There are three elements of the Fannie Mae/Freddie Mac collapse that I am not buying into.
First is the story that extending mortgage loans to people who couldn’t afford them caused the collapse. These people were both a type of catalyst for the crisis and then victims of the downturn, but they did not cause it.
Second is the notion that this shows the need for more government regulation of the banking industry. Au contraire, it was government regulation that both forced bankers to make actuarially unsound loans and then protected them from the consequences that triggered this crisis.
Third is that this is a great example of Republican mismanagement of the economy. That would be more persuasive if Fannie Mae and Freddie Mac had not been a veritable halfway house for Democratic financial luminaries between jobs. For once, even Barack Obama opposes a federal investigation – for fear of what it would reveal about Democratic finance policies in action.
Let’s take a look at the notion that people on the margins who got mortgage loans brought down the industry. That would make more sense if the collapse in home values had not begun in ritzy areas on both coasts and in Nevada.
What happened was that in the mid-90s the Clinton administration (no, this is not an anti-Clinton diatribe; bear with me a bit) emphasized regulations pushing bankers to make loans to people on the margins of actuarial soundness. The stated idea was to move more people into home ownership and away from renting. That’s an honorable goal that, successfully implemented, would stabilize society and the economy as more people would become stakeholders in both our society and its economy. The threat of suits for discrimination was waved in front of skittish bankers who were afraid of what an influx of risky loans might do to their bottom lines. But the carrot of government guarantees was offered to ameliorate those fears.
It didn’t take long for bankers – and speculators – to figure out that there was easy money on the government’s dime. A lot of wealthy folks started ‘flipping’ homes in the nation’s toniest areas, profiting from the expectation of ever-increasing home values. As always, when speculators all jump on the same idea, a bubble was created that eventually had to burst. Burst it did. Heavily-inflated prices in the ritziest areas of the country veritably collapsed. Prices didn’t take nearly as hard a hit in middle America. But the speculative fever infected and killed off many of the weakest borrowers (the marginal ones) along with the speculators who created the collapse with their irrational exuberance (read greed) in the first place.
Did Democrats in either the White House or Congress intend to trigger a speculative bubble that would end up in foreclosures on the very people they were trying to help? Almost certainly not.
But by using their regulatory power to force private entities to adopt looser – and dramatically riskier – standards than sound management would allow, and then by guaranteeing those risks, they created a situation in which rampant speculation was foreseeable and almost certain. Ill-conceived government regulation created this mess in a way that private markets, acting on their own, would never have permitted. Despite their good intentions, Democrats are not blameless. In both 2003 and 2005, Republicans sounded the alarm over the storm gathering over Fannie Mae and Freddie Mac. John McCain was among the loudest voices calling for reform. On both occasions, Joe Biden opposed reform. In 2005, so did Barack Obama.
Meanwhile, prominent Democrats were busy taking advantage of the looser rules to cook the books at the two entities to create bonuses for themselves that would rivsa a Megamillions Lottery jackpot. The much derided Franklin Raines was forced out after arranging the books so he got $100 million in compensation. Jamie Gorelick, the Democrats hero of the 9/11 Commission got herself a cool $75 million in compensation for her stint at Fannie Mae. I am not for a moment suggesting that Democrats are uniquely predatory – we all have our profiteers. But both Republicans and the establishment media generally recognize, say, a Jack Abramoff for the bad actor he is. I weary of watching Democratic profiteers being treated as misguided idealists who ‘did it for the children.’ To watch an Abramoff get four years in prison and a life of disgrace while a Raines remains on the speed dial of the elite media and becomes a financial advisor to Obama is a bit too much of a double-standard.
Whether getting people of marginal means into home ownership is good policy is arguable. Personally, I favor it, believing that the more people we can get to be stakeholders in America the more stable our society will be. To force an entire segment of the economy to defy the laws of the market, though, is not the answer – and is a formula for causing that segment to collapse. It would have been much cheaper and would not have put a whole segment of the economy at risk to offer grants for down payments to marginal applicants, while still applying actuarially sound lending criteria. That would have targeted help to those who needed it without offering a perverse incentive to speculators.
As it stands, Obama opposes any independent or criminal investigation of what led to the quasi-government agencies downfall because both were led almost entirely by Democrats according to Democrats ideas of economic policy.
Democrats and Republicans are a lot closer on many desired outcomes than is generally understood. But Republicans usually better understand that to get to the world you would like you must first recognize and effectively deal with the world as it is, not as you wish it were.
The legendary King Canute
is often derided for his futile effort to command the waves of the sea to recede. It was not an act of hubris, though. Canute gave the command to demonstrate to fawning courtiers the limits of human authority over elemental forces.
**
Charlie Johnston is a member of the Chicago Daily Observer Editorial Board
jahlen says:
Charlie here seems to be living the fantasy that an unregulated free market system actually works.
