Mortgage Rate Price Fixing: Alexander Hamilton to the Rescue

Mortgage Rate Price Fixing: Alexander Hamilton to the Rescue

Daniel Greenwood: Mortgage Rate Price Fixing

The October 12 Wall Street Journal reports that mortgage securitization is now so concentrated that four companies–Citigroup, Bank of America, Wells Fargo and J.P. Morgan Chase–are able to set prices well above their costs. That is, the market isn?t free.

Competitive markets force private companies to be efficient and lean; competition drives prices down and keeps profits low. But what we have is high profits–J.P. Morgan Chase just announced record-breaking profits–and high prices. According to the Journal?s reporting, the Big Four have monopolistic pricing power that they are using to increase their profits at the expense of Americans; they take cheap money from the Fed (that is, us) and mark it up unreasonably before lending it back to us.

If this is true, we are getting none of the benefits of capitalist markets–just crony capitalism handouts to corporations that have captured government.

The capitalist solution is simple, and in this instance it is also the fair and democratic one. The United States ought to close down the semi-privatized FannieMae and FreddieMac guarantee mills, fire their overpaid executives, and let their securities drop in price to reflect the mistakes they?ve made so that investors bear the responsibility for their failures to supervise, as is supposed to happen in markets. At the same time, Congress should abolish the budget-busting, unjust, inefficient real estate speculation subsidy known as the mortgage interest deduction.

We should just follow Alexander Hamilton?s model. He wanted an infrastructure bank; we need a housing bank. Let the federal government set up a competent bank, staffed at civil service salaries, to make simple, plain vanilla thirty-year mortgage loans with proper paper filings to qualified citizens buying homes and apartments. The prices should be no higher than ten times annual rental value, replacement cost, or three time the owner’s income. No bonuses, no lobbying or campaign contributions to buy permission to move into higher profit areas, no speculation, no funny business, no trading, and especially no innovation. Sound banking has been boring since the Medicis.

If the innovative geniuses of Wall Street can compete, let them. I expect that without the taxpayer subsidies of governmental guarantees, the existing CDO market will collapse under its own weight. Securitization, which exists mainly to evade sensible New Deal era law, will disappear. (The only legitimate value securitization is said to have is diversification and insurance, but the shareholders and creditors of publicly traded banks are already fully diversified and therefore as insured as is possible; there is no benefit to paying to duplicate what they have or can get for free.) But if I?m wrong, if securitization adds any value other than the ability to more easily conceal theft and class warfare, let Wall Street and the banks compete freely. It?ll keep the civil servants on their toes. Just wean the bankers from gorging on taxpayer-funded subsidies, too-big-to-fail bailouts, Fed-financed bonuses, and monopoly privileges.

We don?t need fancy innovation designed to generate large bonuses and larger profits. All we need is a functioning banking system making ordinary loans to finance sensible housing. If our overpaid Wall Street financiers and their Main Street banker wannabes are too incompetent or unwilling to supply this service at a reasonable price, the United States is quite capable of providing it without them. It’d be sort of like the old days, when the United States had a successful growing economy and a healthy middle class–only this time, with fewer subsidies for the suburbs and less racial discrimination.