What really happened

The conventional wisdom, already, is that the credit crisis was caused because government wasn’t regulating enough. But no one has explained exactly how regulation could actually have stopped what happened.
Here is the story:
Some smart Wall Street guys (no irony intended) realized that while an individual home mortgage has a default risk, for whole bunch of mortgages together the risk is tiny. So they created new kinds of financial investments by bundling lots of mortgages together, with the homeowner payments then flowing to investors.
So far so good. Then banks began to realize they could make more money by selling their mortgages to these bundlers than by servicing them the old fashioned way. And then they realized that repayment of the loans was no longer their concern. They could make money simply by writing mortgages – any mortgages.
Still the risk, even to the bundlers, didn’t seem too great, because after all, if a mortgage defaults, the lender gets to foreclose and sell the home. With rising home prices, you couldn’t lose.
But then home prices fell; and it turned out you could lose a lot. The mortgage-based securities, which had seemed such a good thing, now became toxic and unsaleable. So all the financial institutions owning these securities were in the soup.
Where, in all this, should government have, or could it have, blown a regulatory whistle? Should it have stopped banks from freely giving mortgages? Was the government supposed to second-guess those bank decisions? Or should it have stopped banks from selling the mortgages on, to the bundlers? On what basis? Or should government have stopped financial institutions from investing in mortgage-backed securities? Aren’t they grown-ups, who ought to have understood the risks they were taking? Should government be looking over those shoulders too?
This was a case of smart people spotting an opportunity to make money by doing something new. And, usually, throughout history, that’s exactly how we progress and grow in prosperity. In this case, the innovation seemed good for the banks – they were making money – good for the creators of the mortgage-backed securities – they were making money – good for their investors – they were earning a reasonable return with what seemed to be reasonably low risk. And it was also good for all the ordinary little people who got mortgages, and homes, that otherwise they would not have been able to afford.
The big irony here is the talk about “predatory lending.” I always used to hear how rotten it was that banks wouldn’t give mortgages to disadvantaged people. Remember all the controversy about “red lining”? Well, here the banks abandoned all that stinginess and started giving out loans to anyone who walked in the door.
The perverse incentive for banks to do that was the unforeseen wrinkle in the seemingly good thing of mortgage-backed securities. But even that would still have worked out okay if home prices had continued their historic rise. So here we see the law of unintended consequences.
But let’s take a deep breath and remember that the whole basic concept of a free market – in which people are at liberty to do with their money what seems best to them, to take what they deem reasonable risks, and to try to capitalize upon opportunities – is no bad thing. If there is one basic truism about financial markets, it’s that you have to take risks to get rewards. It’s true of life more generally. Trying to prevent risk means societal stagnation.
The free market system, propelled by people willing to take risks, has, over the past several decades, resulted in fantastic betterment for society and its citizens, with unprecedented worldwide economic growth and prosperity, and dramatic reductions in poverty and improvements in quality of life for hundreds of millions.
This time, the market laid an egg. But let’s not therefore kill the goose that lays golden eggs.

“The fundamentals of our economy are sound”

Easy, oh so easy, to make mock.
What ARE the fundamentals of our economy?
People doing productive work — creating the goods and services that others want and will pay for. America is the most productive society in world history — creating a GDP of FOURTEEN TRILLION dollars a year.
In the last quarter, it grew over 3% — healthy, by any measure, and certainly not recessionary. (The classic economists’ criterion for recession is 2 consecutive quarters of negative growth.)
Unemployment is only 6% — much lower than in Europe.
These are the fundamentals of our economy.

