Economist blames politicians, not bankers, for housing meltdown that led to Great Recession

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October 19, 2016 – By Ray Hagar, Nevada Newsmakers

In last week’s debate between Nevada’s two top candidates for U.S. Senate — former Attorney General Catherine Cortez Masto and Rep. Joe Heck — a question was asked why no bankers or mortgage lenders went to jail for the housing crisis that led to the Great Recession in 2008.

Yet Thomas Cargill, an economics professor at the University of Nevada, Reno, said it was the politicians — and not the bankers — who should have been punished over the housing meltdown.

“It is unfortunate because that is the myth — that the housing crisis was caused by banks and they should be in jail,” Cargill said Wednesday on the Nevada Newsmakers TV show. “Some of the people who might be candidates for prosecution might be Christopher Dodd, senator from Connecticut, and Rep. Barney Frank (D-Mass.), who played a huge role in the government subsidization of risk to encourage low income and middle income households into home ownership.”

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Dodd and Frank were the architects of the Dodd-Frank Act, which was approved in Congress in 2010 and placed regulation of the financial industry in the hands of the federal government.

Nothing has really changed since the Great Recession, despite the Dodd-Frank legislation, Cargill said.

No it hasn’t,” Cargill said. “So when I hear politicians talk about ‘lock up the bankers,’ and that it was the private market and greed (that led to the recession), as an economist and one who has studied this very carefully in both the United States and Japan, it is just an outright fabrication that is simply not correct.”

Veteran Nevadan Journalist Ray Hagar is known for fair and tough reporting and invigorating commentary.
Veteran Nevadan Journalist Ray Hagar is known for fair and tough reporting and invigorating commentary.

Cargill said the Great Recession was set up by the “Bigger Fool Theory of Pricing,” where the prevailing thought was that housing prices would continue to climb year after year. He gave the example of a home in the Arrowcreek area of southwest Reno that bought for $100,000 then resold to a bigger fool at $200,000 the next year and then later to another fool for $400,000.

“That was a very widespread phenomenon and Freddie Mac and Fannie Mae (Federal government institutions that ensure affordable supply of mortgage funds) set up this secondary market that encouraged this collateralization of loans and was accepting sub-prime loans and guaranteeing them with the government that were stinkers. And they were stinkers only in hindsight because the predictions of price increases didn’t manifest itself. If prices had continued to grow at 10 or 20 percent a year, yeah, those loans made with zero down, they would have turned out OK. But a (housing) bubble never goes on for long. They burst.”

Republican and Democrats share the guilt of the housing collapse, Cargill said.

“This is a real tragedy and government, both Republican and Democrats, have done a very, very good job of convincing the public their hands were clean,” Cargill said. ” But when you really look at the facts, Freddie and Fannie urged subprime lending, the federal reserve provided the liquidity with unprecedented monetary policy and the federal government subsidized risk taking so you could expand home ownership.”

Cargill spoke of other factors that led to the meltdown but focused on the responsibility of the federal government.

“And that doesn’t mean there wasn’t some greed and some fraud in the economy, just like the recent Wells Fargo (scandal),” he said. “This goes on all of the time. But you have to stand back and ask, ‘If the government regulators are so smart and are watching the system so carefully, why did they allow this to go on?’ They knew the collateral mortgage bonds were junk. But they kept their mouths shut.”

The current revival of the housing markets could pull the nation into another potential recession, Cargill said.

“We are now going down that road of low down payments and I think about 70 percent of all new mortgages are guaranteed by the federal government,” he said. “This is a serious, serious problem and people don’t understand how serious the socialization of risk in mortgage lending is. And we paid for it with the Great Recession and were are just setting the cards up for another collapse. Sorry.”

Watch this episode of the Nevada Newsmakers here.

See the schedule for upcoming episodes of the Nevada Newsmakers here.

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