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hmmmm maybe hindsight will help us now

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hmmmm maybe hindsight will help us now

Postby brewer03 » Tue Sep 23, 2008 8:56 am

How the Democrats Created the Financial Crisis: Kevin Hassett

Commentary by Kevin Hassett




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.

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.

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 colleague Peter Wallison, the Securities and Exchange Comiission's chief accountant told disgraced Fannie Mae chief Franklin Raines 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 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.

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 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, Hillary Clinton and Christopher Dodd, 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 was one of the three cosponsors of S.190, the bill that would have averted this mess.

(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.)
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Re: hmmmm maybe hindsight will help us now

Postby kevin » Tue Sep 23, 2008 9:12 am

right...this huge financial crisis in the US was caused by/could have been prevented by one single bill.....
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Re: hmmmm maybe hindsight will help us now

Postby Litespeed » Tue Sep 23, 2008 9:16 am

The disclaimer at the bottom explains it all. It was merely his opinion.
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Re: hmmmm maybe hindsight will help us now

Postby kevin » Tue Sep 23, 2008 9:29 am

ha ha, further debunking this article (seriously, if it was written by a guy who works for a nominee...i mean if i posted something by obamas campaign manager and tried to pass it off as close to ture :bash: ), anywho, in 2005 republicans held a majority in the congress, so trying to insinuate that democrats alone were responsible for derailing this bill is nonsense. People on both sides voted against it, for good reason.

From what i can read the S.190 bill included language that would have essentially privitized certain regulatory agencies. This is why there was opposition to it from both REPUBLICANS and DEMOCRATS. I cant find the voting record on it, but i am pretty sure quite a few republicans crossed the isle on thsi one, so this article really is kind of out of touch, but hey, it reads well!!!

Also, like many on here have said, i think the crisis is everybodies fault, from politicians, to croked lenders, to people signing up for mortgages they knew they could never pay. Iresponsibility all around. But i guess we should just expect the major parties to try and blame on the opposite one. :roll:
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Re: hmmmm maybe hindsight will help us now

Postby Litespeed » Tue Sep 23, 2008 9:31 am

That was my point exactly.
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Re: hmmmm maybe hindsight will help us now

Postby Scott » Tue Sep 23, 2008 10:10 am

Yes there's plenty of blame to go around for a bunch of folks. But as I look around on the net Bush and Republicans/Conservatives are bearing the brunt of the blame as usualy happens. That's hilarious! They've even claimed this started with a bill in the 90's put forth by Sen. Phil Gramm. Baloney. How about Carter's Community reinvestment act whereas banks were forced to offer loans to "poor folks" in "poor" neighborhoods. Just give them a house with a NINJA loan. No income No Job No assets. The timing of all this mess stinks to high heaven if you ask me! Has anyone else noticed all this bad economic news comes after the Dimocraps took over Congress a couple of years ago. How do they get out of being blamed by this junk. Why is it always a Republican problem. Deregulation is not the problem either. We are headed towards socialism/leftism more and more in this country every day. Whenever you try to mix capitalism with socialist policies democratic capitalism dies a slow death. That's basically what's happening. Then again the government (Congress) caused all this mess so why shouldn't they bail the banks out. I'm sure the banking industry went nuts when they passed those bills for giving out high risk mortgages and they were proabably told oh go ahead and if (no when!) the bottom falls out the gov't will come to your rescue.

I also notice that Oil is going back up again. Both Dims and Repubs want that. The treehuggers want the little bitty cars on the road and solar panels and such and the rockefeller/country club Repubs can make money off high oil prices. They should all be shot and replaced with true Conservatives!
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