Tell Me What I Missed - Moral Hazards

[D-Rex Naptime]

This was from a FB debate with some Democratic Socialists. They say that there is no connection to the HUD quotas and the crash included in this argument. So other than Fed manipulation of interest rates, what's missing?

 

An example of a moral hazard would be when HUD directed FNMA and FDMC to increase their balance sheet from 30% to 53% of low-income mortgages. Without FNMA and FDMC buying these up, the banks would have had to write these mortgages at their own risk. Furthermore, investors would have to be more confident in the economic soundness of these mortgages, rather than assuming the soundness on government backing.

 

Sure, Wall Street was squandering in their MBS derivative practices, but this was after Freddie Mac and Fannie Mae had done it. So, you can't hold government harmless. Moreover, through another form of cronyism and cartelization, only certain financial rating firms were designated by the SEC to rate mortgage backed securities. Not very surprising that the ratings were favorable. Going back even further, we see that banks were actually required to loosen their lending standards if they wanted to receive the FDIC and Fed’s approval to conduct certain business activities, such as M&A’s and opening new branches. In fact, Janet Reno outright threatened to sue a bank if they did not loosen their lending standards. To survive the encumbrance of forced financial imprudence, banks had to get creative and provide various lending programs, such as adjustable rate mortgages.