Try this analogy: Clone a boxer. Now you have two boxers with equal skills, strength, etc. Now put them in the ring with the only catch being that one has to fight by the rules. The other is allowed to thumb, head butt, and rabbit punch at will. The referee -- let's call him...Mr. Congress -- has been paid to look the other way.
You have $5000.00. Which fighter will you bet (invest) your money on?
This scenario repeats itself every day in the business world. The pressure to succeed will always force companies to do whatever possible to increase the bottom line.
In the past, the government has stepped in in order prevent dangerous conditions that would maim or kill workers and stop industries from poisoning the air and water. Oh, and let's not forget child labor laws that were passed early last century.
Business fought government every step of the way often by employing thugs to intimidate workers, but more often buying off politicians to do their bidding.
Hell, business even gets public recognition from a president for such activity. Hence Peter Grace receiving Reagan's "Get the Government of the People's Back" award, while at the same time his company ran a mine in Libby, Montana that chose not to inform its workers that they, their families and their entire town were being exposed to asbestos.
.
The financial industry is no different from the industries of old. What fuels this is the peculiarly American ethos that says the quick buck is best. Our infrastructure is deteriorating because capital has been steered toward those ridiculous tech startups of the 90s and then later the securities based on subprime mortgages.
The Europeans understand America's failures because oddly enough they have profited well from U.S. intervention into their economies. Europe has gotten where it has due to the Marshall plan. They saw then that massive government intervention worked. Obviously, they have rolled it back since, but they have managed to keep the best of it. They offer free education and so they have a better educated work force. Health care? The Euros understand that taking that off the plate of their businesses will make them more competitive.
Economically, the U.S. more closely resembles a stagnant and entrenched third world economy than it does a modern economy. True, our ingenuity brought us to the economic and industrial forefront in the previous century, but now we sit with our collective thumbs up our butts, ignore science and cling stupidly to old fossil fuel technology rather than moving to green technology. Or even worse, we base our economy on allowing our most prestigious financial institutions to hang paper on each other.
Casual Observer says:
jahlen says:
"Charlie here seems to be living the fantasy that an unregulated free market system actually works."
Start off with a lovely strawman and then proceed to slay it. Bravo.
Of course the second paragraph tells us that this wasn't the result of an "unregulated free market system":
Second is the notion that this shows the need for more government regulation of the banking industry. Au contraire, it was government regulation that both forced bankers to make actuarially unsound loans and then protected them from the consequences that triggered this crisis.
The free market wasn't making enough loans to those liberals decided should receive them, all in the name of "fairness", and so Democrats INTERFERED with the free market. This is the result.
As for your claims about how Europe and their socialism outperforms the US, it just doesn't square with the facts. Compare the US to other G8 nations of Europe and we have higher percapita GDP (and the gap is increasing) and lower unemployment by a significant amount. Facts are stubborn things. Check them sometime.
jahlen says:
A couple points to correct:
I'm not sure how "Charlie" could be straw man, unless Charlie Johnston is himself is nothing but a generic mouthpiece for the right.
Then:
"...it was government regulation that both forced bankers to make actuarially unsound loans and then protected them from the consequences that triggered this crisis"
Yeah, I heard this talking point too. David Frum at the AEI was yakking shrilly how "the government made us do it! the government made us do it!" Don't you free marketers have the cojones to take some degree of responsibility for your stupidity?
That the government made the financial sector "do it" begs the question: why didn't you all fight back? You had the power to have Glass-Steagall repealed. Also, for the past eight years you've had an extremely sympathetic puppet in the White House, not to mention a Congress that fell all over itself to allow industry to write laws. Given those facts, you would think you would have enough influence to get Congress to force you to stop making moronic financial decisions.
Euros v. U.S
American students consistently rank near the bottom in science and math among industrial nations. Unfortunately, excelling at Guitar Hero will not make up for that.
I'll take your word for GDP, but that's only one measure out of many. Also, it's very "American" in that it only looks at the bottom line, while ignoring many other factors, such quality of life.
Take W.R. Grace again. They have a great bottom line, but please try looking beyond that and take into account Libby, Montana. Would you like a laundry list of corporate criminality?
I recommend you try looking beneath the hood before drawing any conclusions.
Fortunato says:
Wow, jahlen, quite a blast of info. Maybe you should take your Ridelin (sp.) or reread Charlie's post. You dont refute the fundemental facts set out in it, nor do you refute, with the info you offer, the conclusions that Charlie draws from the evidence you dont refute. Very good article, should be must reading for any of those who want to go out and bash Bush, McCain, capitalists or even Wall Street. This financial crisis requires a willingness to research the facts and accept those facts regardless of whom they condemn, it also required a heavy reliance on analytical and critical reasoning and not hystronics or partisan passion. I think Charlie calibrated this article about right.
Mark W. Scott says:
Outstanding piece.
