It’s all their fault

I’m no Sondheim fan, but he did get the psychology of blame down well in a song from Into The Woods that has the constant refrain “It’s all your/his/her fault.”  It’s human to assign blame.

Sometimes, though, assigning blame is easy, and with the current economic crisis, history shows us that the largest part of the blame lies with the Democrats, who acted en masse to block the type of reform McCain was urging.

First, here’s what McCain, back in May 2006, predicted would happen without oversight to control the Raines and Johnsons in charge (emphasis mine):

Mr. President, this week Fannie Mae’s regulator reported that the company’s quarterly reports of profit growth over the past few years were “illusions deliberately and systematically created” by the company’s senior management, which resulted in a $10.6 billion accounting scandal.

The Office of Federal Housing Enterprise Oversight’s report goes on to say that Fannie Mae employees deliberately and intentionally manipulated financial reports to hit earnings targets in order to trigger bonuses for senior executives. In the case of Franklin Raines, Fannie Mae’s former chief executive officer, OFHEO’s report shows that over half of Mr. Raines’ compensation for the 6 years through 2003 was directly tied to meeting earnings targets. The report of financial misconduct at Fannie Mae echoes the deeply troubling $5 billion profit restatement at Freddie Mac.

The OFHEO report also states that Fannie Mae used its political power to lobby Congress in an effort to interfere with the regulator’s examination of the company’s accounting problems. This report comes some weeks after Freddie Mac paid a record $3.8 million fine in a settlement with the Federal Election Commission and restated lobbying disclosure reports from 2004 to 2005. These are entities that have demonstrated over and over again that they are deeply in need of reform.

For years I have been concerned about the regulatory structure that governs Fannie Mae and Freddie Mac–known as Government-sponsored entities or GSEs–and the sheer magnitude of these companies and the role they play in the housing market. OFHEO’s report this week does nothing to ease these concerns. In fact, the report does quite the contrary. OFHEO’s report solidifies my view that the GSEs need to be reformed without delay.

I join as a cosponsor of the Federal Housing Enterprise Regulatory Reform Act of 2005, S. 190, to underscore my support for quick passage of GSE regulatory reform legislation. 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.

I urge my colleagues to support swift action on this GSE reform legislation.

He had some crystal ball there, that John McCain, because it played out precisely as he feared it would.

And why was nothing done?  Well, a Bloomberg op-ed piece says that, despite the fact that the Democrats didn’t control Congress, it was still their monolothic voting block that destroyed any possibility of reform (h/t Gerry Charlotte Phelps).  First, here’s what happened:

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.

In other words, precisely as McCain said, Fannie and Freddie got too big and without any oversight at all.  Also, in keeping with Democratically driven policies, F&F were giving loans to every Tom, Dick and Harry, so that all Americans, without effort, could own homes.

As for the attempt to reform matters, there is no doubt that the Democrats drove that train (emphasis mine):

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.

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.”

Ironically enough, this whole scandal created the Democratic dream:  the government, in true socialist fashion, is now the vehicle for providing Americans with home ownership.  First, change the laws so that financial institutions start giving out ridiculous loans to obviously inappropriate borrowers.  Second, put your high level operatives in charge of the lender, and allow them to rape the system.  Third, resist any efforts to reform the system.  Fourth, when the system implodes, have the government buy every single piece of bad debt in the nation.  Voila — instant socialism, with massive government ownership of property.

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  • spiff580

    Do you really think that the Dems had the goal of socialism in mind when they caused this crisis? I mean, do we really want to give them much credit that they actually knew what they were doing when this mess started? Or is it a situation that a sort of instant socialism was the result or unintended consequences of their ignorant and uninformed action/inactions.

    What do you think?


  • Bookworm

    I don’t think they had the goal. It’s only in novels and movies that people see that many moves ahead in the game. I think, though, that their short-term moves, probably because they all had the idea of getting unfit borrowers into homes come Hell or high water, inevitably led to the fruition of the base goal.

