Hey, and why not make it 100%? Then you’re absolutely guaranteed to never have a mortgage default, because no one would have mortgages.
The problem is finding the right balance between safety and economic growth. Is 20% the right number? Hell if I know. You don’t know either. Certainly it would be safer than not requiring any money down at all, but it would also mean fewer mortgages and slower growth.
The point is that government has no way of knowing either. And again, government was instrumental in pushing down standards. That they would do this is obvious if you look at their incentives - a politician who campaigns for an easing of mortgage requirements gets an immediate boost from everyone who wanted to get a mortgage and now can. The added systemic risk? Well, who knows? And in any event, gaining short term benefit at the expense of long-term risk is right in a politician’s wheelhouse (see: The U.S. debt).
Every time government fails, people like you claim that it’s not the fault of big government per-se, but the fault of specific individuals. You pull out the magic regulation that would have fixed everything, and use that as proof of the necessity of government - conveniently avoiding the fact that you HAD a government, and it DIDN’T do what you think it should have.
In the meantime, when a private ratings agency makes a mistake, you instantly use that to condemn all of capitalism.
It’s easy to defend big government when you are always arguing for government as an abstract ideal, while pitting it against only the failures of the market. You never acknowledge the systemic flaws of government that make it incapable of acting as the pure agent of wisdom that you believe it is.
The stimulus? A perfect Keynesian solution as presented by its proponents. The reality? A giant slush fund used to pay off constituents regardless of whether the constituents could make the most stimulative use of it. The result? More debt, and higher unemployment. The Obama health care plan? A needed mechanism to cover the health needs of everyone and to level the playing field. The reality? 2,000 pages of confusing, contradictory policies wrapped as much in politics as in responsible effective legislation, and a president throwing out hundreds of waivers to favored constituents.
How about debating what the government actually did, and comparing that to what the market actually did, rather than comparing the market to some idealized, hypothetical set of perfect government responses that you believe would have solved the problem - but which no one in government actually proposed?
I never said that. My point was that there WAS a government, there WERE regulatory agencies charged with preventing this kind of thing, and they FAILED. If you could show me that the Democrats were charging hard to stop the chaos and the evil Republicans stopped them, or even that some politicians had warned the public of exactly what was going to happen and had proposed remedies, but couldn’t get traction because the public wasn’t interested, then maybe you could make the case that government just needed some more teeth or leeway to do the ‘right’ thing that was so obvious to them.
But in fact, the government was a full-throated cheerleader for what was going on. Fannie and Freddie were major clearinghouses for Mortgage-Backed Securities, and helped trade on the faith and credit of the U.S. government to legitimize those investment vehicles to a wider market. The government pushed lenders hard to lower lending standards. When some concerns were weakly raised by some politicians, leading Democrats like Barney Frank and Chris Dodd issued statements that everything was solvent, nothing was at risk, nothing to see here, move along.
And of course, one of the main factors that drove all this money to seek new returns was the artificially low interests rates being held by the fed under the mistaken belief that the lessons of the past were no longer operative in the internet era, and that sustained loose money could be absorbed by an economy that would grow indefinitely. Oops.
Until you come to grips with the complete complicity of governments around the world in the lead-up to the economic crash, your complaint that the free market was at fault and your pleas for more government intervention just aren’t going to convince me or anyone else who understands that the failures that led to the crash were failures of the entire system, which was incapable of handling the rapid increase in complexity of the financial markets.
I’m not convinced that the ratings agencies are any more at fault here than was the government. Did they under-state the risk? Yep. But so did everyone else. Can you show me that they were corrupt? Were they getting kickbacks and lying? Or did they give it their best shot and just get it wrong? A lot of people got things wrong in the last ten years. Including the U.S. Congress.
And now let’s look at the future - the government is swimming in debt, and doing nothing about it. Warning flares are firing off all over the place - China divesting itself of dollars, Moody’s and S&P issuing debt warnings, the economy stalling out, the BRIC countries working to set up their own alternative basket of currencies to the U.S. dollar… The market is sending numerous signals to the government that it is on the verge of crashing the economy due to a debt spiral, and yet the clowns in Washington can’t even pass a budget, let alone come to any kind of agreement to do anything but put a fig leaf on the problem.
That’s the reality of government. It’s not your vision of a perfect socratic council carefully weighing the options and acting in pure scientific logic to steer the ship of state down the best path. The reality is that the government is comprised of small men operating way out of their depth, and therefore ceding their power to special interests and partisans and rent-seekers.