According to Obama adviser Lawrence Summers, the banks owe the economy. And it wasn’t government mucking about in the real estate markets that brought on the recession we’re in. It was “irresponsible risk taking.”
Here’s a question, though: What exactly did the banks risk? I thought they were all “too big to fail”? Didn’t we bail them all out? Wasn’t the nexus of the financial collapse the insolvency of Fannie Mae and Freddie Mac, two government-backed entities that controlled 51% of the mortgage markets?
I think Summers is right that “irresponsible risk taking” was at the heart of the financial collapse. But you have to ask yourself why those banks took those risks. Why did banks start making loans to people with a low probability of paying them back?
The answer is because the government created a market for all those bad loans. The federal government used Fannie and Freddie and the Community Reinvestment Act and a myriad of other policies to promote homeownership by forcing lenders to lower lending standards while also creating a market for subprime loans by using Fannie Mae and Freddie Mac to secure them.
At the time of the mortgage market collapsed, Fannie and Freddie combined to own or secure 51% of the nation’s $12 trillion mortgage market. They had that market share because the government created that market share for them.
Did Wall Street engaged in irresponsible risk taking? Sure. But only because the government subsidized it.