  • Ymarsakar

    “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.”

    That’s why we have a free press, Book, so that anybody could publish what he or she felt was important for others to read.

    As for why we have the media, Book, well everybody needs a state controlled or centrally organized propaganda apparatus to calm down the panicking masses. You don’t want them to start forming into mobs, now.

  • Ymarsakar

    I think, though, that their short-term moves, probably because they all had the idea of getting unfit borrowers into homes come Hell or high water, inevitably led to the fruition of the base goal.

    Corruption leads to corruption. Sin leads to sin. Evil leads to evil. Pretty simple from my perspective.

    If the premise is that “doing evil is good” and the conclusion becomes “if doing evil is good then doing even more evil is even better”: eventually, what comes down to it is that evil is defined as “self-destructive actions and events that bring misery and injustice to as many people as it can reach”.

  • spiff580

    Yeah, I’d have to agree with you on that one. I guess the end results is the same either way. With some of the statements that come out the Democratic leadership mouths sometimes I wonder how they can tie their own shoes. And sometimes I wonder about the Republicans as well, but not as much.


  • Zhombre

    Bienvenidos, amigos y amigas, a la Republica de Bananas. Cada hombre un rey, cada mujer una reina. O, como escrito Borges: ” La tarde se había ahondado en ayeres, los hombres compartieron un pasado ilusorio. Sólo faltó una cosa: la vereda de enfrente.”

  • boqueronman

    Socialism is too strong a word here. Apparently the Paulson-Bernanke plan intends to obtain illiquid, or toxic, assets composed of subprime MBSs. The problem is since no one knows how much the individual mortgages in the bundle are worth they cannot be properly valued by the holders or potential buyers. Therefore, the government will commit to “purchasing” the toxic assets at a steep discount, analyze each mortgage in the MBS, put a book value on it and resell the MBS at open auction. The original seller’s balance sheet and income statement will take a substantial hit. The responsible, designated government agency will then offer the “clean” asset for sale at auction. The USG might actually make money from this process. The Paulson-Bernanke plan will only become socialism if the Democrat efforts to add clauses to intimidate the private sector such as setting levels of salary and bonus compensation, mandatory public sector equity participation, representation on the BofDs, adding non toxic assets to a bailout, or something similar. I would hope the Republicans would not only veto anything hinting at direct or indirect government control of this recovery plan but would assure that the taxpayer pays the minimum discounted amount for the toxic asset and that the clean MBS is sold for true market value.

  • Mike Devx

    I found this quote from an article frightening:

    it is important to give the Treasury secretary and the people he hires a good deal of flexibility in designing and experimenting with the mechanics of this rescue. The reality is that these guys will be operating in uncharted territory, making things up as they go along. That means there are no assurances that any particular approach will work and no assurances that this will be the final solution. It also means that, just as we entrust generals to fight a war, we are going to have to trust the Treasury to find a way out of this crisis.

    Boy, that language, “the reality is that these guys will be operating in uncharted territory”, isn’t it terrifying if true that we’ve gotten to this point? And what confidence should anyone have that a government “operating in uncharted territory” is the way to calm frantically boiling waters?

    Dark days.

  • suek

    >> ” we are going to have to trust the Treasury to find a way out of this crisis.”>>

    I’ve heard this before….”I’m from the government, and I’m here to help”

    Run for the hills!!!

  • Ronald Hayden

    What burns me in all this is that we’ve wanted to buy a house for the last several years, but as everyone started buying up stuff they couldn’t afford, we were left in the cold because we wouldn’t pay the insane prices that resulted.

    We were tempted at times, just out of exhaustion and frustration, but thankfully we stayed true.

    If we’re lucky, this situation will cause a move back to old fashioned 20-30% down on a house, and a glut of houses for sale, and finally we’ll be able to make a reasonable deal.

    (We live in San Francisco, which has very limited and very expensive housing on the best of days…this insanity sent things to the moon.)