Monday, September 22, 2008
It's Not as If We Weren't Warned
In 2006 Senator John McCain told his colleagues, "If Congress does not act, American taxpayers will continue to be exposed to the enormous risk that Fannie Mae and Freddie Mac pose to the housing market, the overall financial system, and the economy as a whole." Two years later, well . . .
Everything in real life is more complicated than a blog post, I guess, but I see three major causes for the current financial turmoil, which is clearly rooted in the mortgage industry's meltdown, and is now taking down major investment banks.
First, a lot of people bought more house than they could afford. They and their lenders both took unwise risks. If we have to bail out the borrowers -- a political necessity, perhaps, but not likely an economic one -- I hope we bail out only the ones who are in default on primary residences, where they actually live, not the many speculators who bought houses to flip them when prices went up, then couldn't afford to, because prices went down.
Second, and contrary to the current hue and cry about insufficient federal regulation of the industry, there was regulation that did actual harm. Regulators forced lenders to make cheap loans in areas and demographic groups where the risk was too high, as the price of being allowed to grow their businesses at all.
Third, there really was insufficient oversight of Freddie Mac and Fannie Mae, the gargantuan public-risk-private-profit mortgage companies. Fannie and Freddie paid good money for it, too, and I mean many millions of dollars. Senator Obama says it's all because of the Republican in the White House these last two terms, but the problem is older than that and convincingly bipartisan.
This recent Slate article highlights some of the villains, including several prominent Clinton cronies. These include Franklin Raines, President Clinton's Director of the Office of Management and Budget. As Fannie Mae's CEO, he pillaged to the tune of $90 million. He paid back about $25 million of that in exchange for the dropping of criminal charges. Former Clinton Administration Deputy Attorney General Jamie Gorelick, who tends to show up, in retrospect, only in connection with the biggest disasters -- she helped paralyze US intelligence agencies in advance of 9/11 -- appears in this picture. She walked away with $26 million. In both cases, most of the money came from bonuses awarded based on fraudulent accounting.
The lawmakers who got the biggest campaign contributions in exchange for resisting reforms are mostly -- not nearly all -- Democrats. Here is the Barack Obama connection: Only Democratic Senator Chris Dodd has received more campaign money from Fannie and Freddie, and he's been at it several times longer than Obama. Comparatively, Senator John McCain received a very small amount.
There were warnings enough, and not just recently -- in the Washington Post on May 24, 2006, for example. But attempts to reform Fannie's and Freddie's oversight were blocked by Democrats on Capitol Hill. (To be sure, if the Republicans had been in charge the last two years, they likely would have blocked the reforms, too.) Here, from the Congressional Record, is Senator McCain urging his colleagues on May 25, 2006, to take seriously a bill to reform Freddie and Fannie. In case you're wondering, the bill never got out of committee. (I'm responsible for the boldface type below; the Congressional Record doesn't do boldface.)
Between our two major presidential candidates, in this respect at least, Senator McCain seems to have the better claim on promise of change, while Senator Obama seems to be quite entangled in a big, old problem.
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While we're (sort of) on the subject of people who saw things coming that surprised other people, you may be interested in this Jack Kelly article advocating Governor Sarah Palin as Senator McCain's running mate. He wrote it in June, about three months before McCain's announcement. His crystal ball works better than mine.
Copyright 2008 by David Rodeback.