The following post is by Dealbreaker reader and commenter Infinite Guest.
The e-mails from Goldman Sachs that Senator Carl Levin posted on his website Saturday, ahead of Tuesday’s hearing before the Permanent Subcommittee on Investigations, demonstrate, if anything, that late in 2007, as was widely reported in contemporary media, Lloyd Blankfein and others were rightly concerned by the firm’s mortgage exposure, and the continuing performance of their hedges. The e-mails themselves are not newsworthy. They are only news in the sense that a newsmaker, the senior Senator for Michigan, has presented them along with his office’s own peculiar narrative, at what appears to be, in light of the negative PR dogging Goldman Sachs, a politically opportune time. Nor do these e-mails contribute to our understanding of the financial crisis, nor do they offer any insight into preventing another crisis. Tuesday’s hearing itself, if the statements from Senator Levin’s office are any indication, is bound to be a waste of time. That’s too bad, because Senator Levin, a powerful man, an intelligent, well-connected and highly respected man, is uniquely positioned to understand and address mortgage failures: as Washington is to politics, Detroit is to subprime.
Subprime mortgages are nothing new in Detroit, an early leader in the current epidemic of foreclosures and defaults. Massive post-WWII Federal highway investments in Michigan, and government subsidies and incentives to big automakers building factories in the white suburbs, led to the rapid depopulation and ghettoization of urban Detroit. Following the riots of 1967, HUD instructed the FHA to make thousands of subprime loans in Detroit, many of which would result in foreclosure. Senator Carl Levin, a lifetime resident of Detroit and a loyal friend of the auto industry, was already a prominent figure on the local political scene during the city’s first subprime crisis nearly forty years ago.
Even if the Permanent Subcommittee on Investigations were to take an honest look at subprime mortgages, investigating any of the hundreds of non-bank subprime lenders operating during the past decade in the city of Detroit, for example, it would still be a distraction from more pressing issues. As IMF Managing Director Dominique Strauss-Kahn remarked Saturday, and as everyone knows, the real problems in the developed world are high unemployment and rising public debt.
A working paper by Atif Mian and Amir Sufi of the NBER, “Household Leverage and the Recession of 2007 to 2009,” taking a granular look at local economies, gives strong evidence supporting to the thesis that the mortgage crisis, the recession, and the current level of unemployment, were prefigured by excessive consumer borrowing during the years 2002-2006. Without taking a stand on the sources of easy credit, Mian and Sufi “present evidence that the credit supply shock led to an increase in house prices, which led to an important collateral feedback effect: once collateral values increased, lenders were willing to lend even more to households.” Since subprime borrowers were often refinancing consumer debt, there is a connection between subprime and the recession, and since most durable purchases are financed, the connection between unemployment in general and deleveraging speaks for itself. Analysis like this is worth a hundred Congressional hearings, because it provides a heat map for trouble spots in the national economy, and a chain of events that can be tested for causality, and investigated for culpability. Mian and Sufi, in this paper at least, don’t look at Wall Street to find answers on Main Street. While I understand the short-term political benefits of demonizing Goldman Sachs, I suspect Senator Levin must have some other motive for pursuing them so assertively. He is not up for re-election until 2014, but even if he were, he could easily win without ever saying a word about Wall Street. His older brother, likewise, is a shoe-in to keep his seat in the House. Carl Levin ought to be one of the few national politicians, with nothing to fear, who could afford to take a close look at our economy right now.
Whether one believes that government can create jobs, or should, and regardless of how one feels about Goldman Sachs, one has to question, with all due respect, the wisdom of government taking a gratuitously hostile attitude toward business, toward lenders and employers, at a time when growth is uncertain, credit is tight, and national unemployment stands frozen near ten percent. We should all agree, even as President Obama himself said last week at Cooper Union, “Ultimately, there is no dividing line between Main Street and Wall Street. We rise or we fall together as one nation.”