\nPresident John F. Kennedy once said that success had many fathers, whereas failure was an orphan. One wonders what he would have made of today’s Federal credit programs, a vast network whose obscure political origins have finally been...\nPresident John F. Kennedy once said that success had many fathers, whereas failure was an orphan. One wonders what he would have made of today’s Federal credit programs, a vast network whose obscure political origins have finally been laid bare by sociologist Sarah Quinn of the University of Washington. As Professor Quinn, an INET grantee, points out in the interview below, government-originated credit programs barely existed before the time of the Great Depression until, in 1934, the New Deal chartered the Federal Housing Administration to stimulate mortgage lending. It’s hard to believe that within a generation, the FHA spawned 74 separate programs to bolster credit through guarantees, insurance or outright loans.
But that’s nothing compared to today.
Uncovering securitization’s connection to the vast network of federal credit programs in the postwar era, Quinn’s research seeks to demonstrate how credit programs and securitization together distilled and then exacerbated core tensions running throughout U.S. history, tensions that emerged in the earliest days of the nation and then were crystallized in a fragmented federal government. The point, Quinn says, was nearly always the same: to camouflage, hide, or understate the extent to which the U.S. government actually intervened in the economy. But the problems went well beyond that. As many of the government’s credit programs were partly privatized (with a view simply to getting them off the government’s balance sheet, if not government care), they were authorized to issue securitized bonds, while encouraged private companies to do the same. The legislation created a system that increasingly encouraged people to take on more risks, and to feel more comfortable holding risks that they did not fully understand. We all saw the rotten fruits of that process in 2008.
For one thing, many of these quasi-public companies, such as Fannie and Freddie, have acted like pure private companies, obscuring the social goals that underlay their inception, whilst using their government heritage to exploit the perception of an implied government guarantee for any loan, no matter how bad. It is a type of securitization that Paul Krugman has called, “lemon socialism”, where profits are private and losses are socialized. Quinn sets all of this out in the interview and provides the historic context to explain how it happened. This is important because if we fail to understand the past, it’s hardly likely that we can construct a future set of policies which avoids these problems going forward. \n
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