It is undeniable that greed has played a starring role in our current financial crisis. However, playing the blame game is complex when the actions of so many people in so many positions had a disastrous effect on our economy. Although it may be easiest to blame the self-indulgent nature of Wall Street, other players may be equally, if not more responsible.
I think that we need to focus more on Congress’ actions in precipitating our current reality. I agree that furthering social policy goals should be high atop Congress’ “To-Do List.” However, the current state of our economy can be closely tied to an admirable mandate of Congress: that every American should have the opportunity to own a home.
Since 1992, Congress has pushed Fannie Mae and Freddie Mac to increase their mortgage financing to low and moderate-income borrowers. In fact, Congress has given Fannie and Freddie concrete targets. For example, this year the goal was that 28% of all mortgage purchases would be “specially affordable” loans. These loans typically go to borrowers with income less than 60% of their area’s median income. Furthermore, in 1995, Congress bolstered the Community Reinvestment Act and caused an increase in bank loans to low- and moderate-income families by 80%. These methods allowed Congress to increase low-income home ownership without spending a dime on subsidies.
Win-win, right? Not through the lens of moral hazard. Moral hazard is the prospect that an individual shielded from risk may act differently than he or she would act if fully exposed to that risk. The mortgage meltdown stemmed from Congress’ drive to increase home ownership by reducing its risks. Moreover, these efforts were directed at the riskiest borrowers, leading to an unacceptable level of moral hazard and, in turn, the subprime mortgage crisis. What can Congress learn? Risk may shift or spread among several parties, but it is never eliminated. Maybe the actions taken to further public policy goals should not be freed from the restraint imposed by ordinary risk.
While the investigation continues into the greedy, Wall Street titans, we should not forget about the harmful effect public policy may have played in the failure of our financial system.