Who will write the history of the U.S. Financial Crisis? Contrary to those on the left declaring the “death of market fundamentalism,” so far it’s the right wing. Here is a roundup of some of the most popular articles on the root of the crisis:
“How the Democrats Created the Financial Crisis,” Kevin Hassett, Bloomberg, Sept 22:
The economic history books will describe this episode in simple and understandable terms: Fannie Mae and Freddie Mac exploded, and many bystanders were injured in the blast, some fatally… 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…
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 bill gave a regulator power to crack down, and would have required the companies to eliminate their investments in risky assets.
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.
“Lies or Ignorance?” by Richard Rahn, Washington Times, October 1st:
If government agencies pressure banks to give loans to people who are poor credit risks, do you view this as a failure of capitalism or a failure of government? A number of left-wing politicians and commentators have made the assertion that the financial crisis is a result of too much deregulation under the “capitalistic” policies of President Reagan. Those who make the assertion are either ignorant of the facts or being untruthful…
It is universally understood that the present financial meltdown began with the problems of two enormous government-sponsored enterprises (GSEs) – Fannie Mae and Freddie Mac. These two enterprises purchased mortgages from banks to allow banks to issue larger and riskier mortgages with the explicit goal of increasing homeownership…
Financial regulators are supposed to protect the integrity of the system, the investors and consumers. It was the anti-capitalist left that insisted the regulators make banks originate bad loans and made sure that the GSEs would not have to abide by the rules that everyone else did.
“The Cascading Financial Crisis,” American Enterprise Institute
For many years, AEI scholars have been observing and warning about the giant government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac. But as the economy boomed, few wanted to deal with the risks the GSEs posed to taxpayers and the financial system. While scholars at AEI were arguing that Fannie and Freddie posed systemic risk to the financial system, Congress routinely ignored calls for GSE reform. Peter J. Wallison said in the New York Times in 1999 that “[i]f they fail, the government will have to step up and bail them out the way it stepped up and bailed out the thrift industry.” … Fannie and Freddie did not pay a price for their risky financial behavior because, as always, those who purchased their debt assumed that the GSEs enjoyed the backing of the federal government.
“In Times of Crisis, Trust Capitalism,” Joseph Calhoun, RealClearMarkets, Sept 29:
The “crisis” we face today is not a creation of the market. Government intervention over many years (but especially the last year) is what brought us to the point where we’ve placed our hopes for economic recovery on the good intentions of a Congress facing re-election in a few weeks. There has been much commentary recently about the role of Fannie Mae and Freddie Mac in the creation and expansion of the sub-prime mortgage market which many believe to be the cause of this mess. That criticism is certainly warranted, but little attention has been paid to the real culprit – the Federal Reserve. Furthermore, what attention there has been is concentrated on the role of Alan Greenspan rather than Ben Bernanke. While Alan Greenspan deserves his share of the blame, Bernanke’s contribution to this mess should not be minimized or excused.
“Mislead,” Daniel Mitchell, Cato Institute, October 1st:
Government Caused the Turmoil in Financial Markets. One of the ironies of the bailout debate is that supporters think that more government intervention is the solution to problems caused by bad government policy. The main mistake was probably the Federal Reserve’s easy-money policy. By creating too much liquidity and by driving interest rates to artificially low levels, the Fed set in motion the conditions for a housing bubble.
But this housing bubble is particularly severe because another government mistake — the pernicious and corrupt policies of Fannie Mae and Freddie Mac — lured many people into mortgages that they could not afford. When a housing bubble bursts, that can have a negative effect on economic activity because people lose wealth (or lose the perception of wealth). But when people have been lured into homes they cannot afford and a bubble bursts, the economic consequences are more severe when a bubble bursts because people not only lose wealth, they also lose their homes.
Other mistakes include policies such as the Community Reinvestment Act, which extorted banks into making loans to consumers with poor credit. There are also many other policies that have encouraged economically inefficient levels of housing investment, such as the mortgage interest deduction in the tax code.
“Two Biggest Things Still To Do,” Steve Forbes, Forbes Magazine, October 1:
But the two big viruses remain untreated. The most immediate is the mark-to-market, or so-called fair-value accounting, rules that regulators have been enforcing since the early 1990s… The other virus is the weak dollar. The Federal Reserve’s reckless, loose-money policy in 2004 and again in the summer of 2007 led to a catastrophic inflation in the commodities and housing markets.
Paul Krugman offers a different perspective, pointing to “shadow banks” as the root:
To understand the problem, you need to know that the old world of banking, in which institutions housed in big marble buildings accepted deposits and lent the money out to long-term clients, has largely vanished, replaced by what is widely called the “shadow banking system.” Depository banks, the guys in the marble buildings, now play only a minor role in channeling funds from savers to borrowers; most of the business of finance is carried out through complex deals arranged by “nondepository” institutions, institutions like the late lamented Bear Stearns — and Lehman.
The new system was supposed to do a better job of spreading and reducing risk. But in the aftermath of the housing bust and the resulting mortgage crisis, it seems apparent that risk wasn’t so much reduced as hidden: all too many investors had no idea how exposed they were.
Who will win the debate? The majority of the literature so far supports the market fundamentalists (in part because the majority of economists are market fundamentalists). Where are the progressive economists?
[...] Original post: Root of the Crisis — Who Will Write Economic History? [...]
Big deal. In 2004, eight years ago, EIGHT YEARS AGO, Democrats thought that there was not a crisis with Fannie and Freddie. At the time, who would have said that there was looming crisis with Washington Mutual, Lehman Brothers, Bear Sterns and AIG?
