Sunday, October 12, 2008

Blame Freddie Mac and ACORN for everything

There is an emerging mythos among the Right, pinning the whole of our current financial crisis on Fannie Mae and Freddie Mac. As the tale is told, these two institutions, under pressure from the government to make more loans to the poor and minorities, forced banks to lend to unqualified applicants, and those bad loans eventually drove the market into free-fall.

Daniel Grossman of Slate vehemently disagrees. So does ummm.... I guess his name is Barry Ritholtz. And also some guy named Robert Gordon. Who cares who they are. They're saying what I want to hear.

More to the point, they say it very convincingly. No regulation anywhere required anybody to make loans without vetting an applicant's credit or verifying his or her income. In 2004, Bush weakened the Community Reinvestment Act, weakening the supposed government pressure to lend to minorities. Yet subprime activity accelerated. Finally, most of the subprime loans were made by institutions that weren't under government pressure at all.

The fact is, these are loans that the financial industry wanted to make, no government coercion necessary. Why? Because even the riskiest loan could be packaged up into a AAA-certified package. Thanks to skyrocketing housing prices, even if a loan went bad, the mortgage owner would simply foreclose on a property that was now worth far more than they'd loaned out. Complex mortgage insurance schemes meant that the financial world could delude itself into believing that there was absolutely zero risk.

The two causes I see are 1) Greenspan's super-low interest rates, which made lending cheap, and stupid lending enticing. 2) Government deregulation, especially as it applies to the regulation of the sort of "innovative" financial schemes that allowed lenders to take $150,000 loaned to a paranoid schitzophrenic named Wilbur, package it up with a hundred other risky loans, and sell the whole rickety package in what amounts to a risk-laundering scheme.

The second part of the myth involves John McCain "sounding the alarm". How did McCain actually act on his prescience? According to a random source, McCain launched into action. He gave one speech on the senate floor, which basically regurgitated the contents of a recent investigation, and added his name to a bill that subsequently died in committee. That's a pretty weak response, if you truly believe that McCain had the foresight to see all this coming two years ago. At least with Obama's overblown claims of foresight, he chose the more appropriate target (subprime lending itself).

Reading the news coverage back then, it sounds like the problems with Fannie Mae had more to do with massaged earnings reports than risky lending practices. In other words, it's not the same poison that is rattling the economy today.

1 comment:

john said...

Blame the FED.
They enticed low rate loans on a "variable" rate plan, where if the lending rates went up from the FED, so would the payments to the borrowers.

One sunny day the FED raised the interest rates and this drove all the mortgage payments up and drove all the borrowers into shock, frenzy or into the streets. The high rates brought down home equity through lowering home values.

The FED created the problem and then offered to solve the problem and proceeded to take over the industry using its FED member banks to buy up the portfolios at significant discounts.

In order to keep the top management from blowiing the whistle on how this was done, the FED came up with a caveat in this very lucrative bailout plan, which allowed for the executives who know the "inside story" to reap huge golden parachute severance and bonus payments--hush money.

What is a bit unsavory about all this is; we, the people have this debt upon us and will pay it and for it in so many ways that when "we" find out about how it came to be, plan on a few riots.