Aside from the fact that Carter’s CRA was a bad idea, aside from the fact that Clinton and a Republican Congress expanded it, aside from McCain’s campaign manager lobbying for F/F and Obama’s finance chair being one of the architects of the subprime crisis… this financial mess could have been stopped. There was a chance to steer the economy away from this iceberg. And the Democrats asked, “What iceberg?” and stubbornly held course, and the Republicans rearranged the deck chairs.Via Bloomberg.com: News:
Take away Fannie and Freddie, or regulate them more wisely, and it’s hard to imagine how these highly liquid markets would ever have emerged. This whole mess would never have happened.
It is easy to identify the historical turning point that marked the beginning of the end.
Back in 2005, Fannie and Freddie were, after years of dominating Washington, on the ropes. They were enmeshed in accounting scandals that led to turnover at the top. At one telling moment in late 2004, captured in an article by my American Enterprise Institute colleague Peter Wallison, the Securities and Exchange Comiission’s chief accountant told disgraced Fannie Mae chief Franklin Raines that Fannie’s position on the relevant accounting issue was not even “on the page” of allowable interpretations.
Then legislative momentum emerged for an attempt to create a “world-class regulator” that would oversee the pair more like banks, imposing strict requirements on their ability to take excessive risks. Politicians who previously had associated themselves proudly with the two accounting miscreants were less eager to be associated with them. The time was ripe.
Greenspan’s Warning
The clear gravity of the situation pushed the legislation forward. Some might say the current mess couldn’t be foreseen, yet in 2005 Alan Greenspan told Congress how urgent it was for it to act in the clearest possible terms: If Fannie and Freddie “continue to grow, continue to have the low capital that they have, continue to engage in the dynamic hedging of their portfolios, which they need to do for interest rate risk aversion, they potentially create ever-growing potential systemic risk down the road,” he said. “We are placing the total financial system of the future at a substantial risk.”
What happened next was extraordinary. For the first time in history, a serious Fannie and Freddie reform bill was passed by the Senate Banking Committee. [The Banking Committee Obama lied about being on - ed.] The bill gave a regulator power to crack down, and would have required the companies to eliminate their investments in risky assets.
Different World
If that bill had become law, then the world today would be different. In 2005, 2006 and 2007, a blizzard of terrible mortgage paper fluttered out of the Fannie and Freddie clouds, burying many of our oldest and most venerable institutions. Without their checkbooks keeping the market liquid and buying up excess supply, the market would likely have not existed.
But the bill didn’t become law, for a simple reason: Democrats opposed it on a party-line vote in the committee, signaling that this would be a partisan issue. Republicans, tied in knots by the tight Democratic opposition, couldn’t even get the Senate to vote on the matter.
That such a reckless political stand could have been taken by the Democrats was obscene even then. Wallison wrote at the time: “It is a classic case of socializing the risk while privatizing the profit. The Democrats and the few Republicans who oppose portfolio limitations could not possibly do so if their constituents understood what they were doing.”
I’m looking for, and in the course of my research, putting together in case no one else does it, a timeline of when, how and why we got where we got in the financial mess. I’ve seen several posts that sum it up, which of course now I can’t find. When I find them, I’ll link them. [added: WSJ] Why does it all matter? (And in spite of the graphic, I don’t only blame Obama; there’s plenty of blame to go around, yes, even for the Republicans.)
We can play blame games for the next several months and years, but what would be the point? In this case, there is a point, and it couldn’t be more clear or important. We have two candidates running for President who would bring much different styles to executive authority over regulatory responsibility. Barack Obama and his allies took the money and stayed on the sidelines rather than take proactive action to resolve the credit crisis. McCain and his co-sponsors of this bill had the right idea and instincts, but could not get any cooperation from Clinton, Schumer, or Obama.
Does this mean that Obama gets the entire blame for the financial crisis? Of course not; it’s shared among many people who failed to act, and some who acted poorly to create the problem in the first place by mandating loans to ill-qualified lenders and then allowed those loans to form the basis of widely-traded securities. McCain doesn’t become the sole protagonist in this morality play, either. However, this demonstrates the qualities of both judgment and leadership of both men — and those two qualities are critical for determining which man should be running the executive branch for the next four years.
Finally, The Anchoress has some good advice for this troubling time:
Our leadership is flailing about. I do believe they tread precarious waters and that most of them haven’t a damn clue what is to be done, here. And because they don’t know what to do, they’re retreating to what they do know, which is partisanship and politicization. But these times are too serious for it. It has to stop.
We have to demand that it stop – it is partly what brought us here. But even more importantly, we have to pray. Because prayer has real power. It changes things.
