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Ok, then, one for the other side

How the Democrats caused the financial crisis.

Please, someone, discuss. Debunk. Something.


( 30 comments — Leave a comment )
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Sep. 23rd, 2008 02:55 pm (UTC)
Ask how much money the CEOs of the top Wall Street banks and investment houses and insurers have given to the GOP and McCain.

I can't debunk the money given to the campaigns, that's a matter of public record. However even this article fails to claim in any way that anyone of the three mentioned (Obama, Dodd or Clinton) voted in someway that might be skewed (though others might claim that in S.190 not coming to a vote, that those three had something to do with it but that would be paranoia).

I'd also ask someone to point out to me how it is that with a GOP controlled congress until 2006, the Dems are to blame for the deregulation that led to this. Mind you, they didn't prevent it either, but they weren't in control.
Sep. 23rd, 2008 03:08 pm (UTC)
It's worth noting that even minority parties can block a lot of legislation.
(no subject) - vfish - Sep. 23rd, 2008 03:14 pm (UTC) - Expand
(no subject) - abce - Sep. 23rd, 2008 05:09 pm (UTC) - Expand
(no subject) - crs - Sep. 23rd, 2008 05:38 pm (UTC) - Expand
(no subject) - kirisutogomen - Sep. 23rd, 2008 06:54 pm (UTC) - Expand
Sep. 23rd, 2008 03:00 pm (UTC)
This is why sound economic policy is one of my very top priorities as a voter. It's too hard to fix once it's screwed up in the first place, so you'd better get it right the first time.

(I don't know enough about economics to really predict whether anyone's current actions are likely to help or hurt. I kind of trust the report you mentioned because I have seen similar ones elsewhere.)

Sorry not to debunk.
Sep. 23rd, 2008 03:11 pm (UTC)
Kevin Hassett is a bit too simplistic, although he does have his facts straight. The GSEs have gone after both sides of the aisle, to get the best Congress money can buy for themselves. The opposition to them has come more from the reformers on the GOP side of the aisle, which is why I'd like to see more reformers in the government.

And frankly, why I'm disappointed in McCain this week - up until this week, he's been right on the problem, and his response this week has been more pandering across the aisle, rather than arguing strongly that he was right in the first place, and going for a solution that is slightly less destructive long term.
Sep. 23rd, 2008 03:13 pm (UTC)
The article sounds reasonable to me. The campaign finance stuff seems more implied fearmongering but in general i believe it.

Someone on my flist posted this which I tried to read but it started coming off as seriously angry/partisan, and the issues didn't seem clear to me, and so I largely mistrust the article. I would love to have a balanced view on it but it feels like every one is more interested in trying to gain an edge in today's elections and not interested in actually dissecting what happened in order to learn from it.
Sep. 23rd, 2008 03:19 pm (UTC)
The financial crisis is like the Titanic disaster.

There is no One reason why it happened. There are several, and there were opportunities for a LOT of people in both parties to step forward and do something in the last 5 years.
Sep. 23rd, 2008 03:22 pm (UTC)
Eh, I take whatever the AEI says with a grain of salt.
Sep. 23rd, 2008 03:30 pm (UTC)
Can't debunk it, because it's all true.

It actually understates the case. It doesn't mention that multiple officials in the Clinton Treasury Department also warned of the problem over ten years ago, but got silenced by their own party. It doesn't mention H.R. 2575 in 2003, which got castrated before it ever got voted on.

For the 20 year period from 1988-2008 the top four senatorial recipients of Fannie and Freddy campaign contributions were Chris Dodd, John Kerry, Barack Obama, and Hillary Clinton. Obama and Clinton are especially impressive given how little of that time they were actually in the Senate. The first chairman of Obama's VP search committee was previously the chairman of Fannie Mae.

President Bush has been trying to get the GSEs reformed since the beginning of his first term.

How did Democrats react? Barney Frank said "We see entities that are fundamentally sound financially" and called proposals for stronger regulation "inane". Chris Dodd demanded that the President "immediately reconsider his ill-advised" attempts to strengthen oversight and regulation of the GSEs.

I am very disappointed that now that the crisis has actually come, the Administration is proposing one of the most ill-advised bailouts in history, but I'm pissed off that it came to this point at all, and downright angry that people like Barney Frank didn't just oppose attempts to prevent this crisis, they resorted to name-calling.
Sep. 23rd, 2008 03:51 pm (UTC)
I respectfully disagree with his assessment.

The problem of poorly-capitalized real estate loans is at the heart of the crisis, yes. These two organizations were some of the worst offenders, yes. But the investment banks moved into this field, in a non-government-subsidized way, and they tied under-capitalized mortgages into bundled products that they sold amongst one another.

