Matthew C Klein, Columnist

Missing Piece in Obama Housing Plan: Arrests

Private capital won't return to the mortgage market until the government addresses the uncertainty created by the banks.

August 13, 2013 at 8:28 PM UTC

By Matthew C Klein

Matthew C. Klein writes for Bloomberg View about the economy and financial markets. He previously wrote for the Economist magazine and its economics blog, Free Exchange. Before that, Klein was a research associate at the Council on Foreign Relations, where he spent more than two years studying the history of the Federal Reserve and the intellectual history of monetary economics for an upcoming book by Sebastian Mallaby. He also worked at Bridgewater Associates, where he studied the economies of Central and Eastern Europe and advised institutional investors on asset-liability management. Klein has a bachelor's degree in history from Yale University. Originally from Chicago, he lives in New York.

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Almost everyone, from President Obama to his ideological foes in the Republican Party, wants the government out of the business of guaranteeing almost every mortgage loan made in the U.S. That's all well and good, but there is no reason to think that private investors will be willing to fund the types of mortgages people expect at rates they consider "affordable" in the absence of government guarantees. The government could help assuage investor fears by proving that it is committed to upholding the rule of law and punishing individuals who commit financial fraud.

Those who bought mortgage-backed securities packaged by the big banks during the go-go years have been justifiably scarred by that experience. Yes, it's hard to be too sympathetic to people undone by their own short-sightedness and greed -- after all, nobody forced them to chase slightly higher yields than they could have earned from owning U.S. Treasury bonds. Even so, MBS investors have plenty of reasons to be upset with institutions that systematically misrepresented what they were selling.