Reason has a critique of The Big Lie column. It was so disingenuous, I did something I rarely do: I sent an email to the author and editors at Reason. It went something like this:

I was disappointed to read your comments about my “Big Lie” column. You seem to have completely misread who I was blaming and what the Big Lie actually is.

Only one of two explanations suffice: Either I did a poor job communicating what the issue was, or you purposefully mischaracterized what I wrote.

On the possibility it’s the former and not the latter, allow me this further explanation.

The quote that I critiqued was Mayor Bloomberg’s whopper that the crisis was caused by Congress forcing banks to make ill advised loans to unqualified people. That statement is demonstrably false, and it is what I wrote in the WP. Not, as you described, that government was blameless.

Indeed, beyond the Post column, I have pointed a finger at Washington DC repeatedly. From the very early stages of the collapse, I have stated DC was a significant contributor. Indeed, early in the crisis, I described the government as “Uncle Sam the enabler.” (A Memo Found in the Street, Barron’s September 29 2008).

In the Big Picture blog, I made a list of the top blamees (Who is to Blame, 1-25, June 2009) It is dominated by government players, including the Fed, Congress, SEC, various Senators and Presidents, two FOMC chairs, the OCC, OTS, Treasury Secretaries, as well as private bankers and organizations.

And in Bailout Nation, I clearly detail how Congress did the bidding of Wall Street to allow special exemptions, waivers, and new legislation that contributed to the credit crisis, housing boom and bust, and Great Recession.

Your cartoonish argument is reductio ad absurdum – nowhere in the WP article do I remotely suggest the “big lie” was that Washington, DC played no role. But I do call out the nonsense Bloomberg was peddling, and you are pushing, that banks and Wall Street were merely innocent bystanders in all of this, and somehow were forced into these bad loans.

I would love to see any evidence you can muster that government forced banks to stop verifying employment and income, mandated no credit checks, eliminated debt servicing review, forced 120% LTV lending, or somehow pushed 2/28 ARM mortgages.

Less silly, please.

P.S. The print edition of the article, as well as my online edition, has 12 points numbered, not bulleted. That’s either a font or a browser issue on your end.

As William James noted, “a great many people think they are thinking when they are merely rearranging their prejudices.”

UPDATE: November 11, 2011, 11: 45

Tim prints my response, and adds to the discussion here.

Category: Bailout Nation, Really, really bad calls

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

44 Responses to “Government Blameless in Bubble/Bust/Bailouts?”

  1. stevesliva says:

    I thought of the Big Lie when reading about Carl Richards defaulting on his equity-extracting refi in Las Vegas, even though his house sold for what he paid for it:

    Not exactly a situation where the government forced anyone’s hand. His McMansionhood hardly sounds like an underserved community, and his loans hardly sound conforming. It was private lenders being stupid. Not because the government made them do it.

  2. canoles says:

    “I would love to see any evidence you can muster that government forced banks to stop verifying employment and income, mandated no credit checks, eliminated debt servicing review, forced 120% LTV lending, or somehow pushed 2/28 ARM mortgages.” ~~~~~~~~~~~~~~ So simple, yes? Thanks for calling Reason out on this, we all must keep repeating these simple facts over and over…

  3. Jim Greeen says:

    This is nothing more thn culturally constructed ignorance. Designed by the offenders to influence those that have no clue as to what really happened.

    Shame on them all!!!!!!!!!!

  4. Moss says:

    I read something a while ago that made the argument that Al Capone was the fault of government since it was the government that prohibited alcohol.

  5. To put it in terms of current events, the government was Paterno to the banks’ Sandusky. Unfortunately we are the boy in the shower …

  6. louiswi says:

    You rock Barry!!!

    Keep it up!!

  7. glengarry says:

    Barry, keep speaking the truth. A lot of people thank you for it. Sadly, instead of breaking up the big banks (imo, the only way to effective “regulation”), too many want to deregulate them and encourage them to blow up another balloon.