If you look at the success of mutual funds, you can see where they got the idea, but the problem is that the real estate bubble turned out to be just as volatile as other market bubbles.

Further, the particular bill proposed in the Senate would have created a reform agency removed from the HUD office, whose Director is direct appointment from the President, whose staff is then direct appointment from the Director, and who has the independent authority to determine how "over budget" Fannie and Freddie were.

This is definitely one way to go. Another way to go would have been to strengthen the oversight powers of the office he was seeking to remove entirely (the OFHEO) and shift the responsibilities within that office. By demanding not simply reform, but burn-and-rebuild, McCain set a particular tone, and while I really am not versed enough in the issues to argue whether that was an accurate tactic, it was hardly the only path open to him.

Two forces, greed and politics, together created the crisis, and those are never the domain of one particular party.
Sep. 23rd, 2008 04:03 pm (UTC)
It's good to hear a little something about the nature of the "oversight bill" that the Dems shot down... and to hear just how drastic a measure it was. Thanks.
Sep. 23rd, 2008 04:07 pm (UTC)
The factoid at the end about campaign contributions is deceptive. If you look at contributions from the board of directors or lobbyists of FNMA and FHLMC (who are not counted as employees), they are heavily lopsided towards McCain.


That doesn't debunk the overall story, of course, just a piece of it.
Sep. 23rd, 2008 04:28 pm (UTC)
There was also an interesting bit on NPR last week, someone had an "opinion" piece that much of the current crisis was caused by the banks and GSE's and others doing precisely what the government had been asking for. Which was helping to increase, artificially or otherwise, home ownership.

Well, I suspect that in being penny-wise, this has turned out to be extremely pound-foolish.
Sep. 23rd, 2008 05:41 pm (UTC)
Truth doesn't matter. Only opinion matters. :)

Sep. 24th, 2008 04:41 am (UTC)
Not where I'm from...
Oct. 10th, 2008 04:22 am (UTC)
How EVERYBODY Caused the Financial Crisis (Part I)
How Everybody Created the Financial Crisis

This responsive commentary is provided by an informed, independent voter, compiled from many sources with regard to ‘How the Democrats Created the Financial Crisis’ (09/22/08), by Kevin Hassett.

Original Text> (Kevin Hassett, director of economic-policy studies at the American Enterprise Institute, is a Bloomberg News columnist. He is an adviser to Republican Senator John McCain of Arizona in the 2008 presidential election. The opinions expressed are his own.)

For background, Mr. Hassett is also co-author of the 1999 book Dow 36,000. In 2004 he argued that the housing bubble was nothing more than an illusion foisted upon the public by liberals, and that concerns about it were without foundation. Putting aside the fact that Hassett is a senior campaign advisor to McCain, when judging the strength of his opinion piece it is fair to bear in mind that his reasoning in his book and upon earlier stages of this very economic topic has already proven wrong.

Original Text> Sept. 22 (Bloomberg) — The financial crisis of the past year has provided a number of surprising twists and turns, and from Bear Stearns Cos. to American International Group Inc., 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.

Original Text> 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 and Freddie Mac exploded, and many bystanders were injured in the blast, some fatally.

Original Text> 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. [i.e., loan pools comprised mainly of Prime mortgages, with a smaller proportion of sub-prime mortgages in the mix – not enough to lower the pool’s overall rating]

Actually, other buyers formed 88% of that market. “Freddie’s purchases totaled 13 percent of all the securities created in 2006 and 2007, according to data from its regulator and Inside MBS & ABS, a Bethesda, Maryland-based newsletter used by Federal Reserve researchers. Fannie […] bought an additional 5 percent.”

(It should not be forgotten that this was very deliberately made an unregulated market, open to all comers. There was profit to be made with fully legal investment instruments, and nothing to bar participation by anyone – in keeping with free market principles. Numerous firms acted on the opportunities.)

Oct. 10th, 2008 04:23 am (UTC)
How EVERYBODY Caused the Financial Crisis (Part II)

Original Text> In addition, they held an enormous portfolio of mortgages themselves.

F&F do own a huge proportion of outstanding mortgages, but none were sub-prime; the statement is made to seem to lend weight, but is completely immaterial to the argument being made. It is important to recognize that federal law precluded Frannie & Freddie (F&F) from offering, buying or underwriting a single sub-prime mortgage. They could only buy mortgages issued to borrowers who made substantial down payments and who provided carefully documented proof of income. They were among the few lending institutions that precluded sub-prime lending. Because of regulation, their lending practices were considerably more conservative than those followed by others in the market. What is relevant is that F&F began engaging in the acquisition of AAA-rated loan pools that included within them some sub-prime mortgages.

Original Text> 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.

