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Whether you blame the government or you credit the government, it’s not so simple

- February 2, 2009

As a sidebar to the big discussion of what should be done about the financial crisis, there’s a debate about what brought it on, more specifically how to allocate the blame between, on one side, a barely-regulated private system spinning out of control and, on the other, governmental and quasi-governmental agencies that encouraged loans to people who had bad prospects for credit. (I take it as a given that we can’t simply blame greedy investors, incompetent loan officers, overworked bureaucrats, etc., since these will always be with us.)

Without taking a stand on this issue myself–as I never tire of saying, this is outside my area of competence–I would like to comment on what I perceive are misunderstandings on both sides about the role of government.

As an example, Jeff Madrick writes, “It was principally the investor appetite for the mortgage-based securities and the easy profits made by the banks and mortgage brokers that led to the mortgage-writing frenzy in the 2000s, not encouragement by the federal government to lend to low-income home buyers.” Again, I won’t try to evaluate this claim, but I’d suggest that the government was possibly influenced by the easy profits etc. If the government is encouraging too many people to borrow, this isn’t necessarily a case of naive do-gooders and their unintended consequences. It could well be the product of some serious lobbying.

I don’t know the story of what’s going on here–and here is where some serious qualitative as well as quantitative political science is needed, finding out who lobbied whom and when–but I’d like if the debate on this moved away from the view, on one side, of the government as naive do-gooders or, on the other, as a technocratic savior. This is perhaps one place where political scientists have something to offer?

P.S. I’m not saying that Madrick is necessarily getting anything wrong here, just that his phrasing reminds me of some misconceptions that seem to be out there.