Physicians, heal thyselves

The G20 Economic Summit should be good for a hollow laugh. The world's leading experts in political posturing will all be there. Barack 'I Can’t Believe They Fell For It’ Obama, Jose Manuel ‘Call Me Mister President’ Barroso, and Gordon ‘Ban Politician-hunting With Hounds’ Brown. There they will all be, having their pictures taken with the Queen, and solemnly signing The Undertaking To Do Something.

Not that any of their emissions will concern anyone but the Warmists, for it will amount to nothing but an increase in (Global Warming Alert!) Gaia's temperature from the vast expenditure of hot air, methane and hydrogen sulphide, a mixture which we doctors call ‘arse-gas’. It is malodorous and can induce either narcolepsy or murderous anger, depending on the predisposition of the patient.. Allister Heath pointed out on the World Service in the wee small hours (insomnia, like OH) of this morning that these patronising, rent-seeking, dictators-manqués will make pompous noises about going after tax havens (necessary and guiltless in the present difficulties) and hedge funds (a vital system of financial/economic health-checks) but what they will not do, especially not France, Germany and the USA, is hand over their control of their own banking systems and financial markets. And in the opinion of your humble servant, nor should they. Mr Heath also points out that the crisis to which these clueless amateur bankers will turn their PR machines attention was caused by, er, themselves, in their pompous incomprehension of international financial markets. You took your eyes off your balls, gentlemen. (Is that right? Ed.) More than that, your sort started the whole thing off. Remember? In Washington. Under St William Jefferson Clinton. And you were all complicit. And you are all bastards.

Thus Heath: As Russell Roberts of George Mason University has shown, the rot started in 1992. Congress convinced Fannie Mae and Freddie Mac, the quasi-government agencies that underpin the US mortgage market, to boost their purchases of mortgages going to low income Americans.

Private banks tend to provide the kinds of loans that Fannie and Freddie want to buy, so this was a crucial step in loosening borrowing guidelines. By the end of the century, the two agencies were promoting huge sub-prime securitisations.

Starting in 1996, the Clinton administration was even more aggressive: 42 per cent of mortgages had to go to households with less than median earnings in their area, rising to 50 per cent in 2000 and 52 per cent in 2005. The target for special affordable loans – code for subprime – was 20 per cent in 2000 and 22 per cent in 2005; it was meant to hit 28 per cent this year.

Lawsuits were launched against banks that failed to lend to the poor or those who couldn’t afford deposits. Many were accused of discrimination; lenders and banks were bullied into ditching their traditional prudence. The final piece in the jigsaw came when Fannie and Freddie struck a Faustian pact with Congress earlier this century.

At the time, the Republicans were trying to dismantle the agencies, arguing that they were corrupt and were distorting the market (the latter point is all too clear today).

But Fannie and Freddie, which were originally quite nervous about sub-prime, agreed to massively increase their pump-priming of that segment of the market in return for being bailed out by Congressional Democrats, keen to boost the home ownership rate among poor Americans.

Government support destroyed what prudence was left in the mortgage industry; a flood of subprime securities hit the markets. Financial institutions were very far from blameless; but they would never have dared enter subprime en masse, offer ultra-cheap “liar” loans to customers with no real means to pay them back or do away with proper underwriters, without government support.

Sure, once subprime lending became the government’s priority, Wall Street encouraged and rationalised it, selling new-fangled bundles of mortgages which grossly underestimated default risk. Stupid investors, including many High Street banks, lapped it up.

But while dodgy debt was repackaged and glamorised on Wall Street, it was invented in Washington.