In this WSJ ($) op-ed, American Enterprise Institute fellow Ted Frank provides a particularly lucid explanation of the many benefits of the markets relating to subprime mortgages and the absurd nature of the attempt by some plaintiffs’ firms to extract some ransom from some institutional investors in those markets. While reviewing how certain members of Congress refuse to allow their ignorance to stop them from attempting to make matters worse, Ted asks:

“Shouldn’t at least one of the two political parties have someone heading up the House Financial Services Committee who understands financial services?”

Meanwhile, Michael Lewis asks three common sense questions in regard to the allegations of wrongdoing in regard to subprime mortgages:

1) If the subprime home-loan market was a cynical conspiracy, why did so many of the putative conspirators wind up taking so much of the risk? [. . .]
2) Why does the most financially obsessed and presumably well-informed character on earth, the American Investor, insist on playing the fool? [. . .]
3) Why in this new drama is it so easy to imagine borrowers in a different role, other than the one in which they are currently cast: The Victim? [. . .]

Messrs. Frank and Lewis both hit on an important characteristic of American markets in general and the subprime markets, in particular. The U.S. mortgage market is the most efficient in the world largely because it is the most securitized. Banks don’t need to take the risk that doomed many of them back in 1980’s when they commonly held on to home mortgages that they originated. Now, banks sell them into the bond market to institutional investors who disperse the risk to those who can afford to take it.
Interestingly, a strong case can be made that the mortgage-backed securities markets is a descendant of the liquidity crunch in home mortgage lending that resulted from the savings and loan crisis of the 1980’s, Just as Congress had a big hand in causing the S&L debacle, the current Congressional crusaders are threatening the markets that corrected the 1980’s downturn in home mortgage lending.