Mercury Rising 鳯女

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Republican solution to financial crisis: blame the Democrats

Posted by Charles II on September 15, 2008

Blaming the other side (hat tip, Dan) doesn’t fix the problem, but it wins elections often enough, especially when voters aren’t paying close attention. As banks fail, this strategy is being deployed by Republicans. Unfortunately, the good government types have given them a certain amount of cover by sloppy and simplistic analysis. Even Bill Moyers fell for this.

The latest lame attempt to blame the Democrats for the financial crisis comes down to is this: of Congressmen and Senators who received donations from Fannie Mae and Freddie Mac, a disproportionate number of the top recipients were Democrats. However– red flag #1 in this analysis– overall, contributions were split fairly evenly between Republicans and Democrats (the full list is here). What this suggests to the astute analyst is that Democrats were probably receiving more contributions from all donors than Republicans were.

And, lo and behold, when we discover that the top ranks include many major Democratic presidential candidates, John Kerry, Barack Obama, and Hillary Clinton– candidates who had hundreds of millions of dollars of contributions– suddenly, the simplistic analysis starts to fall apart. After all, a donation of $10,000 means much more to a candidate who has collected $100,000 than to one who has collected half a billion.

Red flag #2: campaign donations are only one way to influence legislation. OpenSecrets also looked at the stock and bond holdings of Congressmen and Senators. Owners of stocks would want to avoid a takeover, while owners of bonds would benefit from a takeover, assuming there were no haircut for bond holders. Clearly, legislators might work to protect their investments.

Unfortunately, these are not broken down according to stocks v. bonds. However, one can go back into their financial statements (here) to see if the investments were returning interest or dividends.

Suddenly, a whole new picture emerges. Nineteen of the top 30 holders of stocks and bonds are Republicans. So, the people with the largest direct financial stake are NOT Democrats.

But all of this analysis misses the main point. Red flag #3: Fannie Mae operated from 1938-1968 as a government entity without any problems. In 1968, it was privatized into a government sponsored entity (GSE). Freddie Mac was formed as a GSE in 1970. Both operated for another 30 years without any significant problems. In the last decade, problems emerged . These included fancy (but not criminally fancy) accounting under Clinton-appointee Franklin Raines and lobbying excess. To the extent that there were problems with Fannie Mae and Freddie Mac, they seem to have been bipartisan in nature– as has been the takeover. And they seem to be recent in origin.

So, finally, what actually caused the crisis at Fannie and Freddie? For this, one has to get pretty deep in the weeds. Bondad has a good summary of the mortgage crisis overall.

1.) Incomes shrank for most Americans over the last expansion.

2.) But Americans kept spending thanks to a mammoth increase in household debt.

3.) To increase the amount of debt in the system, lending standards were lowered.

4.) Lowered lending standards have led to a higher default rate from borrowers.

5.) Higher default rates have lowered the value of all the collateral backed by mortgages.

6.) Lowered collateral values have killed the balance sheets of literally every major financial company.

Fannie and Freddie are not mortgage issuers, so they did not lend to people who couldn’t pay their mortgage. They weren’t investment banks, so they weren’t creating incomprehensible collateralized debt obligations sliced and diced into tranches that were all above average.

What Fannie and Freddie did was purchase mortgages. Where they failed was in paying a higher price than was warranted. However, they had strict rules as to what kind of mortgages they could buy. While they pressed the envelope, their standards were actually fairly cautious. Tanta, riffing off Krugman concludes that two things brought down Fannie and Freddie: the size of the housing bubble and the fact that they were not forced to raise sufficient capital by selling stock to cover the magnitude of losses actually suffered. Only on the latter point is Congress in any way culpable.

Most of the blame for the housing bubble belongs with the Federal Reserve. As Barry Ritholtz explains:

The current headache begins and ends with ideology, namely that of former Fed Chairman Alan Greenspan–an acolyte of Ayn Rand, a free-market absolutist, a true believer in the evils of regulation. Many of the present headaches point directly back to the decisions made by the Greenspan Fed. Sure, there is plenty of other blame to go around: an unengaged president, a clueless Congress, a hapless FDIC, a compromised OFHEO, and Phil Gramm–but the biggest and most accusatory finger points directly at Easy Al.

The Federal Reserve not only made mortgage money available at exceptionally low rates, it was given the regulatory responsibility by Congress to oversee lending quality– and Greenspan blew that off.

Here’s one more attempt to assign blame. From the FT:

[T]he Ohio Republican who headed the House financial services committee until his retirement after mid-term elections last year, blames the mess on ideologues within the White House as well as Alan Greenspan, former chairman of the Federal Reserve.

