Wednesday, July 16, 2008

Behind the IndyMac Failure

There have been events since this Register editorial on IndyMac was written (it's a local story in Southern California, with irresistible visuals of people waiting in line and angry depositors eager to be on camera). Much of it involves shenanigans like people pressured into approving loans for clearly unqualified buyers and likely to default -- but by then the bank would have collected fees, loan officers would have gotten commissions, and the mortgage would have been repackaged as a security.

It is still too little appreciated how much the government -- and "community organizing" outfits like the one Barack Obama worked for at the beginning of his career -- contributed to the subprime crisis. The reason? Constant pressure to give more mortgages to minorities and "underserved" (poor) populations, including many who really couldn't afford them. Combine that with the Fed's loose money the past several years and human greed, and you have the makings of a crisis.

It's also the case the deposit insurance creates a "moral hazard," in that bank officials can rationalize risky behavior when they know the government will make good for their depositors up to $100,000. We learned for a while after the S&L crisis of the '80s, which cost taxpayers about $150 billion, in which deposit insurance played an important role, but people forget after 20 years. It would be one thing if it were run like real insurance -- with premiums rising if the clients engaged in risky behavior and the fact being publicized -- but banks and other thrifts just pay flat fees and ultimately the taxpayers are on the hook.

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