May 23, 2018
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The American nightmare

The American dream, cultivated by politicians, mortgage lenders, the housing industry and Wall Street, was that every American family should own its own home. That dream, now a drawn-out nightmare, was at the heart of the financial crash of 2008, which is still with us in home foreclosures, joblessness and a stalled economic recovery.

The ugly oft-told story appears in a new book by New York Times financial reporter Gretchen Morgenson and a researcher who foresaw the collapse, Joshua Rosner. It beats other accounts by telling the names of the people who brought on the disaster and where they are now — many still running things and richer than before. The aptly-named book is “Reckless Endangerment: How Outsized Ambition, Greed, and Corruption Led to Economic Armageddon.”

They show that the housing bubble grew out of the misconception that people should own their own homes whether or not they could afford to. “Affordable housing” led to adjustable-rate mortgages, often requiring inadequate income, no money down and interest-only monthly payments. The predictable result was that many of the borrowers defaulted and many of the loans went under water, with more owed than the property was worth.

But the loans that had gone sour were bundled with good loans into derivative investment products that were sold on the market with the help of triple-A backing by the ratings companies, which also helped structure the faulty products.

Leading a list of persons responsible for the mess is James A. Johnson, who was chief executive officer from 1991 to 1998 of Fannie Mae, the huge and powerful mortgage finance company set up in 1938 to help borrowers buy homes. One of his defenders, Bill Maloni’s GSE (government-sponsored enterprises) Blog, denounced the book as a “drive-by political shooting” and argued that Mr. Johnson had been long gone from Fannie Mae by the 2008 crash. (Mr. Maloni is a former chief lobbyist for Fannie Mae.)

The failures of Fannie Mae and Freddie Mac, Countrywide, American International Group, Lehman Brothers and other companies have cost American taxpayers hundreds of billions of dollars.

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, named for two of the most strident defenders of Fannie Mae, failed to cut back the large institutions that are “too big to fail,” neglected to increase accountability in the financial industry and said nothing about resolving the insolvent Fannies. Timothy Geithner, who fought regulation of risky investments and helped grow Fannie Mae, is now Treasury secretary.

The jury is still out on whether another credit crisis could descend on us.

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