The critics have forgotten that the House passed a GSE reform bill in 2005 that could well have prevented the current crisis, says Mr Oxley, now vice-chairman of Nasdaq.

He fumes about the criticism of his House colleagues. “All the handwringing and bedwetting is going on without remembering how the House stepped up on this,” he says. “What did we get from the White House? We got a one-finger salute.”

What Oxley doesn’t concede is that a decade ago, his committee tore down the wall imposed by Glass-Steagall between banking and investing. This facilitated the emergence of complex mortgage backed securities. But at least Oxley isn’t, like many of the Flying Monkey Right, trying to claim that Fannie and Freddie were “being used as a piggybank by the Democrats.”

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23 Responses to “Republican solution to financial crisis: blame the Democrats”

  1. Dan said

    Great analysis Charles. Now condense it down to a 5 second sound bite and it’s ready for the hustings!

  2. Dan said

    And in all seriousness, the Fannie/Freddie line will be the meme from the Republicans. It’s coming, and we need a punchy response right away.

  3. Charles said

    I think that “Republican economic plan: blame the Democrats” is both accurate and punchy. When John McCain is reduced to claiming he was talking about the American worker when he said that “The fundamentals are strong,” when Paul Krugman points out that “The fundamentals are strong is a quote from Herbert Hoover, you know they’re running on fumes.

    Probably glue fumes, come to think of it. That could explain a lot.

  4. MEC said

    Fumes of their own manufactured outrage. The effect is much the same as glue fumes, only more toxic.

  5. EB said

    Local radio jerk (sorry…JOCK) today suggested that Democrats secretly pressured Fannie and Freddie to give risky loans to the poor and to minorities, so that they would get more votes. Ergo facto sum, Financial Armageddon is the fault of the Democrats. Uh….wha??? Someone needs to check the water up here in Boston…

  6. Charles II said

    Oh, they have all kinds of lines, EB.

    It’s pretty sad. I’d be the first to say that Democrats contributed to the problems. But the Republicans want too much. They want to turn a problem that is 70% Republican/30% Democratic into one that’s 100% Democratic.

    Reality tends to react when it’s bent that hard.

  7. None said

    Enough blame to go around folks……
    Obama got more from Fannie Mae than any Repub…. look at th political connections from both sides of the aisle….

    http://www.opensecrets.org/news/2008/09/update-fannie-mae-and-freddie.html

    http://www.slate.com/id/2200160/

  8. Charles said

    It would be really nice if people would read before posting, “None.”

    They might discover that that talking point has been examined and disposed of.

  9. Hiqutipie said

    Nice layout Charles…That throws the problem right at the feet of both parties…Now FIRE all those involved…All those on both sides who voted for deregulating the market so these blunders could take place because just like the S&L Crisis that started this mess …Americans are the ones that pay the price while the ones that created it walk off into the Sunsets with their Golden Parachutes…

  10. Charles said

    I have no argument, Hiqutipie. That’s what elections are about.

    The problem is nailing the right ones. Lots of people accepted campaign donations, but only a faction of them actively tore down the regulations.

    (1) I looked up who voted in 1998 for Gramm-Leach-Bliley (S. 900), which repealed Glass-Steagall and creating the shadow banking system. Obviously, the most culpable are Gramm, Leach, Bliley, and their co-sponsors. 44 Democrats voted against. Bill Clinton was for. On the House side, H.R. 10, 86 Democrats voted against, meaning that about 100 voted for.

    (2) Then, in 2000, Gramm snuck a provision into legislation that eliminated credit default swaps. This meant that insurance for dicey mortgages was not examined before it was issued.

    Gramm retired to become a lobbyist.

    Since John McCain hired Gramm and has not even repudiated him, person #1 to fire from politics would seem to be John McCain.

  11. […] Comments Charles on Republican solution to financi…Hiqutipie on Republican solution to financi…Mahakal / מהכאל on Johnny Wendell does […]

  12. ALLDEMSFAULT said

    Do your homework people. Research Community Reinvestment Act (CRA) of 1977 and READ READ READ. This is Carter and Clinton’s mess and YOU KNOW IT. If you don’t, your head is up your……

    http://en.wikipedia.org/wiki/Community_Reinvestment_Act

  13. […] blame-mongering in two ways: first, they try to pretend that they weren’t on the gravy train. They were. Indeed, many of Fannie and Freddie’s former lobbyists now work for John […]

  14. darbykidd said

    The overwhelming amount of blame rests with the Democrat leadership in both the House and Senate. They blocked President Bush’s numerous attempts and requests for reform and oversight dating back to 2002.