  8. Invictus says:

    Fascinating to me is the fact that in the essence of his rebuttal of Barry’s work, Cavanaugh has six links that all — each and every one — refer back to other pieces at…wait for it… In fact, all six were penned by Cavanaugh himself. Personally, I always find it a more compelling argument when one can draw on oh, say, anyone else but himself. Or did no one else advance the same argument Cavanaugh made?

    Beyond that, Cavanaugh spent that column rebutting an argument that BR didn’t even make.

  9. bobby says:

    great stuff

  10. jonpublic says:

    Don’t feed the trolls.

  11. willid3 says:

    just proves that you can’t convince some of some thing when their livelihoods depends on them not believing any thing you proved

  12. carleric says:

    Under every rock and financial blurb, one can find an apologist for Wall Street and the banks…how many representatives and senators did they buy today?

  13. RugbyD says:

    As an avid Reason reader, I was quite disappointed at Tim’s post. Not their best work. I suggested further research on his part into point BR has made, in depth, over an extended period of time.

  14. CSN says:

    and lets remember who was lobbying and helping to form gov’t policy.

  15. Moe says:

    Irony = Writing for a site called “Reason” and not utilizing any.

  16. gman says:

    Reason is always against any form of anti trust type enforcement, the type of enforcement that is necessary to realistically be cavalier w/ the “let them fail” mindset after the fact.

    Across a range of issues Reasons economic thinking in practice is violently pro cyclical.

  17. James Cameron says:

    However . . . this is all additional blather or misdirection on Cavanaugh’s part. The fact is – and a quick read makes this abundantly clear – that nowhere in his column does BR claim that government was blameless or or did not have a significant role as Cavanaugh claims. Indeed, one is left wondering exactly what article he was reading. And, of course, it’s apparent he never bothered to read or at least scan the book for background research.

    The only thing he did get right were the bullet points, which is a coding issue (I found the same on different browsers) . . . but that’s a crumb.

  18. Arequipa01 says:

    One item in this debate about Government’s culpability in the mortgage mess which is too often overlooked is the unusual assertion of regulatory authority by the OCC during the Bush catastrophe/disaster/armaggedon/sh*tstorm (am I making my point?).

    From the conclusion of a paper published in the Loyola Consumer Law Review (Kim):

    “This article demonstrates that the OCC’s interpretations must
    be motivated by its sole aim to expand its regulatory jurisdiction.(fn) In
    the absence of Congressional intent, the OCC should not be permitted
    to construe the NBA so as to cripple the state’s oversight function and,
    simultaneously, to extend its own regulatory jurisdiction to cover operating
    subsidiaries. Such aggressive constructions, coupled with judicial deference,
    may strip each state’s important oversight function of protecting its consumers,
    as well as the dual banking system in the U.S. Considering that the recent
    subprime mortgage turbulence may be a “necessary consequence”
    of the OCC’s preemption since 2001, restructuring the OCC’s regulatory
    scheme for operating subsidiaries can contribute to addressing problems
    in the subprime mortgage market.”

  19. Arequipa01 says:

    The OCC interpretation of an 1867 statute led to a show down with Eliot Spitzer which ended in definitive unemployment for his call girl. Dems the breaks.

    It is clear that the 2002-2006 housing bubble was engineered, intentional and Bush admin policy. See also:

  20. Ridge Runner says:

    The Escher “Drawing hands” lithograph is an illuminating image of crony-capitalism ‘regulation’ or ‘self-regulation’

    The ideological fixation on the merits or demerits of “public” regulation vs “private” self-regulation of economic activity blinds the ideologues to the true arrangement in a crony state : both ‘public’ and ‘private’ are controlled to the advantage of the connected, and it’s root-hog-or-die-capitalism for the unconnected (or worse, if market activity of the unconnected is made a criminal offense, i.e., as in North Korea, and the unconnected are for all practical purposes directly enslaved to the whims of the connected). In a crony state, the “rule of laws, not men’ becomes ‘rule of the law by connected men for their benefit’. So, of course the banksters took full advantage of the public policy mandate to ‘serve the under-served’ by greasing the financial conduits to produce unaffordable loans knowing the ‘implicit state guarantee’ for the housing agencies and the TBTF banks would be their safety net when the crap floated to the surface. And the ‘official regulators’ looked the other way while all of this was going on, knowing that their post-government future was assured by the very banksters they were supposed to be regulating. So far, despite the Tea Party and OWS ‘peasant rebellions”
    ( )
    the banksters and their confederates have gotten clean away. As long as the peasants mistake various brands of institutional window-dressing for reality, the connected will continue to follow their winning game plan.
    Power and prosperity: outgrowing communist and capitalist dictatorships

