A Book of Interest

Well, I’ve started reading Raghuram Rajan’s Fault Lines: How Hidden Fractures Still Threaten the World Economy, and have gotten through the overview/introductory chapter and the first chapter as well. Mr Rajan in his analysis of the current recession blames it on what he terms “fault lines” where competing interests and actions of different organization, nations, and other groups, which taken by themselves individually are understandable and rational when they interact at their “boundaries” create phenomena he likens to the fault lines of geology. The first chapters of this book describe the major players and how they contributed to the recession and why what they were doing was rational and in their best interest. 

The first thing he looks at in the opening chapter is perhaps one of the biggest causes of the recession. The US mortgage industry, specifically the two big government mortgage institutions. He begins by looking at the rising 90/10 income gap and locates its primary cause as education. He follows that story by looking at politicians and then a short history of mortgages in the US in the 20th (and current) century. Politicians respond quite quickly to pressures and unrest of the voting public. Currently in the US there is a rising income gap between those with HS education or less and those with college degrees and technical aptitude. This problem has been on the rise for the last 30 years. Politicians the long term (right?) recourse which is to attempt to “fix” the broken educational system. The quick fix is re-distribution. One particularly dangerous form of such redistribution is by given them loans. And lo, this is what we did. Begun by the Clinton administration and followed by Mr Bush the mandate for Fanni and Fred were to sell more and more NINJA and liar loans. For a guy like myself, who thinks a limited role for government is best especially the federal government the story of continued ghastly decisions that comprise the story of the mortgage industry in the US and its history was horrifying to say the least. This ugly road down which we’ve been travelling is going to be a long road hard path to undo. 
Here’s one thing not brought out clearly in the first chapter, but which seemed problematic. Fannie/Fred wrote $3 trillion of questionable loans in the last 10 years. 20% of them defaulted and where one of the driving factors behind our current recent economic unrest as the banks had some little difficulty absorbing that. Here’s the thing. The housing prices skyrocketed in a large part under the pressure of this expansion. Now they are falling. What happens when the next 20 or 40% of those loans default? Why does anyone think that won’t be happening? 
Isn’t it wonderful that Fannie and Freddie are government institutions but aren’t accounted for by/on the budget? Clever of them. 

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