    Here is a handy timeline at this link: http://www.glennbeck.com/content/articles/article/198/15484/

    Look at that and read these articles as well.

    http://www.bloomberg.com/apps/news?pid=20601039&refer=columnist_hassett&sid=aSKSoiNbnQY0

    http://newsbusters.org/blogs/noel-sheppard/2008/09/20/ibd-carter-more-blame-financial-crisis-bush-or-mccain

    http://www.ibdeditorials.com/IBDArticles.aspx?id=306632135350949

    http://mpinkeyes.wordpress.com/2008/09/17/barney-frank-and-chuck-schumers-role-the-fannie-mae-failure/

  15. Charles II said

    Darby, I hope you realize that what you have presented amounts to exactly zero evidence. It might persuade Kool-Aid drinkers, but it’s just opinion.

    One point of politics to understand: the Republicans have been trying to destroy Fannie since 1938 (and Freddie since 1970). But Fannie has worked very well for a long time, so well that it has a lot of defenders in the building and mortgage industry. Without that secondary mortgage industry, its very likely we would not be a nation of homeowners. Democrats take pride in these programs, which have been around longer than most people have been alive. That doesn’t mean that the programs are perfect. However, even now, the number of bad mortgages on their books is very, very small. If they had been better capitalized, they’d probably still be in business. Where they went wrong is more in trying to cater to their shareholders than in their business practices. Capitalizing companies means going to your shareholders and telling them you need to dilute their stock. It’s… not very popular.

    And, by the way, the fully-private companies that operate in that space are not immune from fraud.

    Now to your …um… sources. Kevin Hassett, the Bloomberg OpEd, is the guy who predicted that the Dow would be at 36,000 in 1999. We were just laughing about him. He was last seen holed up in a hotel room because he won’t debate a real economist. To take a few points in his article, I’ve refuted Wallison and Calomiri here. Elsewhere, I’ve shown Greenspan’s role in the crisis. And, by the way, a bunch of Fannie and Freddie lobbyists work as senior aides for McCain.

    Hassett is just making it up.

    Glenn Beck is an idiot, and it’s a waste of time to refute him. His carefully-constructed timeline is cherrypicked (and it looks like it was fed to him by the White House). For example, if it’s true that the Administration was serious that Fannie and Freddie were a problem, then why did they, as Rep. Michael Oxley (R-OH) put it, give him the “one-fingered salute” when he tried to regulate Fannie and Freddie?

    When things add up that badly, you should suspect that the guy doesn’t know arithmetic.

    Newsbusters is a right-wing site which thinks that whenever the media criticizes the Republicans, it’s biased.

    Excuse me, but f–k them.

    Investors Business Daily has nice stock tables, or so they tell us. But its reasoning is cockeyed. In 2003, there was NOT a crisis because of too much lending. Subsequent to the accounting scandal in June of that year,Fannie was actually having trouble with a shrinking mortgage portfolio. And, maybe more to the point, the Congress was in Republican hands. So, if Bush was so determined to get reform through, why didn’t he?

    As I’ve pointed out, according to Michael Oxley, bush wasn’t interested in reform. He was interested in frustrating real reform. Maybe– as he did so many other times– he proposed things to anger the Democrats, but he was not trying to actually change things.

    I’ve done a pretty careful job of examining– and refuting– many of the arguments that the Republicans have used in this blame game. My sources are, for the most part, mainstream publications. Where they’re not, they’re well-respected websites.

    I am, frankly, disgusted by the cheap shots and manufactured “facts” they have used.

    Better show up with something better than this cheap merchandise if you want any respect on these boards.

  16. darbykidd said

    Charles,
    Firstly, I’m not here to get “respect on these boards”. I really couldn’t care less about this board. I was doing a search on google for “Financial crisis blame” and this discussion was one of the results.

    I think that the links I posted have some good points that some people would be interested in reading. Some of those articles were opinion pieces yes but they included quotes on the record from the President as well as Democrats. I’m not saying that its all the Democrats fault. I wish the President and Republicans would’ve done more to stress the importance of reform. I do however, from the facts I’ve seen, think a good portion of the responsibility for nothing getting accomplished on this matter in the past 6 or 7 years rests with them. The President (and Mccain by the way) are on the record repeatedly saying that something needed to be done. Powerful democrats like Dodd, Frank, Schumer are on the record with their words and actions to the opposite. I think its a cheap shot when Nancy, the Democrats can do no wrong, Pelosi says that that Democrats deserve NO blame. Unbelievable.

    I don’t think its fair to say those links are not “mainstream”. Bloomberg, Investors Business Daily, and a reprint from a New Hampshire newspaper. You may not like the particular writer, but that’s like me saying the New York Times or Washington Post is not mainstream because of a particular article’s author. I don’t think its fair to call Glenn Beck an idiot. He does have a show on CNN and regularly bashes idiocy and bad decisions on both sides. I think he is about Common sense but that’s my opinion. I personally think Keith Olberman is way more biased. That’s just my opinion.