This is extremely overstated for effect; Hassett does not make a serious effort to show this assertion is true. Above, he identified the market he’s discussing as the market in subprime-mortgage loan pools … not individual loans. F&F together constituted only 18% of the marketplace of firms engaged in buying mortgage loan pools. As large as they were, and as big a position as they took there, they could not ‘become the market.” F&F can’t be blamed in isolation, or even primarily, for fueling the crisis.

Original Text> Their large presence created an environment within which even mortgage-backed securities assembled by others could find a ready home.

Neither Freddie Mac nor Fannie Mae created the housing bubble. Nor did they invent Collateral Debt Obligation instruments (CDOs), nor were they among the institutions that were betting it all on highly leveraged Credit Default Swaps (CDSs). Those extreme risks were taken by the investment banking firms, hedge funds, and other speculative investors.

Original Text> 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.

< bold>This is quite true. But as noted in Economist’s View, “There are two questions that are being confused in the debate over the source of the financial crisis:

1. What caused Fannie and Freddie to fail?
2. What caused the financial crisis?

Answering the first question does not necessarily answer the second.

Showing that some politician, some policy, some legislation, lack of effective regulation, whatever, caused Fannie and Freddie to fail is important, we need to know why they were vulnerable when the system got in trouble, but Fannie and Freddie did not cause the crisis, they were a consequence of it. “

Oct. 10th, 2008 04:24 am (UTC)
How EVERYBODY Caused the Financial Crisis (Part III)
Original Text> Turning Point

Original Text> 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.

With a large measure of hyperbole, this posits a convenient but highly questionable thesis. Regulation of F&F alone would have been insufficient - there were far too many players involved, and they were using far too many trading practices including but also going well beyond those employed by F&F.

The Downfall of Fannie & Freddie

Interestingly, because F&F were precluded from directly participating in the sub-prime boom their investment performance in the market was lower than others. (“Fannie dropped 17 percent from 2004 through 2006 and Freddie declined 7.9 percent. The Standard & Poor’s 500 Index, by contrast, gained 7.4 percent.”)

Therefore, Fannie and Freddie were under pressure from shareholders to generate profits to bolster their stock price. At the same time, in 2005, F&F were urged to increase purchases of sub-prime debt by the Bush administration (directly and via the Dept. of Housing), as part of its ‘Ownership Society’ initiative, begun in 2004.

Under pressure by its investors and the government alike, F&F eventually resorted to CDOs. But even then, F&F could not and did not want to buy or guarantee sub-prime loans, correctly perceiving them to be insanely risky. Instead, they limited themselves to purchasing only the supposedly very safest AAA-rated classes of mortgage-loan pools (as Chief Executive Officer Richard Syron noted in self-congratulatory manner in May 2007).

What finally got them into trouble, very late in the game, was that they were specially authorized and directed by the Fed (in an ill-fated attempt to stem the already-turning tide) to loan money to banks that already held too many sub-prime loans, and those which had engaged in a high degree of derivates trading. It is indeed clear, in retrospect, that the problem was larger than this measure could forestall, and that F&F were inadequately capitalizalized to take on that burden. It brought them down.

Oct. 10th, 2008 04:25 am (UTC)
How EVERYBODY Caused the Financial Crisis (Part IV)

Original Text> 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 colleague Peter Wallison, the Securities and Exchange Commission’s chief accountant told disgraced Fannie Mae chief Franklin Raines that Fannie’s ------------- on the relevant accounting issue was not even ``on the page’’ of allowable interpretations.

Original Text> 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.

Original Text> Greenspan’s Warning

Original Text> 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.’’

It is important to be clearer about the nature of Alan Greenspan’s 2005 warning. In April, Alan Greenspan gave a speech praising sub-prime lending practices. He claimed that “Where once more-marginal applicants would simply have been denied credit, lenders are now able to quite efficiently judge the risk posed by individual applicants and to price that risk appropriately.”

Alan Greenspan’s actual concerns (and as reflected in the quotation above), were not with F&F’s lending practices, but instead that they were, simply put, too successful – he feared that if unrestricted they would continue growing until they constituted too large an influence in the market –that they might become so influential that if anything untoward were to happen, it would be disastrous. Because of F&F’s “creative accounting” abuses, and Greenspan’s warning, F&F’s regulators (the Office of Federal Housing Enterprise Oversight) placed limits on the amount of loans and securities the companies could own, and also created a regulatory requirement that they begin holding 30% more capital than required by law, to protect against housing market instability.

Going beyond F&F-related issues, he repeatedly expressed in many forums, even more strenuous objections to under-collateralized lending, excessive trading of overly complex CDOs, and under-collateralized CDSs (which is not to say that he himself did not also employ those vehicles, since they were available and legal). These warnings were not acted upon by Congress.

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