By Brian Summerfield, Online Editor, REALTOR® Magazine
When the Bourbon royals took over France again after the violent revolutions and Napoleonic wars that spanned more than two decades through the late 18th and early 19th centuries, the famous French diplomat Talleyrand supposedly said they had “learned nothing and forgotten nothing.” In other words, they immediately resumed the behaviors that had led to those national catastrophes in the first place.
Unfortunately, Talleyrand’s quip may apply to the United States during the Great Recession that started in late 2007. In remarks this morning at a 30 Under 30 event held in NAR’s Chicago office, Bethany McLean, co-author of the best-selling All the Devils Are Here, said the response to the financial crisis shows how much we — politicians, business leaders, regulators, and the public — haven’t learned. The book, written with New York Times columnist Joe Nocera, is a riveting account of the financial innovations and regulatory decisions that led to the near collapse of the world economy in the fall of 2008. McLean is a contributing editor with Vanity Fair, a columnist for Slate, and a frequent guest on Bloomberg news.
Part of the problem with bringing about real change is the complexity of the crisis. “What makes the narrative unsatisfying is that there’s not one simple explanation for it,” she said.
Attempts to boil it down are often politically motivated. For instance, some analysts want to pin the blame for the meltdown entirely on the government and thus use government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac as a scapegoat. However, while the GSEs make convenient villains, they didn’t actually play a “determining role” in the financial meltdown, said McLean, who characterized them as a sort of red herring in the story.
At this point, no one is seriously proposing that the government get entirely out of the secondary mortgage market, McLean said. Without the government guarantee, she acknowledged, the 30-year mortgage would be history. However, she questioned the wisdom of blending public and private functions in the market, because it leads to a situation where risk is socialized (that is, spread to taxpayers) yet profits are privatized (with the beneficiaries being corporate executives, shareholders, and employees of specific companies). That’s a position NAR has taken as well in its testimony to Congress on proposals to reform Fannie Mae and Freddie Mac. “The rich irony is that’s exactly what we’ve done with the big banks. The banks were the biggest critics of Fannie Mae and Freddie Mac,” McLean said. “Yet they enjoyed the benefit of private gain and socialized losses, because the government determined they were too big to fail.”
While Fannie Mae and Freddie Mac have taken the greatest heat — Fannie, in particular, has been a continued target because of the challenges it has had regaining profitability — individual borrowers have also been faulted for making poor financial decisions. McLean said she was initially critical of consumers — and still maintains the need for personal responsibility — but the research she conducted for her book showed that, to a much greater degree, it was perverse financial incentives in mortgage lending that led to the breakdown.
“The industry sold [consumers] bad mortgages,” she said. “Everyone could make money, even if the borrower couldn’t repay the loan.”
So if not Fannie, Freddie, and borrowers, which parties were primarily to blame for the financial crisis, and what could have been done differently in the immediate aftermath?
McLean put most of the responsibility at the feet of the big Wall Street investment banks and the institutions charged with regulating them, such as the Securities and Exchange Commission (SEC), the Federal Reserve, and the U.S. Treasury. She said the biggest, most meaningful step that could have been taken in the wake of the downturn would have been to break up the so-called too-big-to-fail banks.
Instead, the opposite occurred. Lehman Brothers disintegrated, and Bear Stearns and Merrill Lynch were bought by other financial institutions as part of bailout packages. Now, the too-big-to-fail banks are even bigger, and, consequently, more assets are consolidated in fewer enterprises than ever before.
The Dodd-Frank bill passed last year only gets at the margins of financial reform, she said. “Much of Dodd-Frank was a blueprint of what Congress wanted to see,” McLean explained. However, the details of interpretation and enforcement have been left to the regulators, and provisions such as the regulation of derivatives and the new Consumer Financial Protection Agency are being fought tooth-and-nail by big banking interests.
At play is what McLean termed “implicit corruption” caused by the fact that regulators are so close to the industries they’re regulating and share the same pro-market mentality. In fact, many high-level regulators came from law firms that count the biggest Wall Street banks as clients. On the one hand, she said, these people know high finance better than anyone else. Unfortunately, they have as much of an interest in protecting that industry as policing it.
“That aspect of corruption is hard to fix,” McLean said. “Until you outlaw greed or strip selfishness out of human nature, some of this stuff is inevitable.”
At this point, the best way to fundamentally change the conditions that led to the near-collapse of the financial system is to alter the mentality at all levels by putting a greater focus on responsibility, education, and skepticism.
For a consumer, that means understanding that a financial instrument that’s being pushed on you isn’t necessarily in your best interest. For home buyers, it means taking a practical view of the value of home ownership.
“If the home turns out to be a great investment, that’s wonderful,” she said. “But I don’t think it should be compared to other kinds of investments. Your home should be a place to live, a place of security, and I think we’ve lost sight of that.”
McLean served as a primary consultant to the HBO dramatization of the financial crisis, “Too Big to Fail,” which premiered last night on the network. A preview clip is below.