Via DPF, I was fascinated to read this op-ed by Don Brash in the Herald discussing the origins of the current financial crisis (shorter Brash, monetarism and the banking system are fine, but there’s too much government intervention in the free market and that’s what caused all this mess). There’s so much to comment on here but I was particularly struck by this claim:
We also know that, in the nineties, the United States Government started putting pressure on American banks to lend to borrowers of quite marginal creditworthiness to prove that they were not discriminating on the basis of race.
Brash is talking about the Community Reinvestment Act, the theory being that the Clinton administration forced the poor banks to lend money to greedy ‘people of race’ who refused to pay it back. This is a talking point that crops up a lot on right-wing blogs – the boys at No Minister have been regurgitating it ad-nauseum and the subtext is pretty obvious: niggers (and hispanics) are to blame for the sharemarket crash – but it’s been refuted by every mainstream finance or business publication in the world. Business Week have a good discussion of the issue here; Barry Ritzholtz has excerpts from a speech by Federal Reserve Governor Randall Kroszner:
I will also discuss the findings of a recent analysis of mortgage-related data by Federal Reserve staff that runs counter to the charge that the CRA was at the root of, or otherwise contributed in any substantive way, to the current subprime crisis . . .
“This result undermines the assertion by critics of the potential for a substantial role for the CRA in the subprime crisis. In other words, the very small share of all higher-priced loan originations that can reasonably be attributed to the CRA makes it hard to imagine how this law could have contributed in any meaningful way to the current subprime crisis.”
I guess this shouldn’t come as any surprise; under Brash National ran it’s 2005 election campaign on the premise that low-income Maori were the scourge of the New Zealand economy so I can see how he’d be attracted to the idea that poor black mortgagees caused the global liquidity crisis, even if it has been roundly refuted. But isn’t this supposed to be Brash’s area of expertise? Shouldn’t the former governor of our own Reserve Bank be a little more up to speed than the morons at No Minister?
Here’s another revealing excerpt from Brash’s op-ed:
Gould seems not to have noticed that the crisis emerged not in the essentially unregulated hedge fund industry, or even among private equity funds, but in the most highly regulated part of the financial sector, namely banking.
It feels a little hubristic to be nay-saying Don Brash’s expertise on issues like this – but try and find me a reputable history of the sub-prime mortgage crisis that doesn’t state that the crisis emerged when Bear Stearn’s sub-prime hedge funds were wiped out in July of 2007. This isn’t complex, technical stuff, this was a front-page news story that Brash is oblivious to.
Brash is also being dishonest when he points to regulated financial sectors as being the source of the problem; the collaterized debt obligations (CDO’s) that wiped out banks in the US and UK were owned by structued investment vehicles (SIV’s), companies that were deliberately opaque and designed to avoid reglation and government oversight. (The Financial Times has a good overview; I love the narrators lisp).
I guess Brash has – literally – devoted his life to the cult of monetarism, the mystical belief that the market always works and the market is the only thing that works, and at this point in his career there is nothing that can happen in the real world that will prove him wrong. Brash certainly knows about the failure of the Bear Stearns hedge fund but in his mind it’s not important. Somehow, somewhere, government intervention is to blame. It always is.
This happens in the scientific community as well; when a new ‘paradigm’, or model emerges and displaces the old one most scientists adopt the new theoretical framework – but the high priests of the old system rarely if ever do. Einstein never accepted quantum theory, younger geologists had to literally wait for the older generation to retire and die before plate tectonics became a dominant theory.
We’re still going to have true believers like Dr Brash around for a while, just as there are still wild-eyed marxist-leninsts standing on street corners handing out the Daily Worker and insisting that Communism is a great idea, it just hasn’t been tried properly yet. It’s okay to feel sorry for them.
Pity aside, this was a fascinating insight into how insulated Brash is from reality; it sends chills down my spine whenever I think about how close he came to running the country.