  21. JohnnyVee says:

    Barry: I knew you were pissed when I started reading, but when you went all latin on his @ss, that was something: “reductio ad absurdum “

  22. ews says:

    Your column is pretty loose in defining the Big Lie (you refer to “A Big Lie,” “The Big Lie,” and “Wall Street has its own version: Its Big Lie . . .”) But it appears that you finally defined the Big Lie at the end of your article as “the discredited belief that free markets require no adult supervision.”

    Maybe anarchists believe that, but nobody else does. Not libertarians and Not Reason. So I guess I’m not sure what your argument really is.

    I bet, at the end of the day, you and the Reason folks are on fairly common ground. Just don’t tell Invictus, he’ll get the vapors.

  23. ews says:

    I realize now that’s the “Previous” Big Lie.

    So what’s the Big Lie today?

  24. BusSchDean says:

    My problem….getting students ready for some not so good role models. The intentional characterization of the crisis as: 1) black and white (government in black hats; business in white hats) and 2) not a systemic failure over time almost guarantees there will be no serious fix.

  25. Ridge Runner says:

    @Moss: “I read something a while ago that made the argument that Al Capone was the fault of government since it was the government that prohibited alcohol.”

    It was certainly the market rules put into place by the Volstead Act and the ratification of the 18th amendment that made it possible for a crude thug like Al Capone to move up from being a petty “Chicago Way” criminal to a wealthy “Chicago Way” mob lord, and for a generation of ‘Big Easy’ law enforcement personnel to become very well-off gate-keepers to the illicit market Prohibition created.

    That’s why the drug cartels, the well-fed DEA bureaucracy, and a law enforcement community hooked on the non-tax revenue source made possible by the Civil Asset Forfeiture statutes would be appalled if the “Drug War” was called off and recreational pharmaceuticals were available on terms similar to the legal mind-altering drugs, alcohol and tobacco.

    @Pelle: Yes, that’s about right. Like a government-private cronyship is that Penn State affair. Too bad about the kid (or the unconnected public, in the case of the bankster/regulator cronyship) but, as another coach put it, “Winning isn’t the most important thing, its the only thing.” As long as that sentiment rules, the debt-addicted, sports-crazed, mind-altering-drug-consuming public will get what it wants with all the accompanying consequences, including the ‘unanticipated’ and unwanted side effects of raped kids and default-blasted economy.

  26. Arequipa01 says:

    Also, in regards to ‘who saw it coming’:

    Wilmarth is cited in the Loyola Law Review piece/link above. He authored:

    “The Unwarranted Regulatory Preemption of Predatory Lending Laws” (N.Y.U.L. REV. 2274 (2004))
    [Haven't found a link]

  27. Simon says:

    Do you consider yourself to be Libertarian BR? I am sure I have read your description of your political leanings somewhere on this blog and I would not say you are particularly libertarian as I understand it to mean which is basically right wing to the point of, “nature, red in tooth and claw” style, victor takes all, survival of the fittest type belief. You are data driven which means your leanings are more towards science than philosophy and I guess that means that if it can be shown that it is better for society to provide support nets and social services than not to that is what you would promote. That is not particularly libertarian in my opinion.

  28. NotQuiteSo says:

    BR, you are absolutely, breathtakingly right on all of this. Never stop saying it. If only the Washington Post would let you, it’s worth reprinting that column every few months just to remind the country of what led to the crisis, over and over, until every citizen recites it in his or her sleep.

    And never stop going “all latin on his @ss” (a coinage for which @JohnnyVee should win a prize) when [he/she/they] deserve it.

