October 03, 2008

The Financial Crisis - Who's Responsible?

I don't know much about economics, so this whole financial meltdown has not been easy to follow. It would be nice to understand the cause, but there is so much political spin surrounding the issue that it's difficult to trust either side. However, it does seem possible to make some good criticisms even if only on principle alone, and that is exactly how some are assessing blame.

Those on the Left, eager to cast blame on their opponents, have done so in two ways. First, they point out that this is a problem in lack of oversight and the Republicans are the party of deregulation. Second, they claim that Republicans have been the party in power for the last several years, so this happened on their watch. Let's take each of these ideas in turn.


The first thing that should be noted is that "regulation" does not necessarily equal "good." Governmental agencies are monuments to regulation, but we almost universally view these things to be models of waste and inefficiency. Even so, one of the biggest financial headaches, Fannie Mae and Freddie Mac, are regulated in a very profound way: they are underwritten by the government! If these organizations did not have such a safety net, then perhaps there would have been more caution in their policies. That certainly makes theoretical sense.

Additionally, as I understand it, there is some measure of oversight for these organizations. If we are to examine guiding principles in assessing blame, then we must determine whose principles would be most likely to lead to a relaxing of fiscally responsible standards in this governmental oversight. Since the Democratic Party is ostensibly the party of charity and compassion, would we not expect that it would seek to do everything in its power to get financial assistance to those who might otherwise not attain it? But granting loans to low-income persons exposes us to certain financial risks. Isn't a big part of the problem that we are saddled with the burden of high-risk loans that never should have been granted in the first place? Where might we be now if qualification for loans had been more difficult to come by, as those heartless Republicans would have it? But to some minds, being heartless and being responsible seem indistinguishable. It is a distinction that often needs to be made to children.

The Party in Power

It is always amusing (and frustrating) to see how blame is assessed based on who is or was in power. It seems to be a no-win situation. If your party is in power in the White House or Congress, then you can take credit for any good thing that comes to pass. But any bad thing can be blamed on the consequences of the last administration, or the fact that you don't control both the legislative and executive branches. So, all the failings of the current Democratic controlled Congress can be blamed either on the fallout of the prior years when it was controlled by the Republicans or on the president himself. But even when the issues in question can be immediately traced to the present term, there is still the option to blame the other party for blocking your efforts. That, in particular, may be the key to answering the charge that while the Republicans controlled Congress they failed to put the needed limits on Freddie and Fannie.

I was curious as to whether or not the Democrat's blame had any true warrant. One suspicion that it had not was found in the fact that most everyone who pointed an accusing finger did so on these general grounds. Usually when someone has the goods they point to specific events or quotes. I have not yet seen this, but I have been hearing some incriminating charges against many Democrats from conservative commentators (interestingly, the liberals are saying things like, "there's enough blame to go around," and "let's not start playing the blame game"). So, I decided to do a quick search of my own to see what I could come up with. Here is just a sampling of what I found.

From Sept 30, 1999: Fannie Mae Eases Credit To Aid Mortgage Lending

Fannie Mae, the nation's biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people

From Sept 11, 2003: New Agency Proposed to Oversee Freddie Mac and Fannie Mae

The Bush administration today recommended the most significant regulatory overhaul in the housing finance industry since the savings and loan crisis a decade ago.

. . .

Among the groups denouncing the proposal today were the National Association of Home Builders and Congressional Democrats who fear that tighter regulation of the companies could sharply reduce their commitment to financing low-income and affordable housing.

''These two entities -- Fannie Mae and Freddie Mac -- are not facing any kind of financial crisis,'' said Representative Barney Frank of Massachusetts, the ranking Democrat on the Financial Services Committee. ''The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing.''

Representative Melvin L. Watt, Democrat of North Carolina, agreed.

From April 2, 2004: Panel Approves Mortgage Company Bill

Legislation giving regulators the power to take over the mortgage giants Fannie Mae and Freddie Mac if they become insolvent narrowly won approval Thursday in a partisan vote by a Senate panel. Prospects for Senate passage appeared dim, however.

