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What's Wrong With Simon Johnson?

Simon Johnson, the former chief economist of the IMF
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Simon Johnson, the former chief economist of the IMF

Simon Johnson, the former chief economist of the IMF who is now a leading financial commentator at Baseline Scenario, is one of the more prominent critics of the view that blame for the financial crisis falls on affordable housing and fair lending policies. The problem is that his critique is extremely misguided.

Let's take this recent column Johnson wrote for Project Syndicate.

Johnson begins by attempting to summarize the view that, for example, FCIC commissioner Peter Wallison appears to hold.

In December, the Republican minority on the Financial Crisis Inquiry Commission (FCIC), weighed in with a preemptive dissenting narrative. According to this group, misguided government policies, aimed at increasing homeownership among relatively poor people, pushed too many into taking out subprime mortgages that they could not afford.

But this isn't quite right. What Wallison argues is that GSEs and banks lowered credit standards and accumulated huge mortgage holdings in an effort to comply with misguided government policies.

Shortly after making that mistake, Johnson restates what he takes to be Wallison's point in a way that demonstrates that he doesn't really understand it at all. (Emphasis mine.)

This narrative has the potential to gain a great deal of support, particularly in the Republican-controlled House of Representatives and in the run-up to the 2012 presidential election. But, while the FCIC Republicans write eloquently, do they have any evidence to back up their assertions? Are poor people in the US responsible for causing the most severe global crisis in more than a generation?

It is very difficult to see how that last question follows from anything that came before it. The proposition that the financial crisis was brought about by government policies aimed at increasing homeownership among the poor has no logical connection at all to the culpability of the poor for the crisis.

This is easy to understand if we think of other types of misguided government regulations. Take, for example, the regulation of fishing. For years, it has been common practice for regulations to set minimum sizes for fish that can be taken. The idea is to allow fish a chance to mature enough to breed at least once, in hopes that this will keep the population robust.

For individual fishermen, this usually means just throwing back a fish that is too small. For large commercial fishermen, however, this involves using fishing techniques that allow smaller fish to escape their nets and traps.

Now the purpose of this kind regulation is to preserve the fish population. A recent study, however, indicates that this kind of selective fishing might have the perverse effect of reducing the biodiversity of the fish population and making it more fragile and prone to collapse in the face of unexpected changes.

In 2010, a team of researchers wrote: “We believe it is time to critically rethink traditional selective fishing approaches that might not protect ecosystems and fisheries as intended, but may in fact make them more vulnerable to large changes in structure and function.”

Now according to Johnsons logic, if we say that a regulation intended to protect smaller fish from harvesting causes the ecosystem to become more vulnerable we are also claiming that small fish are responsible for harming the ecosystem. Clearly, that's nonsense.

In the same way, it is simply nonsensical to equate blaming affording housing and fair lending policies for the crisis with blaming the poor.

Of course the poor are not responsible for the financial crisis. And the small fish aren't responsible for falling biodiversity. In both cases, misguided regulations are to blame.

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