Friday, December 17, 2010

Paul Krugman on the 'Wall Street Whitewash'

In the world according to the G.O.P. commissioners, it’s all the fault of government do-gooders, who used various levers — especially Fannie Mae and Freddie Mac, the government-sponsored loan-guarantee agencies — to promote loans to low-income borrowers. Wall Street — I mean, the private sector — erred only to the extent that it got suckered into going along with this government-created bubble.

It’s hard to overstate how wrongheaded all of this is. For one thing, as I’ve already noted, the housing bubble was international — and Fannie and Freddie weren’t guaranteeing mortgages in Latvia. Nor were they guaranteeing loans in commercial real estate, which also experienced a huge bubble.

Beyond that, the timing shows that private players weren’t suckered into a government-created bubble. It was the other way around. During the peak years of housing inflation, Fannie and Freddie were pushed to the sidelines; they only got into dubious lending late in the game, as they tried to regain market share.

I do wonder if the GOP is backing itself into a corner where it can never, ever acknowledge that the free market -- as wonderful as it is -- might have some shortcomings or excesses. Thoughtful conservatives (and not just the ones that liberals like) recognize that and consequently allow that *some* regulation is needed. But if the market can do no wrong that isn't caused by the government, then regulation is always and everywhere wrong.

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