The False Explanation

You’re going to hear a lot of stories in the coming days, and probably have heard a few already. Following the high profile collapse of the giants in the financial sector, there are going to be a number of groups jumping to advance their agenda by telling you falsehoods about who is to blame. Socialists, statists, anti-capitalists and all manner of other market and freedom haters are already jumping to lay blame at the feet of capitalism. Yet many of these people have themselves played a part in this mess. The Obama campaign is already out to make “deregulation” a dirty word, and has released an ad making two false claims: first, that deregulation had anything to do with the financial crises and, second, that allowing competition in health care would create a similar situation. Even the New York Times, criticizing the ad for its falsehoods, acknowledged that “[deregulatory changes] were viewed by many as having benefited consumers by encouraging competition, and those changes have not been linked to the current crisis.” But in order to advance the socialist regulatory agenda, it is constantly necessary to demonize the free market.

The most hypocritical market-basher, by far, is long-time Democratic Party embarrassment Barney Frank. Frank has been making the rounds dispensing his distorted account of what has happened. For instance, he attributed AIG’s troubles to “lack of regulation,” and self-righteously declared, “the private market screwed itself up and they need the government to come help them unscrew it.” On the overall financial meltdown he says, “Some private-sector people made irresponsible decisions because there wasn’t adequate regulation.” Not quite. There was inadequate regulation, but of government, not the private-sector. It is government policy and government sponsored entities Fannie Mae and Freddie Mac that are the drivers of this meltdown. And when it came to regulating their behavior, Barney Frank was a chief roadblock.

Freddie and Fannie became a half-way house for democrats heading out of government.

In 2003 President Bush attempted to address the problem created by Fannie and Freddie’s insulation from market incentives. The President proposed an agency to oversee the quasi-governmental companies. Democrats, bought and paid for by F&F, were strongly opposed.

Granted, I would have preferred that President Bush had chosen market incentives over regulation by cutting Fannie and Freddie loose from government altogether. But, and this is a big but, if government is going to insist on socializing risk, it’s better that it also provide even a crude form of accountability (and crude is all the accountability government can muster compared to markets), to make up for it. Leaving F&F roaming free as part-private and part-governmental, with the dueling and often contradictory missions it implies, without either market or government forms of accountability, was the worst possible solution. It’s also the one Barney Frank demanded when he opposed Bush’s effort and declared that, “[Fannie and Freddie] are not facing any kind of financial crisis,” before also concluding, “The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing.” And that is exactly what led us to this mess: the government’s reckless demands for “affordable housing.”

A Government Created Mess

In 1977 a Democratic Congress, working with a Democratic President, produced the Community Reinvestment Act (CRA). The CRA forced banks to make unsound loans to poor, uncreditworthy borrowers, all in the name of liberal fairness. Required to keep extensive records of their minority lending practices, banks became targets of racial shakedown artists. If they weren’t satisfied with a bank’s submission to their extortionist demands, they could have them denied the right to expand or merge with other banks.

In 1994 Clinton revamped the CRA and kicked off a new wave of reckless lending. This is where Freddie and Fannie jumped in to corner the market on bad loans, loans which wouldn’t have ever been made if rules requiring money down and sufficient sources of income hadn’t been thrown out the window in the name of racial equality.

Another contributing government factor was the loose monetary policy pursued by the Fed. By keeping interest rates too low, the Fed contributed to an influx of dollars into the market. When money is created faster than productivity warrants, it results in a misallocation of resources in certain assets, creating “booms.” Former vice president and economic advisor at the Federal Reserve Bank in Dallas, Gerald P. O’Driscoll Jr., blames the Fed for not properly weighing the costs of their inflation targeting methods:

In a vibrant market economy with technological innovation and ever new profit opportunities, the monetary policy that maintains price stability in consumer goods (or zero price inflation) requires substantial monetary stimulus. That stimulus will have a number of real consequences, including asset bubbles. These asset bubbles have real costs and involve misallocations of capital. For example, by the peak of the tech and telecom boom in March 2000, too much capital had been invested in high-tech companies and too little in “old economy firms.” Too much fiber optic cable and too few miles of railroad track were laid.

The Democrats’ Revolving Door

While government policy was meddling with the financial markets, government officials made themselves quite comfortable in the financial sector. Freddie and Fannie became a half-way house for democrats heading out of government. Franklin Raines, currently Barack Obama’s financial advisor and former Clinton era budget director, spearheaded Fannie Mae into countless Enron-style accounting manipulations and scandals. Foreshadowing the left’s current strategy to peg their failures on advocates of free markets, Raines derided those who pointed out his companies risky and shady practices as “ideologues” trying to “undermine” Fannie Mae.

Jim Johnson, also a former Fannie CEO and a board member of Goldman Sachs, is a policy advisor who was chosen by Obama to lead his vice-presidential selection team. Johnson was forced to fall on his sword when it was revealed he and several other prominent democrats received special perk loans from Countrywide Financial’s CEO Angelo Mozilo. With no banking or financial experience whatsoever, Jamie Gorelick, former Deputy Attorney General under Clinton, was appointed Vice Chairman of Fannie Mae in 1997, and got fat off of Raines’ accounting scandals. Rahm Emanual, the 4th highest ranking democrat in the House, was similarly shuffled onto Freddie’s board after leaving the Clinton White House.

Meanwhile, their Democratic colleagues who remained in government were assured their part of the take. Chris Dodd, now Chairman of the Senate Banking Committee, raked in the most from Freddie and Fannie, at $165,000. Perhaps these donations are what Dodd had in mind when, in July, he referred to Fannie and Freddie as “fundamentally sound and strong.” Number 2 on the graft list is Barack Obama, who took in over $125,000 in his short tenure in the Senate. The government’s pet mortgage lenders further feathered their nests by opening “partnership offices” in the district of key members of Congress, where they could funnel millions of dollars to their supporters. The bribes paid off. Compared to IndyMac, which didn’t offer democrats any protection money and was thrown to the wolves by Chuck Schumer, Fannie and Freddie are now looking at billions in taxpayer support.

It’s not hard to see why, when President Bush sought to counter Fannie and Freddie’s government created incentives for recklessness, he was fought by Democrats at every turn. According to the White House, 17 attempts at reform were blocked by democrats. Government’s inability, thanks to Democratic cronyism, to replace the market checks which it destroyed by demanding reckless behavior on the one hand, and subsidizing risk with an implied guarantee on the other, provided the perfect financial storm for disaster.

One would think it would be difficult for those on the left to so easily absolve themselves of any responsibility, while simultaneously blaming those who attempted to stop them from creating this disaster, but that is exactly what they’ve done. Phil Gramm, who sought to relax the Democratic created requirements that banks issue risky subprime loans, has been tagged a “deregulator,” which is, in their view, automatic proof of guilt. Barack Obama blames the problem, as he does everything, on “Bush-McCain,” even as he found room in his campaign for those actually responsible and belongs to a party which protected Fannie and Freddie from reform. In short, the left is trying to rewrite history even as it’s being made. The ink hasn’t yet dried on the reporting of their government sponsored mess, and already they are blaming those who believe in freedom and oppose their interventionist programs. They think the failures of government should justify yet more government. They are wrong and their lies shouldn’t be allowed to disguise this fact.