And, get this, they are not even saying that Fannie and Freddie do not need tighter regulation or tougher financial ratios. They are just saying do not kill the basic mission of Fannie and Freddie.
Here’s Schumer (D-NY): “I think Fannie and Freddie need some changes, but I don’t think they need dramatic restructuring in terms of their mission, in terms of their role in the secondary mortgage market, et cetera. Change some of the accounting and regulatory issues, yes, but don’t undo Fannie and Freddie.”
Sounds moderate and reasonable to me.
Moreover, what you are NOT saying is that in 2005 in the House of Representatives, a bill to far more tightly regulate Fannie and Freddie was passed with the cooperation of leading Republicans, such as Bennett (who sponsored the bill) and Michael Oxley chairman of the house finance committee, who got the cooperation of Barney Frank.
So, in 2005 in the House, a bill was passed to more tightly regulate Fannie and Freddie, but it failed in the Senate. It never got out of committee. Why? Because at the time, the Bush administration wanted to go all the way and cut off Fannie and Freddie entirely.
Here’s the proof:
Former Chairman of the House Finance Committee Michael Oxley says (in the Financial Times in early September):
In the aftermath of the US Treasury’s decision to seize control of Fannie Mae and Freddie Mac, critics have hit at lax oversight of the mortgage companies. The dominant theme has been that Congress let the two government-sponsored enterprises morph into a creature that eventually threatened the US financial system.
Mike Oxley will have none of it. Instead, the 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.” The House bill, the 2005 Federal Housing Finance Reform Act, would have created a stronger regulator with new powers to increase capital at Fannie and Freddie, to limit their portfolios and to deal with the possibility of receivership.
Mr Oxley reached out to Barney Frank, then the ranking Democrat on the committee and now its chairman, to secure support on the other side of the aisle. But after winning bipartisan support in the House, where the bill passed by 331 to 90 votes, the legislation lacked a champion in the Senate and faced hostility from the Bush administration.
Adamant that the only solution to the problems posed by Fannie and Freddie was their privatization, the White House attacked the bill. Mr Greenspan also weighed in, saying that the House legislation was worse than no bill at all.
“We missed a golden opportunity that would have avoided a lot of the problems we’re facing now, if we hadn’t had such a firm ideological position at the White House and the Treasury and the Fed,” Mr Oxley says. (See: http://www.ft.com/cms/s/0/8780c35e-7e91-11dd-b1af-000077b07658.html?nclick_check=1)
End quotes:
Then what happened? Well, the Democrats and moderate Republicans cut down the Republican bill, which never got out of Senate committee. McCain’s backing of a bill to more tightly regulate Fannie and Freddie has received a lot of publicity lately, but in my opinion, his bill would not have regulated any more strictly than the House bill, Federal Housing Finance Reform Act of 2005. (For confirmation, see http://www.opencongress.org/bill/109-h1461/show and click on “more” after “amends the housing”)
Moreover, most financial experts in the real estate market are now saying that Fannie and Freddie played a very small role in the vast increase in risky loans that were made in the Real Estate Bubble. By far most of the loans were made by commercial mortgage companies, who were unregulated and not subject to the Community Reinvestment Act (CRA). So, why did they make so many loans to the poor. NOT because of any government law or prodding. They made lots of loans to the poor because they almost desperate to make as many loans as possible in a boom market, and the greatest area of opportunity was in poor areas. Bush was even proud of it.
Here he is in 2003 in signing the “American Dream Downpayment Act of 2003:
“The rate of homeownership in America now stands a record high of 68.4 percent. Yet there is room for improvement. The rate of homeownership amongst minorities is below 50 percent. And that’s not right, and this country needs to do something about it. We need to — (applause.) We need to close the minority homeownership gap in America so more citizens have the satisfaction and mobility that comes from owning your own home, from owning a piece of the future of America.
Last year I set a goal to add 5.5 million new minority homeowners in America by the end of the decade. That is an attainable goal; that is an essential goal. And we’re making progress toward that goal. In the past 18 months, more than 1 million minority families have become homeowners. (Applause.) And there’s more that we can do to achieve the goal. The law I sign today will help us build on this progress in a very practical way.
Many people are able to afford a monthly mortgage payment, but are unable to make the down payment. So this legislation will authorize $200 million per year in down payment assistance to at least 40,000 low-income families. These funds will help American families achieve their goals, and at the same time, strengthen our communities.”
So you could say that Bush contributed to the bubble and to making risky loans.
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http://economistsview.typepad.com/
“Who will win the debate? The majority of the literature so far supports the market fundamentalists (in part because the majority of economists are market fundamentalists). Where are the progressive economists?”
Hahaha. Did you ever stop and consider the obvious- most economists are market fundametalists because “market fundamentalism” is right. The evidence backs it up, and the experts are in consensus.
or you really so blind to your own hypocrisy? Perhaps if I switched a few words in your statement around:
“Who will win the debate? The majority of the literature so far supports anthropogenic global warming (in part because the majority of climate scientists are not skeptics). Where are the skeptical climate scientists?”
~T. Greer
Every body knows the storm was beginig in 2001 and in 2008 the storm result was collapsed the economy.Most of the loans were made by commercial mortgage companies, who were unregulated and not subject to the Community Reinvestment Act (CRA)and nobody speak about them.It is worthy to attention we know who were playing in morgage crisis and who win this play.The mafia gang includes bankers,realtors,mortgage broker and…win billion dollars of people for mortgage and now they buy all houses cheap and 4 next years they sell these houses more than yet to people and unfortunitly government paid thier losses from our wealth? We must take refuge in Karel Marx