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.”
This entry was posted on September 15, 2008 at 2:17 pm and is filed under Flying Monkey Right, mortgage crisis, Republicans as cancer. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.
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