The Enlightenment and its critics

The Enlightenment began about three centuries ago. It was an intellectual movement centered upon the realization that the world is not impossibly mysterious, but makes sense; that science and rationalism can give us authentic truth, and thus the means for better lives. This is the essence of the modern mindset. Yet it has its detractors, who mainly paint it as mere Western ethnocentrism. The Enlightenment did arise in the West. However, its appeal was not its Westernness but, rather, its human universality. Multiculturalists who say that rationalism is something peculiarly Western are actually insulting non-Western cultures.
Some deeper cynics even reject the values of the Enlightenment. Everything seen as bad in subsequent history has been laid at the Enlightenment’s doorstep. It took us directly to Auschwitz, we are told; it promoted a misplaced, inhumane deification of reason and science, a foolhardy optimism, and that mainstay of the misanthropic hit parade, hubris. This indictment is symptomatic of the postmodernist infection, denying that we can know anything or that anything is really true.
But the Enlightenment did not represent a Pollyanna belief that reason can solve everything. To the contrary, its whole point was to deal with the world’s hard realities, without fairy tale delusions. The Enlightenment did stand for truth and reason; and for freedom, justice, equality, and tolerance. It opposed superstition, witch burning, torture, unearned privilege, and the kind of fatalism that actually refused to combat evils and misfortunes because they must be God’s will. The Enlightenment was self-critical, subjecting its own assumptions to the same rigor it applied to others. It held that people have a right to happiness, and can reasonably hope for it. Progress was not deemed inevitable—merely possible.
That’s hardly a cockeyed optimism. But in fact Enlightenment thinking has given us progress way beyond anything its originators could have dreamt, and not only in material conditions of life. The American Revolution was its direct product; the Declaration of Independence was an Enlightenment manifesto. Those ideals, as well as reason and science, have utterly transformed the world, and we are vastly the better for it.
Sneer at all this, reject it if you like, but that’s of no help whatsoever in living our lives and improving them. Most who disdain the Enlightenment would not even be around to do so were it not for the scientific advancement it spawned.
Some pessimists nevertheless hold that the Enlightenment has basically failed, because in the conflict of reason and science versus faith and superstition, the latter still have the upper hand. The religious impulse is indeed deeply embedded in human psychology, perhaps even wired in somehow by evolution. Yet by no means are we prisoners of this mentality; religious belief has plummeted in Europe in recent decades, showing that people can free themselves of it.
Biologist Stephen Jay Gould tried to paper over the divide by arguing that science and religion are “non-overlapping magisteria” that concern entirely different things, and hence are not in conflict. However, it’s no coincidence that the centuries when Christianity ruled supreme were called the “Dark Ages” and scientific knowledge actually retrogressed. We all remember how the church stomped on Galileo, and even today we see religious efforts to suppress evolution science. But fortunately the Dark Ages are behind us, with religion’s power waning. And, having struggled for millennia prising out the truth from nature, we are hardly about to turn our backs on the answers. Spirituality may still have a place in human culture, but if so, it increasingly must find accommodation with a world of reason and science.
It is true that religious fanaticism has perennially been a source of conflict and bloodshed, and the religious-based violence coming from the Muslim world today might be seen as merely the latest recrudescence of a perpetual malady. Sam Harris, in The End of Faith, details how murderous religiosity has been throughout history. And yet, it seems clear that the advanced nations have finally outgrown this. While many Americans take their religion pretty seriously, the day is long past when even the truest of believers would entertain the idea of killing people with different beliefs. Instead, the psychology of pluralism and tolerance has taken such firm hold that for all their religious fervor, Christian fundamentalists are wholly acquiescent in living amid synagogues and mosques and even secular humanist associations. In the wake of 9/11, it was remarkable not that a few American Muslims were violently attacked, but that it was so few, and the nation was practically unanimous in condemning such attacks.
If this Enlightenment spirit of peaceful toleration has not yet been attained by all human societies, one can quite reasonably hope, and foresee, that in due time those other laggards will catch up, and grow up.
We can’t expect it overnight. An awful lot of blood was shed before we Westerners at last gave up torturing and burning people over religious issues. But we have come a long way, and our better ideas are spreading. Taken as a whole, humanity is on the right path.