  29. covel says:

    Someone on my facebook said, “The blame on the housing bubble should go to the banks, Federal Reserve and the government. Not just one group like the banks or just the government.”

    Not going to spend my waking days arguing against folks blaming this boogeyman or that, but IMHO the preponderance of evidence for said bubble is especially clear when we all look in the mirror.

    The other debates are a sideshow.

  30. wrongwy says:

    Reason Staff write from the perspective of “let them eat cake.” I’m glad you cal them out. Recently read a column by Shika Dalmia, senior policy analyst at Reason Foundation. With this kind of reasoning, Ms. Dalmia could run for office like Michele Bachman.

  31. flocktard says:

    @ Arequipa01

    See also the genesis of the Georgia anti-predatory law being repealed due to interference from the rating agencies, who threatened that any mortgage paper originating from that state would not be rated, and thus could not be sold. This is thoroughly detailed in the Morgenson/Rosner book, but of course, the authors chose to make Jim Johnson of Fannie the object of their obsession.

    “While predatory lending violates all notions of decency and ethics, it has been largely legal due to previously loose consumer protection laws. This is not only wrong- it is tragic.” Gov. Roy Barnes of Georgia Oct 25, 2002

    “But the death blow did not come from predatory lenders (who amassed funds to defeat Barnes) it was dealt by S&P, Moddy’s and Fitch….S&P said it would no longer allow mortgage loans originated in Georgia to be placed in mortgage securities that it rated. Moody’s and Fitch followed with similar warnings”

    This meant Georgia lenders would have no access to securitization.

    Great, huh?

  32. Ridge Runner says:

    @flocktard: “the Georgia anti-predatory law being repealed due to interference from the rating agencies, who threatened that any mortgage paper originating from that state would not be rated, and thus could not be sold”

    And where did these NRSRO’s get their ogilopolistic power? Answer: the financial regulators handed it to them. Some years ago, it was suggested that this was a bad idea. Regulator response:

  33. herewegoagain says:

    Many months ago Barry posted a quiz that identified one’s political bias. It interested me to discover that my answers were almost identical with BR’s, and the bias was of a borderline variety. A nominally indeterminate Liberal/Libertarian/Independent hybrid.

    I enjoy this site because Barry is a flexible synthetic thinker, not a rigid ideologist. The REASON critique begins with a presumption of Libertarian bias, which is just wrong. And everything that proceeds from that just gets “wronger’.

  34. illyia says:

    Good luck with those “reason” able people: You said it!

    “a great many people think they are thinking when they are merely rearranging their prejudices.”


  35. nanotech says:

    I’m not sure if defining this site as the 5th most libertarian on the ‘net, above even the Ron Paul forums, is remotely accurate. Apparently even the act of allowing logic and reason to prevail over politics is sufficient to pigeonhole someone into a political stance in these partisan times. Best taken as an inadvertent compliment, I suppose.

  36. leveut says:

    After reading comments and columns here in Ritholtzia, I found myself wondering in what country and in what administration and on what planet most of the first half of Gretchen Morgenson’s co-authored book take place. It obviously wasn’t these United States on this planet, as in her galaxy far far away, GSEs and the Clinton Administration did bad and naughty things.

    Meanwhile, here on earth, it was everybody but GSEs and seems to be solely the Bush Administration.

  37. JimCap says:

    Kudos, Barry. Keep up the good work.

    You can’t argue with a self-styled “libertarian”. Their “ideas” are absolutely fixed, and they rationalize around those preconceived, hoary notions.

    I’ve had a much easier time speaking with a deeply devout Christian or Muslim; they’re open-minded in comparison.

    I’ve never seen anyone cling to “The World Is All About Me” ideas than a “libertarian”; except for my kids, when they were around 11 or 12.

    Anything from “REASON” won’t be based upon reason. That’s clear. I’m glad you’re out there, speaking and writing the truth. Now we need our policymakers and legislators to listen.