. . .

The Republican-written bill was adopted by the Senate Banking Committee, 12 to 9, mostly along party lines.

. . .

But Democrats on the committee warned that creating the possibility of receivership would give excessive power to the regulators that could harm the two companies.

. . .

[T]he minority Democrats would very likely use procedural rules of the Senate to block its passage.

From April 6, 2005: Greenspan Urges Better Regulation of Fannie Mae and Freddie Mac

Appearing before the Senate Banking Committee, Mr. Greenspan said the enormous portfolios of the companies - nearly a quarter of the home mortgage market - posed significant risks to the nation's financial system should either of the companies face extensive problems.

. . .

The two companies have been formidable lobbying forces and been able to block attempts made by lawmakers

. . .

Senator Charles E. Schumer, Democrat of New York, criticized Mr. Greenspan's recommendation and called it both inconsistent with his other views on regulation and potentially damaging to the housing markets. Without identifying anyone in particular, he also suggested that some people who have advanced tougher regulation of the two housing finance companies are really pushing a broader agenda to eliminate the companies and their mission of providing affordable housing.

From: Federal Housing Enterprise Regulatory Reform Act of 2005

For years I [John McCain] have been concerned about the regulatory structure that governs Fannie Mae and Freddie Mac--known as Government-sponsored entities or GSEs--and the sheer magnitude of these companies and the role they play in the housing market. OFHEO's report this week does nothing to ease these concerns. In fact, the report does quite the contrary. OFHEO's report solidifies my view that the GSEs need to be reformed without delay.

I join as a cosponsor of the Federal Housing Enterprise Regulatory Reform Act of 2005, S. 190, to underscore my support for quick passage of GSE regulatory reform legislation. If Congress does not act, American taxpayers will continue to be exposed to the enormous risk that Fannie Mae and Freddie Mac pose to the housing market, the overall financial system, and the economy as a whole.

And this recent summary article: Blame Fannie Mae and Congress For the Credit Mess

In the wake of Freddie's 2003 accounting scandal, Fed Chairman Alan Greenspan became a powerful opponent, and began to call for stricter regulation

. . .

Fannie and Freddie retained the support of many in Congress, particularly Democrats, and they were allowed to continue unrestrained.

. . .

Sen. McCain's criticisms are at least credible, since he has been pointing to systemic risks in the mortgage market and trying to do something about them for years. In contrast, Sen. Obama's conversion as a financial reformer marks a reversal from his actions in previous years, when he did nothing to disturb the status quo.

. . .

Now the Democrats are blaming the financial crisis on "deregulation." This is a canard.

. . .

If the Democrats had let the 2005 legislation come to a vote, the huge growth in the subprime and Alt-A loan portfolios of Fannie and Freddie could not have occurred, and the scale of the financial meltdown would have been substantially less. The same politicians who today decry the lack of intervention to stop excess risk taking in 2005-2006 were the ones who blocked the only legislative effort that could have stopped it.

Why the McCain campaign is not hammering the Dems over this is a mystery to me.



At 10/04/2008 6:42 AM, Blogger Sam said...

I saw a video on youtube that basically made the same point--that the financial crisis was the result of the efforts of democrats to make it easier for people to get housing loans they couldn't afford, and that republicans tried to stop it. When I watched the VP debate, I wondered if it would ever come up, and it didn't. It is a curiosity that the McCain campaign doesn't bring it up. Maybe there is more to it that we're not getting. Economics is a complicated subject.

At 10/13/2008 11:59 AM, Anonymous Anonymous said...

Yes, it is obvious you don't know much about economics. The 2005 bill did pass through the committee to be voted on by the republican controlled senate. The legislature in 2005 was totally controlled by the Republican party, and in fact, this was true throughout all but the last year or so of Bush's administration (2007), when it was an equal split in the Senate and a slim Dem majority in the house. Any one who can do basic arithmetic knows that the Fredde Mac/F Mae thing was not the entire cause of the economic meltdown. I guess if I were a republican, after 8 years of economic destruction under a repub administration and congress, I would try to latch onto something like the B. Frank thing to try to make it sound like it wasn't my party's fault too. Those of us who do understand economics aren't going to fall for this.

