Fed Shrugged as Subprime Crisis Spread

Edward M. Gramlich, a Federal Reserve governor who died in September, warned nearly seven years ago that a fast-growing new breed of lenders was luring many people into risky mortgages they could not afford.

But when Mr. Gramlich privately urged Fed examiners to investigate mortgage lenders affiliated with national banks, he was rebuffed by Alan Greenspan, the Fed chairman.

The rest of the article goes on to cite others who warned of the looming dangers. So why were their warnings not heeded? Possible reasons:

1. Those making money from the schemes had enough influence to prevent any investigation or new regulation.

2. Those tasked with regulation didn't see any problem.
   

2a. Because they were incompetent
2b. Because they were ideologically blind

1. A simple examination of the financial records of legislators will show which ones were at the receiving end of the contributions from the mortgage industry. Several of them are running for high office or rerunning for their current seat.

2. In the case of Greenspan I chose 2b as the more encompassing. When you join a cult like that started by Ayn Rand (as Greenspan did) you have to be ideologically blind and accepting of the dogma as a precondition to joining. This leads to incompetence.

There is a lesson for the present. Several of the leading GOP candidates are also ideologically blind. Several are economic fundamentalists and some are religious fundamentalists (some both), we can expect them to be incompetent when in office as well.

One open question is where was the EU during all of this? Did the analysts in businesses and academia not care about the US mortgage market? Did the EU governments think that any bubbles popping in the US would not affect them? Were European banks and financial firms playing the same games as those in the US and buying off politicians and regulators?

Is stupidity contageous?