is because banks and the GSEs made loans to people who were credit risks. Fannie and Freddie specifically exist to promote home ownership for people who can't get a loan from traditional banks. Congress urged banks generally to increase loans to minorities and low-income people who traditionally were unable to obtain mortgages. The reason that they weren't able to obtain mortgages before is because they don't make enough money to pay the mortgages. And then when they couldn't pay their mortgages - the whole thing came tumbling down. (For the record, there were also plenty of higher-income people who took mortgages larger than they could afford.) There's plenty of blame to go around - the GSEs are the worst combination of public and private, the banks shouldn't have made risky loans, etc. - but the poor were the beneficiaries of these risky policies along with the rest of us. Ignoring economic realities in the name of "progressivity" or "antidiscrimination" or even "social justice" eventually hurts everyone. Although it may seem unfair that some people will never own their own homes, it's much kinder than encouraging them to incur a debt they can't pay, and eventually losing something they've come to love. And blaming the credit instruments (i.e., credit swaps) for the crisis just ignores the fundamental unsoundness of the underlying mortgages.