  38. Jim67545 says:

    In all of the discussion of the GSE’s, bank’s, mortgage originators’, legislators’, regulators’ role in this there is a person, who represents 50% of the transaction, not often mentioned. That is the borrower.

    Had there been no demand, there would have been no supply of sh-ty mortages. What percentage of those “on the cusp”, as Bloomberg phrased it, knew in their hearts that they would be really pushed to make payments and meet their other needs? Yet they went ahead anyway. Perhaps they hoped that, like seemingly everyone else’s house, their house would increase in value 15% a year and if their income failed to rise they would dump the sucker later at a profit. Perhaps they understood greed and gain but not the risks. Perhaps they drank the coolaid.

    The environment was one of euphoria. I’ve referred to it as a feeding frenzy. I remember an acquaintance telling me his summer home in Florida was rising in value 30% a year. In the presence of this housing “gold rush” is there any surprise that so many reacted just as so many reacted in 1849 to the gold rush in California or, later, the one in the Yukon? Buy and flip. Buy now because next month the price will be higher. Remember that?

    There is a great deal of truth to placing the blame on relaxed regulation, unscrupulous lenders, rating agencies, etc. They were clearly enablers, encouraging forces and even fraudsters. The situation would not have catalyzed without them. But at the end of the day the borrower had to walk into the lending instituion, apply and sign the paperwork. To paint them as mindless innocents who were helplessly drawn in overelooks as much fault as anyone’s in this mess.


    BR: There is always demand for shelter, and there will always be a giant queue if you offer up free money.

    The role of making credit decisions — evaluating who can service the debt — falls on financially sophisticated lending institutions. Theya re the ones with a fiducuiary obligation, with expertise, and ultimately, with the capital to lend.

    To declare this to be a 50/50 split is laughably naive.

  39. Equityval says:

    I’m struck by the unwillingness of the assembled here to consider the role that the “ownership society” initiatives played in laying the ground work for the housing disaster. It was a bipartisan effort, that started in 1994 with Clinton, and Bush met and raised that bet. Apparently, government leaders decided that about 50 years of established mortgage lending practices were out of date and that we needed to bend the rules so that we could push the home ownership rate up. How’d that turn out?

    Yes, there were plenty of others who took that idea to extremes and were all too happy to cash in on the notion that “everyone should own a home” when they knew better. But it is naive to ignore the signal value, to say nothing of the subtle ways that politicians and regulators can shape the behavior of regulated entities, when the president or one of his key aides tells lenders that need to loosen up a little so that we can make more people homeowners.

    This NY Times story from 2004 is quite instructive in reviewing the origins and development of the ownership society. And if regulators had been paying attention to stories like this in 2004, they might have been able to nip the bubble in the bud before it consumed the financial sector.

    A few quotes from the story:

    “Indeed, encouraging homeownership is one of the few issues the Clinton and Bush administrations pursued with equal ardor….

    Bill Clinton saw housing as a potentially winning issue early in his 1992 presidential campaign….
    in 1995, he rolled out a 100-point plan for homeownership… It encouraged lenders to ease borrowing by reducing the traditional down payment of 20 percent to a few percentage points or in some cases nothing at all. With help from Congress, the tax law was changed to let first-time buyers use their retirement funds without penalty…As a result of policies pursued both by Mr. Clinton and Mr. Bush, the ownership rate climbed to beyond 68 percent now from 64.1 percent in 1992…

    Chase was certainly eager for the business. The bank had embarked on a national expansion into home lending and was sensitive to the minority-lending goals of regulators who held sway over its growth. In 1996, it won high praise for joining an urban program that counsels first-time buyers on the pitfalls in homeownership…

    George McCarthy, a housing economist at the Ford Foundation, says the easier credit unleashed by the homeownership drive has exposed vulnerable buyers to fraud and excessive debt. Already, the F.B.I.’s caseload of 500 mortgage fraud investigations is up fivefold since 1997.

    ”The risk of more Poconos is huge,” Dr. McCarthy said. ”In every affordable market in the country we are seeing these fast run-ups in prices, double-digit appreciation, and the problem is that people who are not well versed and able to tell what the true value is can get hoodwinked.”