  17. Charles II said

    Darby, this is not a place to dump a list of crap links. That’s called “link spam.” We tend to delete it. Since yours isn’t of commercial nature, I’ve given it the benefit of the doubt temporarily.

    Again, this is not a place to dump a list of links. We have conversations here. I’d appreciate you taking the courtesy to read and reflect on the points that I have researched, just as I have taken time to read and reflect on– and refute– what you’ve posted.

    If you really don’t care about being respected on these boards, I’ll be happy to delete any of your further posts. Our community, and its happiness, matters to me.

    One other point: if you ever again use the word “Democrat” as an adjective, I will troll-rate you. To quote Hendrik Hertzberg,

    “There’s no great mystery about the motives behind this deliberate misnaming. “Democrat Party” is a slur, or intended to be—a handy way to express contempt. Aesthetic judgments are subjective, of course, but “Democrat Party” is jarring verging on ugly. It fairly screams “rat.” At a slightly higher level of sophistication, it’s an attempt to deny the enemy the positive connotations of its chosen appellation. … Perhaps there are some who hope to induce it to go out of existence by refusing to call it by its name, à la terming Israel “the Zionist entity.” And no doubt there are plenty of others who say “Democrat Party” just to needle the other side while signalling solidarity with their own—the partisan equivalent of flashing a gang sign.

  18. Charles II said

    AllDemsFault, I just noticed your comment in the spam bucket and restored it.

    You are arguing that despite the Republicans controlling the presidency and Senate for 20/28 of the preceding years and controlling the House for 12 of those years, including 1995-2007, it is entirely blameless for the financial crisis.

    Doesn’t being so completely dishonest cause you health problems?

  19. OTown said

    Could someone please explain to me how this isn’t the Democrats fault? Look at the quotes from today’s WSJ.

    http://online.wsj.com/article/SB122290574391296381.html

    The Republicans tried to reign in Fannie and Freddie after their portfolios spiraled out of control with vast amounts of subprime mortgages following Clinton’s expansion of the Community Reinvestment Act. And no Fannie did not have a shrinking mortgage portfolio..if you read your article correctly it says that Fannie was bringing their portfolio down in size only after its accounting scandal and the government’s realization that their capital ratio was only 3%! Any bank with that kind of capital ratio is deemed insolvent. Unfortunately, Fannie wasn’t able to reduce its portfolio enough so once an economic downturn occurred there was basically no way to prevent the GSE’s from failing.

    http://query.nytimes.com/gst/fullpage.html?res=9C0DE7DB153EF933A0575AC0A96F958260&sec=&spon=&pagewanted=1

    http://query.nytimes.com/gst/fullpage.html?res=9E06E3D6123BF932A2575AC0A9659C8B63&scp=1&sq=%22barney+frank%22&st=nyt

    And just because Bush and the Republicans were in control of Congress at the time, doesn’t mean they can pass any law they want. The Democrats blocked the legislation plain and simple. They didn’t want anyone to take away their precious GSE’s regardless of the consequences.

  20. Charles II said

    You know, OTown, if you had read one f^%$ing word from the post, you’d have answered your own question. For example:

    Fannie and Freddie are not mortgage issuers, so they did not lend to people who couldn’t pay their mortgage. They weren’t investment banks, so they weren’t creating incomprehensible collateralized debt obligations sliced and diced into tranches that were all above average.

    You say, “if you read your article correctly it says that Fannie was bringing their portfolio down in size only after its accounting scandal and the government’s realization that their capital ratio was only 3%!”

    If you had read the f%$#ing post, you would have seen that it states the issue of capitalization very, very clearly. Fannie and Freddie were private companies. Their managements should indeed have sold stock and improved their capitalization.

    This is what p!$$es me off about right-wingers. They take NO TIME AT ALL to think about what the other fellow is saying. They dump a bunch of links in a thread and say, “See?”

    Well, here’s my answer: F%$k you. What you’re doing is link-spamming. Act like an adult, and we’ll talk.

  21. da said

    Funny, the whole financial crisis started in the Clinton administration when Clinton forced banks to allow loans for people who were unable financially. McCain in his campaign did not blame the Clintons. So what is this about Republicans blaming Democrats?

  22. Charles II said

    Da, this is simply not so. We have discussed this to death. The changes made under Clinton– and a Republican Congress, if you recall– simply allowed people to object to bank mergers if the bank had not done lending inside the neighborhood from which it collected deposits. That’s all that Clinton did!

    You can find a pretty good summary here.

    If you’ll read our website regularly, rather than doing drivebys, you’ll find that we do a fair amount of research before making claims.

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