Fourth-Hand Opinions on a Complicated Topic

The eye-opening thing is how many people believe that something as extensive as the current financial crisis can be analyzed simply and placed at the door of a particular political party — even a particular individual! By the time one gets to such specific and flatly stated explanations as Froma Harrop's, it is likely that readers are receiving a restatement of a paraphrase of a summary of a synopsis of a hypothesis:

McCain's former economic adviser is ex-Texas Sen. Phil Gramm. On Dec. 15, 2000, hours before Congress was to leave for Christmas recess, Gramm had a 262-page amendment slipped into the appropriations bill. It forbade federal agencies to regulate the financial derivatives that greased the skids for passing along risky mortgage-backed securities to investors.

And that, my friends, is why everything's falling apart. That is why the taxpayers are now on the hook for the follies of Fannie Mae, Freddie Mac, Bear Stearns and now the insurance giant AIG to the tune of $85 billion.

And politically motivated oversimplifications such as that, my friends, are why those on opposite ideological poles in this country often seem to be speaking about wholly different worlds. To partisans — which is a category whose siren call I hear from time to time, as I navigate the ideological waters — just about everything confirms their own view and proves competitors' to be nakedly fallacious. Such responses are natural, to be sure, and in many ways defensible. Pointing out the other side's culpability is wholly rational, and often hypocrisy-free, if it is in actual or preemptive response to one-sided accusations in the other direction.

More profoundly, though, the factors that point to one's own side don't appear as culpability so much as indication of an idea's corruption or misapplication. Harrop foists calamity on Gramm's shoulders on the grounds that he "greased the skids" of the financial industry. Well, skids need to be greased lest they stick; the key is in the choice of path, and conservatives, notably Jonah Goldberg, will point out such stearing:

The starting line for the parade of falling dominoes doesn't begin on Wall Street. Nor, alas, will the parade end there. But if you want to know where it really begins, look to the Capitol steps.

The self-proclaimed angels in Washington will tell you they've been working tirelessly to expand the American dream of homeownership by making mortgages available to people unable to plunk down 20 percent on a house. Franklin Raines, the Clinton-appointed former head of Fannie Mae from 1998 to 2004, made it his top priority to make mortgages easier to get for people with poor credit, few assets and little money for a down payment.

So, without getting into the mire of who's in bed with whom (no matter how instructive, even important, that may be), what went wrong? In summary, it appears that the federal government pushed lenders to expand their market into riskier ventures and that deregulation made it easier for those lenders to spread the risks, which is typically a good thing, a safeguard. The involvement of government-backed institutions (Fannie and Freddie) and the growing sense that the likelihood of government assistance in the face of collapse decreased the gamble, and the Federal Reserve Board's efforts to keep the economy moving by means of low interest rates enabled a broader field of players.

Meanwhile, an increasing market for low-end houses due to this opportunity, in concert with a generally growing economy, pushed prices up and expanded the range of consumers turning to new means of borrowing. In other words, those who might previously have saved up a few thousand dollars for down payment on a starter home found that houses meeting their minimum standards were no longer within reach by traditional methods. An entire market segment, replete with a new category of how-to television shows, emerged to change intolerable houses into tolerable ones, flipping them to capitalize on the market's updraft.

The pot further sweetened with the use of equity mortgages to bring homes up to standards that would previously have been sought at the outset, to supplement incomes strained by outsized housing and debt costs, and (yes) to monetize families' largest investments for toys and extravagances. The pool of loans, ostensibly with the promise of guaranteed cash flow, made for an attractive addition to portfolios across the spectrum from individual investors to massive pension funds. Finally, accounting regulations enacted in response to Enron minimized lenders' ability to calculate the value of their holdings on a longer (and therefore more stable) view.

Who — or what — in all of this deserves blame, as distinct from partial responsibility: those who greased the skids, those who loaded their aspirations, dreams, and desires into the sleigh, those who pushed it down a particular hill, or those who presumed to stear it through the thicket? Personally, I'd point out that three out of four of these categories are actually different faces of the government.

Capitalism is a process, a strategy, and a very effective one. The danger comes with the pursuit of a "third way" that attempts to put it to work toward a particular cause that is chained to an immovable object like the government. Any private party attempting to push the market in one direction or another must weigh odds and calculate losses versus potential gains, which it will have to face as they arise. The government can dictate policies with consequences that can't possibly be known and — as we're seeing with the bailouts — wind up increasing its power when things go wrong. Until, that is, things go so terribly wrong that the whole system shakes itself apart.