The so called mainstream media have been misreporting the facts, figures and faces in the credit meltdown.
I like to believe that part of the reason is due to the fact that most of the MSM is staffed by graduates of journalism school, and so economic and financial principles may be a little beyond their understanding. Then again, many in the business and financial community are stumped when asked to explain to a colleague or executive management trying to explain the mechanics of credit default swaps, or their relationship to Fannie & Fredie.
And while I would like to believe in their ignorance cover story, I do know as do many prominent journalists, that Fannie & Freddie have been steered, protected and banrupted by the upper echelon of the Democratic Party. Some of the Fannie Mae executive managment whom are now counselling Obama on economic policy.
Who can honestly believe that there is no bias in the press? The most eggregious aspect of this bias is that it moght ended may end up facilitating the get-a-way of all of the perpetrators of the biggest financial scam ever.
How scary is that?
If Obama gets in bend over and kiss your assets goodbye.
jahlen says:
True, Fortunato, I took a somewhat broad approach to answer the original article. It was a more philosophical approach that was grounded in some real life facts and also some conjecture.
Funny thing is though, between you and Casual Observer, I haven't seen quite the rebuttal that you demand of me.
All you seem to do is shriek "liberal" and resort to an even more general argument than the one I posed.
Just to keep things interesting, please answer my argument:
"That the government made the financial sector "do it" begs the question: why didn't you all fight back? You had the power to have Glass-Steagall repealed. Also, for the past eight years you've had an extremely sympathetic puppet in the White House, not to mention a Congress that fell all over itself to allow industry to write laws. Given those facts, you would think you would have enough influence to get Congress to force you to stop making moronic financial decisions."
Feel free to replace the words "puppet" and "moronic" with whatever kind and gentler words you'd like to choose.
I'll even give you extra points for explaining how Phil Gramm's "Economic Modernization Act" had nothing to do with the Enron debacle.
Kenny Boy lives!!!
elo says:
Great piece.
I'm an Obama supporter, but I do get tired and discouraged by some Democrats' perception that there isn't similar corruption in the Democratic party as well.
James Surowiecki wrote a piece in the New Yorker back in March, questioning the high value that Americans place on home ownership. (http://www.newyorker.com/talk/financi...)
Dr. Tantillo did a recent post naming Freddie & Frannie this week's 'brand loser(s)' and calling for what he terms a "brandover," arguing that marketing will need to play a key role if F&F are too be successful in the future--and that they'll need a new name.
Here's a link to Tantillo's full post: http://blog.marketingdoctor.tv/2008/0...
nepr says:
Mr Johnson, the construction of your argument strikes me as rather shaky.
First, there's the assertion that the financial sector was somehow forced to make sub-prime loans. But, you, yourself, say:
"Did Democrats in either the White House or Congress intend to trigger a speculative bubble that would end up in foreclosures on the very people they were trying to help? Almost certainly not."
This implies that the mortgage writers, in providing sub-primes to speculators, were, in fact, doing something other than the regulations intended. How, then, were they "forced" to do something that the regulations never intended them to do?
Next, you bring in Fannie Mae/Freddie Mac without stating, or even suggesting, how they figure into your argument. These two entities purchase mortgages. They don't originate them, so what part did they play in this scenario? Perhaps, they purchased too many sub-prime loans, but what does that have to do with the present situation? Fannie/Freddie's problems, at least, didn't have to do with over-exposure to sub-primes, did they? Didn't the problems stem from them being under-capitalized and, therefore, totally dependent upon credit to fund their continuing operations? So, aren't they simply victims of the credit freeze-up, rather than the cause of it? Also, keep in mind that the government was already in the business of purchasing mortgages, before Fannie and Freddie existed, as private entities. Are you, then, saying that no one, not even the government, should have been in the business of purchasing mortgages, and that this would somehow have prevented the sub-prime market from being born, or collapsing and creating the credit freeze-up? In short, Fannie and Freddie come off as red-herrings, that don't really help the construction of your argument.
You then move on to take the Democrats, and Mr Raines, to task for the accounting scandals at Fannie. Again, you make no connection between those scandals and the collapse of Fannie (which, see above, is an apparent red herring, in any case). And, again, you, still don't say how Fannie has anything to do with the credit freeze-up, other than as a victim.
So, all-in-all, I'd say you need re-visit your logic if you want to convince us, your readers, that,
"...it was government regulation that both forced bankers to make actuarially unsound loans and then protected them from the consequences that triggered this crisis..."
Indeed, you don't even bother to try to support the second part of this assertion, that begins with "...and then protected them...".
Please, try again.
George says:
Hey nepr, Charlie explains what you say he doesn't very well. Your criticism seems to be that he didn't write a 50-page explanation of economics for you before making his points. You may not be smart enough to understand what he's saying, but that's on you not him.
George says:
So if McCain handles this right the problems in the economy point right back to Obama and his ilk. Is that what you're saying?