"As it turns out, these companies were pumping their monies into the same real-estate market that was being kited by the lending practices of lending institutions that now are being bailed out. How could we forget the S&L crisis that had one of Bush Sr.’s other son’s Neil that was involved in a collapsed company ‘Silverado’, in its fall? Of course not, Neil pays $50,000, & collectively with the other officers they settle out for $26 million. At least we didn’t have to deal with Neil on the political front? Hope not anyway… Guess who the President was during all of that crap? 1st Ronnie then Bush Sr. has a bailout plan. Not to let the Democrats off the hook; why wasn’t the S&L crisis even part of the election debate? Is something fishy? I bet there is…

How is this for change: ENRON? That mess ended up on the lap of Baby Bush. ENRON contributed heavy money to him; probably to pay off any government overseers that maybe looking over the shoulders. Not to worry though, if there was anyone assigned to that task, chances are they didn’t know what to look for anyway? I am sure ENRON would have paid them off too. So again who bailed out ENRON?

How come these CEOs & top officials of these companies can keep their wealth & the citizens of the country have to bail these political crony companies out? I say it is the wealthy that use politics to make sure their stack of money is unscathed but the taxpayers is “all in”. The loyal Republicans will blame the Democrats; most of the time it has been Clinton but now they’re swinging the bats at Obama. Because The Republicans insist it wasn’t their fault even though all these financial failures or “blowouts” happened on their watch, I am going to hold them accountable. Some day they may wake up & admit: “hey, it isn’t the Dems; it’s those wealthy goons who keep playing us”. Let me tell you, they are in ALL Parties.

If you want to see more financial failures, vote McCain because he will be the same part of the same machine Bush is now. The same people & puppeteers are behind the scenes manipulating markets & tapping taxpayers for bailouts, while on the front side saying they “the Republicans” are not for raising taxes. By their sheer ineptitude, they are raising taxes because they mismanage finances to the point where taxpayers have to come to the rescue & bailout their incompetence or corruption schemes to make themselves or their cronies wealthy.

So heads up Republicans, if you are against Obama because he “might” raise taxes, your Party already has by the corruption practices it allows. Also I will add they have done their part to devalue the currency of this country…"

At 10/17/2008 6:55 PM, Blogger Paul said...

"Totally controlled by the Republican party"? I think the last time any party held a commanding majority was in the mid-late 70's, and that was the Democratic Party. And as I mentioned, even a majority party (or majority bi-partisan position) can be stymied by a suitably motivated minority. That is the beauty and curse of a system established with protections against the possible tyranny of majority rule. It is also not the case that either party is monolithic enough to always guarantee 100% agreement on any given vote, which is a good thing.

It is not enough to simply point the finger at the majority party. Even so, what will we say: You didn't scream loudly enough while the economy was being raped? Perhaps Republicans had failed to effectively sell their case, but it seems to be a fact that they were the ones most often making it and that Democrats were the ones most often crying foul.

My main concern would relate to which party is by-and-large more principally disposed toward pressing for economic aid to those who would not otherwise qualify. Besides the testimony of news articles such as those I cite, the Democrats themselves have in the past trumpeted these efforts to be the champion of the little guy. They have claimed it as a party virtue (issues aside of whether it is in practice true).

And as to the role of Freddie and Fannie, enough economists on both sides of the isle have convinced me that these are a big part of the problem. And where others are at fault it seems that the same problem of pressure toward lowering standards also applies.

I will conclude by pointing out that even Bill Clinton has himself admitted that the Dems were guilty of "resisting any efforts by Republicans and the congress, or by me when I was president, to put some standards and tighten up a little on Freddie May and Fannie Mac." I will prefer the self-incriminating word of a Democrat president and many articles from the liberal N.Y. Times over an anonymous commenter on my blog, if you don't mind.


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