Dennis Prager: “What role did Wall Street play in producing the current recession?”
Sowell: “They played the role of suckers who bought mortgages that weren’t worth what they paid for them.
“A system had been set up whereby the government required financial institutions to have their securities rated by three government-designated rating companies. Wall Street didn’t have a lot of choice in this. The rating companies had no way of knowing how risky these things were because these new mortgages were very different from the things these rating agencies (Standard and Poor’s, Moodys, Fitch Ratings) normally rate.
“There are securities that have been around for 100 years. They have 100 years of data on what has happened to these securities in good times and war and everything else. They were good at rating these securities. These new securities were a decade old before they collapsed yet the law required these rating agencies to pretend to know how risky they were when no one knew.”
Dennis: “Why did no one know? They were subprime loans to people who couldn’t afford them.”
Sowell: “That was true in general, but you don’t buy securities in general. You buy particular securities. What Wall Street was doing was bundling thousands of these mortgages together and selling the income stream to others. There was no way Moodys could’ve known how trust-worthy those homeowners were.”
Dennis: “Did you know?”
Sowell: “In general. In 2005, I wrote in the Wall Street Journal that these financial arrangements could collapse like a house of cards. But I wasn’t the only one saying that. But that’s very different from me looking at a particular bundle of mortgages and say how they are worth. The people at Moodys are not loan officers. Think of how much information you have to give a loan officer to get a mortgage. Moodys doesn’t see any of that. All they see is the mortgage.”
Dennis: “The original sin here was the government telling banks that you must give loans to people you don’t want to give loans to.”
Sowell: “For very good reason.”
Thursday, January 06, 2011 Radio Show
H2: Basic Sowell
Prager H2: Dennis talks to the great Thomas Sowell, scholar in residence at the Hoover Institution, Stanford University. His essential book Basic Economics: A Common Sense Guide to the Economy has now been issued in a 4th edition.