Your Mortgage, Maybe, But it’s Wall Street’s Rent
|November 23, 2013||Posted by Staff under Editorials|
When firms compete for government subsidies and regulatory advantages, economists call it “rent-seeking.” That is how it has been for generations. Wall Street’s rent-seeking is classic.
Once it was difficult for Wall Street firms to sell mortgage securities that lacked the Freddie or Fannie label, which investors treated as tantamount to a government guarantee. So during the subprime mortgage boom, Wall Street came up with the collateralized debt obligation, or CDO, which allowed them to market mortgage securities without a government guarantee. The trick was to create “tranches” that were so well protected against default that they could earn AA and AAA ratings from credit rating agencies. It was these tranches, backed by extremely low-quality subprime loans, that were at the heart of the financial crisis. Ironically, by 2006 and 2007, Freddie and Fannie had decided to buy their way into this market, and so they suffered some of the worst losses from low-quality mortgages.
As usual, Wall Street needed favorable regulatory rulings in order to get its subprime machine rolling. As a result, the capital requirements for a bank holding a very safe mortgage where the borrower had made a down payment of 30 percent were more onerous than those for a bank holding a CDO tranche backed by the most dodgy subprime loans with low down payments.
For Wall Street, the ideal situation is one in which taxpayers provide a guarantee that makes mortgage securities viable, banks remain hamstrung by capital requirements that penalize them for holding loans that they originate, and the government enterprise that supplies the guarantee is not permitted to have a portfolio of securities, the way Freddie Mac and Fannie Mae have operated.
Today, the housing finance reforms that have the most bipartisan support appear to do exactly what Wall Street wants. Whenever this system suffers its next crisis, taxpayers will be delivering the bailout. The mortgage bankers and Wall Street firms win. You lose.
A more recent story on this topic
Ed. Notes: Wall Street doesn’t only get the kind of rent economists talk about — excess profit due to favors from politicians. Wall Street also gets classical rent — people’s payments for land and resources. Most people buy buildings that aren’t floating in the air but are erected firmly on the ground, and so pay for both the structure and the location. While most people might not realize it, bankers do; they know that most of their profit comes from people paying for sites, not for houses, especially in the pricier neighborhoods.
Just as bankers don’t earn modern, jargonistic “rent”, neither do they earn rent for land. They neither made land nor made locations valuable — society in general does that. Hence our payments for land and resources should return to society. Owners should pay in land taxes or Land Dues; residents should get back rent shares or a Citizen’s Dividend.
If government did recover socially-generated rents, it could quit taxing our useful efforts, those counterproductive taxes on our labor and capital. If government did pay citizens a dividend, it could quit subsidizing wasteful and addictive programs. Plus, if government stuck to this geonomic program, it would not open loopholes for Wall St nor bail them out. Then it be: “your mortgage and all of ours rents.”