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Fenris
Sep 22nd 2008, 03:00 PM
Sometimes it is a partisan issue...


How the Democrats Created the Financial Crisis:

Commentary by Kevin Hassett





(http://www.bloomberg.com/apps/news?pid=photos&sid=aSKSoiNbnQY0)

Sept. 22 (Bloomberg) -- The financial crisis of the past year has provided a number of surprising twists and turns, and from Bear Stearns Cos. (http://www.bloomberg.com/apps/quote?ticker=JPM%3AUS) to American International Group Inc. (http://www.bloomberg.com/apps/quote?ticker=AIG%3AUS), ambiguity has been a big part of the story.


Why did Bear Stearns fail, and how does that relate to AIG? It all seems so complex.



But really, it isn't. Enough cards on this table have been turned over that the story is now clear. The economic history books will describe this episode in simple and understandable terms: Fannie Mae (http://www.bloomberg.com/apps/quote?ticker=FNM%3AUS) and Freddie Mac (http://www.bloomberg.com/apps/quote?ticker=FRE%3AUS) exploded, and many bystanders were injured in the blast, some fatally.
Fannie and Freddie did this by becoming a key enabler of the mortgage crisis. They fueled Wall Street's efforts to securitize subprime loans by becoming the primary customer of all AAA-rated subprime-mortgage pools.


In addition, they held an enormous portfolio of mortgages themselves.
In the times that Fannie and Freddie couldn't make the market, they became the market. Over the years, it added up to an enormous obligation. As of last June, Fannie alone owned or guaranteed more than $388 billion in high-risk mortgage investments. Their large presence created an environment within which even mortgage-backed securities assembled by others could find a ready home.



The problem was that the trillions of dollars in play were only low-risk investments if real estate prices continued to rise. Once they began to fall, the entire house of cards came down with them.



Turning Point



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 (http://www.aei.org/) colleague Peter Wallison (http://search.bloomberg.com/search?q=Peter+Wallison&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1), the Securities and Exchange Comiission's chief accountant told disgraced Fannie Mae chief Franklin Raines (http://search.bloomberg.com/search?q=Franklin+Raines&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1) 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 (http://search.bloomberg.com/search?q=Alan+Greenspan&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1) 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 (http://banking.senate.gov/public/). 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 (http://www.aei.org/publications/pubID.22514/pub_detail.asp) 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.''
Mounds of Materials



Now that the collapse has occurred, the roadblock built by Senate Democrats in 2005 is unforgivable. Many who opposed the bill doubtlessly did so for honorable reasons. Fannie and Freddie provided mounds of materials defending their practices. Perhaps some found their propaganda convincing.



But we now know that many of the senators who protected Fannie and Freddie, including Barack Obama (http://search.bloomberg.com/search?q=Barack+Obama&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1), Hillary Clinton (http://search.bloomberg.com/search?q=Hillary+Clinton&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1) and Christopher Dodd (http://search.bloomberg.com/search?q=Christopher+Dodd&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1), have received mind-boggling levels of financial support from them over the years.



Throughout his political career, Obama has gotten more than $125,000 in campaign contributions from employees and political action committees of Fannie Mae and Freddie Mac, second only to Dodd, the Senate Banking Committee chairman, who received more than $165,000.



Clinton, the 12th-ranked recipient of Fannie and Freddie PAC and employee contributions, has received more than $75,000 from the two enterprises and their employees. The private profit found its way back to the senators who killed the fix.



There has been a lot of talk about who is to blame for this crisis. A look back at the story of 2005 makes the answer pretty clear.



Oh, and there is one little footnote to the story that's worth keeping in mind while Democrats point fingers between now and Nov. 4: Senator John McCain (http://search.bloomberg.com/search?q=John+McCain&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1) was one of the three cosponsors of S.190 (http://www.govtrack.us/congress/billtext.xpd?bill=s109-190), the bill that would have averted this mess.

Literalist-Luke
Sep 22nd 2008, 03:12 PM
Very enlightening - thanks! :yes:

Teke
Sep 22nd 2008, 04:50 PM
"It is a classic case of socializing the risk while privatizing the profit."

This one sentence says mega tons of what is happening to the U.S.

Scruffy Kid
Sep 22nd 2008, 05:30 PM
How the Democrats Created the Financial Crisis
Sometimes it is a partisan issue...

How the Democrats Created the Financial Crisis:
Commentary by Kevin Hassett

Sept. 22 (Bloomberg) ... There has been a lot of talk about who is to blame for this crisis. A look back at the story of 2005 makes the answer pretty clear.

"A look back at the story of 2005 makes the answer pretty clear." :rofl:
You know what else: it's the democrats who are responsible for all cases of rape, cancer, drunkenness, lack of Christian belief, bad abstract art, annoying children who try to play the violin and just make awful noises, and most dirty diapers. Just get rid of those democrats and all our problems -- all -- would go away!!

Sorry, but this is tripe journalism; an unreasoned anti-democrats slam.

I say this not because I favor democrats or republicans, but because anyone with an iota of knowledge of the complexity of this kind of financial meltdown could not attribute it to the passage or non-passage of a single bill.

This crisis hit Paulson, Bernanke, Wall Street, and everyone else very much by surprise. Had these folks foreseen such a possiblity they would have taken much stronger measures weeks back. Do I fault Paulson, or Bernanke, or other republicans who were charged with foreseeing or averting such crises. Certainly not -- just as, for instance, I don't fault the military personel who didn't discern some signs of the Pearl Harbor attack. It's very difficult to perceive complex phenomena which unfold largely through forces hard to observe, and hard to sort out warning signs which are normal from those that herald serious disasters. Careful study of many sorts of disasters and predictions suggests this.

Further, no one can know what the results of a bill such as is suggested would have been. It's not like the Treasury and Fed don't have lots of regulatory and inspection powers, formal and informal, anyhow.

So to shoot from the hip like this about identifying THE culprit -- the democrats of course -- is silly. I know strongly Republican econ professors who studied with Bernanke when he was at the Stanford Biz school, and was also teaching in the graduate econ program there. Smart people, knowledgeable about and deeply trained in these matters, and strongly committed to the Republicans. NO ONE of them makes this kind of inane "here are the culprits" statement; all of them -- knowledgeable and sophisticated about the banking system and economics -- would, I believe, find such statements irresponsible and simplistic.

So why spew this kind of venom? Why encourage knee-jerk, one-sided, politically charged, uncharitable and intellectually irresponsible comments from all sides?

You know, half of Americans will vote democratic, half republican.

If we keep engaging in these kinds of "it's all your fault" tirades,
how will the country ever be able to work together constructively on its problems?

Fenris
Sep 22nd 2008, 05:56 PM
"A look back at the story of 2005 makes the answer pretty clear." :rofl:
You know what else: it's the democrats who are responsible for all cases of rape, cancer, drunkenness, lack of Christian belief, bad abstract art, annoying children who try to play the violin and just make awful noises, and most dirty diapers. Just get rid of those democrats and all our problems -- all -- would go away!!This is not an unreasonable attack. The author laid out specific policies laid out by specific Democrats that caused specific problems.




You know, half of Americans will vote democratic, half republican.

If we keep engaging in these kinds of "it's all your fault" tirades,
how will the country ever be able to work together constructively on its problems?So your solution to the problem is to pretend that the problems Democrats caused had nothing to do with anything. In this way we can 'work together' by enacting more policies that cause more problems?

RabbiKnife
Sep 22nd 2008, 06:11 PM
One cannot "work constructively" with an opponent who wills only to socialize the entire nation.