Gay Marriage

The ancients had rather more relaxed views about homosexuality; the change in attitudes is at least partly attributable to religious doctrines stressing sex for procreation and not recreation. This leads many to regard gay sex as sinful—and many straight people are baffled by same-sex attraction and repelled by what gays do.
Gays mostly insist they were born that way, and didn’t choose it. The evidence supports this. Studies have found physiological brain differences between most gays and straights, whereas there has never been any valid evidence tracing homosexuality to “nurture” rather than nature. This is confirmed by the virtual impossibility of “curing” homosexuality.
So gays are indeed different. But let’s not forget that everybody is, after all, different from everybody else. One can even say that being different is normal; variation among individuals within a species is the rule throughout all nature. It would be a dull world if all people were identical. Furthermore, though 100 percent gays are a small minority, many others are not 100 percent heterosexual, with some degree of same-sex attraction being quite widespread.
All this makes clear that stigmatizing homosexuality is irrational. Gays do what they do not because they are willful transgressors of societal norms but because of how they were made. And meantime, most of us have moved some distance away from thinking sex should only be for making babies, accepting instead that nature has made us to enjoy sex. Nature’s purpose is merely to promote DNA replication, but we need not enslave ourselves to that narrow remit, being free to use this gift from nature to enrich our lives however we can, just as we use our other gifts. And if that is okay for heterosexuals, it should be equally okay for gays. They, too, have a fundamental human entitlement to enjoy sex.
Yet gay marriage still seems too big a bite for many people to swallow. Some of the arguments are couched in terms of seemingly legitimate societal interests. Gay marriage does offend against deeply ingrained cultural tradition, which merits some serious respect and weight. However, culture evolves. Not so long ago, firmly established cultural tradition barred interracial marriage—and sanctioned numerous other forms of racial discrimination, including slavery. Our culture has changed, and for the better, broadening our concepts of human dignity and rights.
Some still say that same-sex weddings undermine the institution of marriage—yet it’s never clear how. Obviously, the immediate result is more, not fewer, marriages. If marriage is a good thing, and it’s better for men and women to be married than not, or better than cohabiting informally, why isn’t the same true for gay couples? Further, it is fanciful to imagine that heterosexual marriage would decline if same-sex marriage is an option. Again, sexual orientation is not a choice, and people do not generally go gay on a whim. For a straight person like me, the opportunity to marry another man would be no temptation! It’s true that some people are bisexual or confused about their sexuality, and many gays do enter conventional marriages in an effort at conformity. But such marriages are clearly not made in heaven; they tend to be problem-ridden and failure-prone. Isn’t it preferable to allow people to make marriages that fit them better? If you truly care about the institution of marriage, you should rather see a lesbian successfully married to another lesbian than unhappily married to a man.
Parenting is also a concern. Some say marriage is for procreation, and hence should be forbidden to gays. However, it’s not forbidden to octogenarians, and others incapable of procreation; while in fact gays can have (or adopt) children. Another argument is that a child is best raised by a father and a mother and that every child deserves both. That is a fine sentiment, and such dual parenthood should be encouraged. But society does not insist upon it—does not prohibit single parenthood. Though we do take children away from parents who are proven unfit in specific ways, parenthood is otherwise a universal right. A teenaged unwed mother is allowed to raise her child. Why then shouldn’t we let two mothers, or two fathers, do so? Aren’t two parents better than one? Moreover, gay couples often get their children through adoption. Surely those children are better off having two same-sex parents than no parents at all!
Some might still object that a gay couple would raise a gay child. Even if this were so, would it harm society? Gays will never be anything but a small minority. But, again, the truth is that sexual orientation has nothing to do with upbringing, it is inborn; so a child raised by gays is no more likely to turn out gay than one raised by straights (though if he does happen to be gay, he is likely to be better adjusted).
And let us not forget that gays can, in most states, legally adopt and raise children even without being married. So barring their marriages does nothing for the children. Allowing such couples to marry should, in fact, provide a more stable and nurturing family environment. One thing you can be sure of with gay couples is that their children are wanted; gays don’t have “oopses,” but actually must go to great lengths to become parents.
In the end, the issue is really all about love and joy and happiness. Even if you do see valid social policy points against gay marriage, surely those rationales must yield to the more fundamental human right at stake. What can be more crucial to the pursuit of happiness than to marry the person you love? Gays are human beings, entitled to seek fulfillment in whatever ways work for them. If same-sex marriage is a vehicle for pleasure, love, and self-realization—we should welcome it.