Arnold Kling is making sense:
How did we get into this mess in the first place? We got here because financial executives took on mortgage credit risk without understanding what they were doing. Some of them were new to the business, like the high-flying Wall Street firms who entered the industry during the boom. Some of them thought they were insulated from risk, because of new derivative hedging instruments. Some of the executives never belonged in the business in the first place, including Dick Syron at Freddie Mac, who in 2003 took over a firm where there was lots of knowledge of mortgage credit risk and proceeded to flout the warnings of experienced middle managers and the Chief Risk Officer about the firm’s plunge into subprime lending. Congressional and Administration meddling in support of “affordable housing” played a role, and those folks are still around working on the latest legislation.
I am wearing two hats in opposition to the bailout idea. One hat is my libertarian hat, which does not like the power grab. The other hat is the applied financial economics hat, which was my career in the late 1980′s and early 1990′s. Speaking from the latter point of view, I have to warn that nobody involved in the bailout proposal has sufficient knowledge of mortgage credit risk. They are like Dick Syron–in over their heads without realizing it. The last thing we need in the mortgage market is another large, inexperienced player.
No one, no one has said this will solve the problem. No one has said it will solve the major problem in housing and finance.
To answer James’ question, I would have to say that the proposed bailout is probably just stupendously terrible, but it could be incomparably wretched.