One reason the current financial crisis seems so mystifying is, I think, the absence of a simple, coherent story that explains what the crisis is about. The Enron and WorldCom scandals earlier in the decade could be distilled to a plausible story about greed and the failure of the accounting firms and other gatekeepers who are supposed to police Wall Street. With the current crisis, by contrast, three main narratives seem to be competing for attention. And each is deeply flawed.
The first, which has been offered by Senator Bernie Sanders and others, attributes the crisis to Wall Street greed, and demands that Wall Street be punished and ordinary Americans helped. Wall Street greed certainly is a major factor in the crisis, most visibly in the pushing of exotic, mortgage-related securities that now have come back to haunt many financial institutions. But the greed story has at least two problems.
First, the greed wasn't limited to Wall Street executives. Borrowers and real estate speculators also seem to have been a little too acquisitive in the days of cheap money and soaring real estate values. Second, it seems clear that adopting the Wall Street greed story and punishing the banks and their executives would end up hurting ordinary Americans, by making banks even more reluctant to lend money to individuals and small businesses than they are now.
The second story is a story about deregulation gone amok. The bete noir of this story is the 1999 legislation, co-sponsored by former McCain adviser Phil Gramm, that reversed the New Deal era Glass-Steagall regulation that had prevented commercial banks (the ones that take deposits) from combining with investment banks. The problem with this story, which Obama has credited at times, is that the reversal of Glass Steagall seems to have nothing to do with the current crisis. Rather than causing the trouble, commercial banks and banks that combine commercial and investment banking (such as Bank of America and Citigroup) are the ones that have so far best weathered the storm. Two of the most visible collapses, Bear Stearns and Lehman Brothers, were standalone investment banks.
The House Republicans who temporarily torpedoed the bailout bill on Monday have offered a very different story, a narrative about the need to trust the markets and stay the course, rather than adding to the government's new role as the nation's investment bank. McCain has given some succor to this view, although he has tended to emphasize the greed narrative of late and favors the bailout. The problem with the stay the course narrative is that it seems likely that the crisis in the credit markets, and banks' reluctance to lend, will get radically worse unless the government steps in.
The one narrative that strikes me as more plausible than any of these three, but which no one seems willing to raise, is a story about our preoccupation with homeownership in this country, particularly since World War II. The desire to expand homeownership is in many respects a wonderful thing- I certainly have benefitted from it myself- but it also has serious downsides. Homeowners are privileged by comparison with renters, most obviously in the tax deduction for interest. And the efforts to pump up the housing market in recent years, in part by keeping interest rates low and in part by protecting Fannie Mae and Freddie Mac from reform, seem to have spawned much of behavior that is now being criticized. It is hard to imagine a serious conversation about whether our commitment to subsidizing home ownership has gone too far. Everyone from prominent interest groups to ordinary American has a stake in continuing to promote homeownership in every way possible. But the costs of this commitment strike me as the one story that best explains the current crisis.