Falling Awake

Just Darts Since 2009

Breathtaking dishonesty on financial crisis

It’s tough to know where to start here, so let’s just dive right in.

Take a look at Senate Majority Leader Harry Reid’s (D-NV) statement made a week ago:

We are now seeing eight years of reckless Bush economic policies come crashing down with unimaginable speed and severity.
 
“This crisis puts our economy and the well-being of the American people in serious jeopardy.  President Bush said on Friday that we should assign blame later – which is, of course, exactly what you would expect the culprit of the crisis to say.  [This line reveals Reid’s mindset.  There is no reason in the Democrat worldview for trying to solve a problem until after fingers have been pointed.]
 
“But the American people have a right to know what brought us to this grave economic danger.  The answer is a president and Republican Congress determined to repeal all reasonable oversight and accountability, ignore what they couldn’t repeal and allow corporate greed and recklessness to saturate our economy.

Got that?  Okay, now read this New York Times article from five years ago:

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

Under the plan, disclosed at a Congressional hearing today, a new agency would be created within the Treasury Department to assume supervision of Fannie Mae and Freddie Mac, the government-sponsored companies that are the two largest players in the mortgage lending industry.

The new agency would have the authority, which now rests with Congress, to set one of the two capital-reserve requirements for the companies. It would exercise authority over any new lines of business. And it would determine whether the two are adequately managing the risks of their ballooning portfolios.

The plan is an acknowledgment by the administration that oversight of Fannie Mae and Freddie Mac — which together have issued more than $1.5 trillion in outstanding debt — is broken. A report by outside investigators in July concluded that Freddie Mac manipulated its accounting to mislead investors, and critics have said Fannie Mae does not adequately hedge against rising interest rates.

Here’s Senator Chris Dodd (D-Ct), the odious Chairman of the Senate Banking Committee:

It is regrettable that 40 days before an election, it has taken the worst economic crisis in our nation since the Great Depression to finally get the attention of the President.  Until this point, the cries for help from millions of Americans being forced from their homes and struggling to make ends meet fell on the President’s deaf ears.  Now, we face challenges that were entirely preventable and avoidable.

Well, they might have been preventable, if the chairman of the banking committee hadn’t been in Countrywide Financial’s pocket.  As for the “President’s deaf ears,” go read that New York Times article again.

Here’s Dodd again:

The landscape of our nation’s economy has been radically re-shaped by the United States government over the course of just a few days and in a totally ad hoc manner.  Companies that form the foundation of our financial markets are shrinking and disappearing practically overnight.  Their insatiable appetite for risk has permeated all sectors of the financial services industry, and has spread beyond our shores.  It has felled giants like Bear Stearns and Lehman Brothers; brought others to their knees like Merrill Lynch, A.I.G., Fannie Mae, and Freddie Mac; prompted the largest thrift failure in our history – IndyMac Bank; and eliminated the final two independent investment banks – Morgan Stanley and Goldman Sachs.

Huh.  That’s quite a litany.  But he forgot to mention Countrywide Financial.  Must have slipped his mind.

If you clicked on that New York Times link, you might have spotted this little nugget at the bottom:

These two entities — Fannie Mae and Freddie Mac — are not facing any kind of financial crisis.  The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing.

Who said that?  Congressman Barney Frank (D-MA), Chairman of the Financial Services Committee.

And see what his priorities were (and are)?  Affordable housing.  “Affordable housing” can mean many things, but when you’re the Chairman of the Financial Services Committee it means “subprime mortgages.” 

AFFORDABLE HOUSING–>SUBPRIME MORTGAGES–>RECORD FORECLOSURES–>FINANCIAL CRISIS–>TAXPAYER BAILOUT.

Given this inevitable chain of circumstances, why not just confiscate our money to directly purchase a home for every poor credit risk?  It might be cheaper.  Ah, but then you wouldn’t be able to decry the high salaries of CEO’s, would you?

And what does the Democrats’ plan include?  Money for ACORN, of course.  ACORN does what, again?  Well, for one thing, ACORN registers Democrats to vote.  Fraudulently.  But that’s another topic.  More to the point, ACORN lobbies for affordable housing.   And the beat goes on.

See, on this issue, Democrats can’t lose.  If mortgage companies lend based upon ability to repay, they are threatened with regulations regarding “discriminatory lending practices.”  If they lend without considering ability to repay, they are threatened with regulations regarding “predatory lending practices.”

If our public schools taught economics with half the zeal they reserve for condom use, the voters might not be able to be fooled like this.  Which, of course, is why Democrats think the public school system is just peachy.

You know who was most prescient on the housing bubble?  Ron Paul.  If the man hadn’t associated with crazy racists and 9/11 “truthers,” I might have voted for him in the primaries.  He gets economics.  Again, this is from five years ago:

The connection between the GSEs [Fannie Mae and Freddie Mac] and the government helps isolate the GSE management from market discipline. This isolation from market discipline is the root cause of the recent reports of mismanagement occurring at Fannie and Freddie. After all, if Fannie and Freddie were not underwritten by the federal government, investors would demand Fannie and Freddie provide assurance that they follow accepted management and accounting practices.