    Should housing prices drop, he says, the fallout may track the stock market scandals in which sundry accounting irregularities, ignored during the booming 1990′s, were exposed. Prospective buyers should be warned that a house is an investment that can lose value, he and other housing experts say.

    Marc Weiss, who helped shape the Clinton administration’s homebuyer campaign, says the program did not have enough safeguards to protect first-time homebuyers. ”We were so focused on expanding homeownership that we probably didn’t put enough attention with our private sector partners on what is needed to help people from getting in trouble,” he said. “

  40. Jim67545 says:

    BR: So, you are saying that the loan applicant has NO responsibility to judge whether they can or cannot afford the loan for which they are applying? That is laughably naive, and blind, on your part.

    I worked for 30+ years as a loan officer and the origination process was/should be a consultation between the applicant and the loan officer. The loan officer can apply whatever metric he wishes but only the applicant knows the many possible financial factors that are unique to their family. Do they have a sick child who requires extraordinary expenses? Is the marriage in trouble and divorce a real possibility? Do they prefer to buy a new car every other year which stresses the budget? Take expensive vacations or struggle to keep their kids in private school? Are they supporting a parent? Is their employment suspect and a layoff a possibility? And on and on it goes.

    LTVs, D/I front and back and the most detailed application will never reveal what the applicant alone knows about their actual ability to repay.


    BR: Mortgages are a commercial transaction. The borrowers obligations and duties are clearly spelled out in the Note they sign. If they make payments on a timely basis, they get the benefit of using the property until they own it. If they fail to make payments, the consequences are spelled out.

    The banks decided they no longer cared about information like Income, employment history, debt obligations, credit ratings. They got precisely what they asked for: Borrowers unable to prove they were qualified to receive loans. The results were laughably predictable.

  41. Jim67545 says:

    As you might imagine from what I’ve said of my background, I am well aware of this as a commercial transaction. In fact, I’ve made this point repeatedly when various folks have advocated simply wiping away the lender’s legal position.

    With all due respect to you (and that respect is enormous), it appears to me that you do not understand the actual lending process – at the point of application and origination. First of all, the lender only gathers a limited set of information. More obscure information, such as “How is your health?” are not asked. Others such as “How are you and your husband getting along?” are clearly too delicate to ask. Other things such as “Are you currently being sued?” are asked but applicants routinely scoot on by those.

    There is a process called “prequalification” in which a potential mortgage loan applicant asks how much they can afford to bear in a payment prior to shopping for a home. This is pretty commonly done. In my experience in virtually every case when the pure income and current debt service amounts are used the potential applicant will say that the payment is larger than they wish to have. Why? Many reasons. They might reveal that their son is autistic and needs therapy that costs $X a month, that their second car will need to be replaced soon with a new loan payment, that the husband is to lose overtime and can’t carry as much debt.

    This is a healthy discussion and one which should, but often does not, take place. I mention these things so you will have a little better perspective of the tangible and intangible elements that only the applicant can know and supply. When the applicant does not consider or supply these, it is their responsibility. After all, the lender is not a mind reader. This, of course, does not even consider applicants purposely misleading or deceiving the lender.

  42. Jim67545 says:

    To absolve the borrower of any responsibility in the (note) contract reminds me of the person, charged with car theft, claiming to be innocent because the car’s owner left the car door unlocked, the keys in the ignition and the car running.

  43. DeDude says:

    Sorry Jim67545;

    You may be right if your perspective was true. However, most of these people should never have gotten the house even if they had no ghosts in the closet. Every professional involved from agent to lender was working for the deal. If those professionals had bothered digging a little deeper they could have seen that these deals would end in disaster for the homeloaner. But they were making money on it regardless, so they more or less deliberately closed their eyes for that easily discovered reality. Most of the homeloaners were not equipped to figure out what a disaster they were signing on to. They bought the hype about real estate always going up and having never gone down (and by now or be locked out forever). Yes there were a few professional house-flippers duping the lenders, but they are a very small fraction of the whole picture.