Simon Johnson United States is torn by a heated debate on the causes of the financial crisis of 2007-2009. Should we blame the government for what went wrong? And, if so, how?
In December, the Republican minority in the Commission of Inquiry into the Financial Crisis (FCIC, for its acronym in English) intervened with a narrative of dissent trial. According to this group, the wrong policies of government, designed to increase the number of homeowners among relatively poor people, too many people pushed to get subprime mortgages they could not afford.
Potentially, this narrative can gain much support, especially in the House of Representatives controlled by Republicans and on the eve of the presidential election of 2012. But while Republicans in the FCIC eloquently written, is there any evidence to back his claim? Do poor people in America is responsible for causing the most serious global crisis in more than a generation?
Not according to Daron Acemoglu of MIT (and author along with me on other issues), which presented its findings at the annual meeting of the Association of Finance United States in early January. (The slides are available on its website at MIT.)
Republican narrative Acemoglu broken into three different questions. First, is there evidence that American politicians respond to the preferences and wishes of low-income voters?
The evidence on this point is not as definitive as one would like, but what we have, for example, from the work of Larry Bartels of Princeton University, suggests that in the last 50 years, virtually the entire political elite U.S. stopped sharing preferences of voters in low and middle income. The views of the officials are much closer to those commonly are heard at the top of the income distribution.
There are several theories regarding why this change occurred. In our book '13 bankers', James Kwak and I emphasize a combination of the growing role of campaign contributions, the revolving door between Wall Street and Washington, and, above all, an ideological shift towards the idea that the finances are good, that more finance is better and the best thing is finance out of control. There is a clear corollary: the voices and interests of relatively poor people have little in American politics.
Acemoglu's assessment of recent research on the 'lobby' is that private sector parties wanted to relax financial regulations, and worked hard and invested a lot of money to get this result. The impetus for a large market for subprime mortgages came from inside the private sector "innovation" by the giant mortgage lenders like Countrywide, Ameriquest, and many others, backed by large investment banks. And, to speak bluntly, were some of the biggest players on Wall Street, not overly indebted homeowners, those who received government bailouts after the crisis.
Acemoglu then asks if there is evidence that income distribution worsened in the United States in late 1990, prompting politicians to loosen the reins with respect to loan money to people who were "behind." Revenues in the U.S., effectively, became much more unequal over the past 40 years, but the timing does not fit this story at all.
For example, from the work he did with David Author Acemoglu (also of MIT), we know that income for 10% more gains rose sharply during 1980. Weekly earnings grew slowly in the case that less than 50% and 10% earn less earned at the time, but less favored sector in the distribution of income was actually relatively well in the second half of the 1990's. So nobody had to fight it but this segment on the eve of the foolishness of the subprime mortgage, which occurred in early 2000.
Data From Thomas Piketty and Emmanuel Saez, Acemoglu also notes that the dynamics of income distribution by 1% to more wins in America seems different. As suggested by Thomas Philippon and Ariell Reshef, a marked increase in this group in the earning power seems more related to the deregulation of finance (and perhaps other sectors). In other words, the big winners of the "financial innovation" of all kinds in the past three decades were not poor (or even the middle class), but the rich-people already charged too much -.
Finally, Acemoglu examines the role of federal government support housing. Without doubt, the United States long provided subsidies to owner-occupied housing, mainly through a tax deduction for mortgage interest. But this subsidy at all explains the time the housing boom and the crazy loans.
FCIC Republicans accuse the firm of Fannie Mae, Freddie Mac and other government-sponsored companies that supported housing loans under guarantees of different types. They are right when they say that Fannie and Freddie were "too big to fail", allowing them to ask money borrowed at a lower cost and more risk-financing with little capital to support his statement -.
But if Fannie and Freddie poured into dubious mortgages (particularly those known as Alt-A) and made transactions with high-risk providers, this represents a relatively small and appeared late in the cycle ( example, 2004-2005). The main impetus for the rise came from the whole machinery of the securitization of "private label", it was just that: private. In fact, as pointed out by Acemoglu, the powerful private sector players consistently tried to marginalize Fannie and Freddie and exclude them from segments of the rapidly expanding market.
FCIC The Republicans are correct in placing the government in the heart of what went wrong. But this was not a case of over-regulation or excess of range. By contrast, 30 years of financial deregulation, which was possible because it captured the hearts and minds of regulators, and politicians both Republicans and Democrats, gave a narrow elite of the private sector, mainly on Wall Street " - almost all the benefits of the housing boom.
The negative side went to the rest of society, especially in people with little education and poorly paid, now lost their homes, their jobs, hopes for their children all at once. These people did not cause the crisis. But paying for it.
WASHINGTON, DC.
* Simon Johnson, former IMF chief economist, is co-founder of a leading economics blog, http://BaselineScenario.com , a professor at MIT Sloan and senior fellow at the Peterson Institute for International Economics. His book, 13 bankers, who wrote with James Kwak, is now available in paperback.
Read also: the poor to the global crisis
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