Ironically, by transferring the risk of a widespread mortgage default, the government increases the likelihood of a painful crash in the housing market. This is because the special privileges granted to Fannie and Freddie have distorted the housing market by allowing them to attract capital they could not attract under pure market conditions. As a result, capital is diverted from its most productive use into housing. This reduces the efficacy of the entire market and thus reduces the standard of living of all Americans.

Despite the long-term damage to the economy inflicted by the government’s interference in the housing market, the government’s policy of diverting capital to other uses creates a short-term boom in housing.  Like all artificially-created bubbles, the boom in housing prices cannot last forever. When housing prices fall, homeowners will experience difficulty as their equity is wiped out. Furthermore, the holders of the mortgage debt will also have a loss. These losses will be greater than they would have otherwise been had government policy not actively encouraged over-investment in housing.

Perhaps the Federal Reserve can stave off the day of reckoning by purchasing GSE debt and pumping liquidity into the housing market, but this cannot hold off the inevitable drop in the housing market forever. In fact, postponing the necessary, but painful market corrections will only deepen the inevitable fall. The more people invested in the market, the greater the effects across the economy when the bubble bursts.

Republicans say no one’s to blame.  Democrats say Republicans are to blame.  They’re all engaged in breathtaking dishonesty, but at least the Republicans are displaying charity.

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5 responses to “Breathtaking dishonesty on financial crisis

  1. bensimo1 September 27, 2008 at 3:08 pm

    Well done.

    What you say is absolutely correct. But there is more.

    Two months after Bush became President he sent his people to the Congress to warn them of the terrible risks to our financial health represented by Fannie and Freddie. In 2003, Bush submitted a proposed law to Congress to increase regulation of the two GSEs. In 2005, John McCain became a co-sponsor of a bill to change how Fannie and Freddie could operate and Greenspan told Congress that if they failed to act the consequences could be very serious for our financial security. Congress killed the bill in committee. Who led the charge to stop these proposed reforms? Those now yelling the loudest about greedy Wall Street – Schumer, Dodd, and Barney Frank.

    But who got the whole thing started? The answer is Democrats demanding affordable housing for people who can’t afford to buy a home. They began with the privatizing Fannie and Freddie under a powerless regulator, then passed the Community Reinvestment Act (great name) of 1977, and finished up in 1995 with a major revision of that act to further coerce banks to lend to the poor and to create the Mortgage Backed Securities that would make the whole thing possible.

    13 years later and the chickens came home to roost.

    Democrats and a very few liberal Republicans created this mess, not companies and not Wall Street. But they call this a bailout of Wall Street which had nothing to do with it. The financial industry did participate, but then who can stop the coercive power of the federal government. The present proposed law will keep giving lots of money to Acorn, a housing organization which also has defrauded elections and funneled lots of money to community organizers. Obama knows a lot about that since he was their lawyer.

    Best regards, Ben

  2. Mike Kriskey September 27, 2008 at 7:37 pm

    Thanks, Ben. I hate it when the comment’s better than the post, though, so try to write more poorly in the future.

    I had a feeling the legislation mentioned in the New York Times article I linked to was killed in committee, because I searched the House website for an hour and couldn’t find anything about it. Thanks for the information.

    If this were a case like the internet bubble, I’d have no sympathy for the losers–well, I guess I’d have some sympathy, but no money for them.

    But the investors did not entirely bring this fiasco upon themselves. They were basing their investments–quite correctly–on the idea that these risky loans were encouraged by the federal government, and the belief that the government would step in to limit their losses.

    The government has no business in doing this. In a truly free market, the bailout would be both unnecessary (the number of investors and their exposure to this risk would not be nearly so great) and unwise (the moral hazard).

    Thanks again for your contribution.

    Mike

  3. bensimo1 September 30, 2008 at 2:23 pm

    Thanks for the thanks, Mike. And your conclusions are right on in my humble opinion. Government as usual turns out to be the problem not the solution and Democrats will control the whole thing in a few months.

    Best regards, Ben

  4. Joy November 7, 2008 at 6:20 am

    Regulating Fannie Mae and Freddie Mac would not have prevented recent events. The Community Reinvestment Act required that banks make only about 1% of their loans to people who might otherwise not have been able to afford it.

    The remaining 99% of the problem was failure to regulate by George W. Bush’s Administration. One example is allowing trillion upon trillion of credit default swaps to be issued without any kind of regulation. And this happened completely on his watch. They were invented in 1997 by folks at J.P. Morgan Chase and grew unregulated under Bush particularly between 2003-2007 to astronomical amounts. That’s why AIG needed a bailout. It would have been virtually impossible to untagle the mare’s nest created by the unregulated issuance of these.

    The country still may have been able to withstand this crisis if we hadn’t been taking on debt to the tune of $700 billion for the war in Iraq. If only Condoleeza Rice hadn’t been asleep at the wheel summer of 2001 the events of 911 might have been avoided and the excuse to carry out the first George Bush’s vendetta against Saddam Hussein might not have existed.

    Thank God it’s a new day!

  5. Mike Kriskey November 10, 2008 at 10:51 pm

    If only Condoleeza Rice hadn’t been asleep at the wheel summer of 2001 the events of 911 might have been avoided and the excuse to carry out the first George Bush’s vendetta against Saddam Hussein might not have existed.

    I was going to answer you point by point, Joy, pointing out your contradictions and disputing your assertions, but you’ve exposed yourself with this line as someone not worth debating.

    Good luck in the coming Utopia!

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