I would first off like to thank Dan Koestner for bringing this article to my attention. Interesting perspective and solution that does not involve a bail out. I have a link to the actual article. But I have put a summary of his proposed solution.
-Pablo
Gingrich on Bailout Bust: 'I Don't See How the President Can Avoid Firing Secretary of Treasury'
http://www.foxnews.com/story/0,2933,430429,00.html
Link to the video
Tuesday , September 30, 2008
"....
VAN SUSTEREN: Is Secretary Paulson the right guy to be spearheading this?
GINGRICH: No. I mean, I think that he must have been a terrific deal-maker at Goldman Sachs and a great chairman of Goldman Sachs, but I don't think that's the same job as being a secretary of the Treasury. And I think the president would be much better off if Undersecretary Kimmet was now replacing Secretary Paulson. The administration won't like to hear that, but I think it's true.
One reason is that there's a step they could take tomorrow morning that would dramatically improve things with no congressional action, and that is to change the accounting rules that the Sarbanes-Oxley bill imposed on the system called "mark to market." It's a complicated issue, but I think it's so central to our future, Greta, that every American needs to understand. We adopted an artificial rule which drives down the price of everything in a period when prices are declining. So we artificially make it much worse for companies.
Both Chairman Bernanke and Secretary Paulson have indirectly admitted this when they said that they would pay two or three times the market value for paper because the paper is so dramatically undervalued. Now, that's a sign that it's the core accounting system that's wrong.
Two Chicago economists indicated on Thursday they thought this was 70 percent of the problem. That's $500 billion of the $700 billion that Paulson wants. The European central bank warned in 2004 that this would be a disaster, that you cannot do what we tried to do under Sarbanes-Oxley.
So my challenge to the administration is simple. Suspend tomorrow morning the mark-to-market requirement. Replace it temporarily with a three-year rolling average. You will overnight explode the amount of liquidity on the street. Companies will immediately have relief all across America. It will be a stunning effect. And you will have bought plenty of time to now think through in a better way what was so badly designed by Secretary Paulson and that, frankly, could not be salvaged.
VAN SUSTEREN: All right. If this is so simple -- and Secretary Paulson is a man certainly with a long history in the financial system, having been at Goldman Sachs -- if this is so easy to change to this three- year rolling average, which you say will introduce liquidity into the system so quickly, why isn't he doing this? I mean, he doesn't -- he seems like a guy who would know this stuff.
GINGRICH: Well, I think there are at least two major reasons. The first is that Chairman Cox of the Securities and Exchange Commission sees his job as implementing the rigidity of Sarbanes-Oxley, and so he's doing what the Congress said during the last crisis. The fact that it's making it clearly and demonstrably worse doesn't seem to be getting through to him.
In the case of Secretary Paulson, I honestly believe -- and this is obviously grounds for real debate. But my personal belief is that he liked the idea, as a former chairman of Goldman Sachs, that he would get to spend $700 billion and he wanted the power.
Let me give you a single example. They could have come in and asked for a loan authority. They could have said, We will loan money at Treasury plus 2 percent to any firm that has a liquidity problem, but the firm has to work it out and it can't be a bailout. He didn't take that route. He was asked by House Republicans over and over again. He wouldn't take that route. He wanted the authority to go up and buy these assets -- and by the way, to buy them at prices that he arbitrarily set based on his judgment, not at market value.
And so I think that part of this is, if you will, a kind of hubris that was centralizing so much power in the Secretary of the Treasury that I think was very unhealthy for the American system. I was delighted when Senator McCain intervened the other day, and with his help, Congressman Boehner and the House Republicans significantly improved what was a very bad bill. And my fear now is that Speaker Pelosi will move to the left and make the bill dramatically worse by Thursday or Friday.
....GINGRICH: Every time I turn around, somebody says to me, "Let me tell you my horror story." Let me tell you how bad mark to market is because what it does is, it says to a firm, if you have one bad sale, you remark your inventory based on this new market, and that drives your inventory down. And now you've got to go out and borrow the extra money to cover this change in your values. On an upward cycle, it would lead you to overvalue your property. On a downward cycle, it leads you to undervalue your property.
And all you have to -- don't take my word for it. Read the testimony of Bernanke and of Paulson, who both said -- the chairman of the Federal Reserve and the secretary of the Treasury, who both said under oath that they would pay two or three times the current market value because the paper is actually worth dramatically more than its current value.
Now, that tells me what we have here is an accounting problem, which is leading to a liquidity problem. And as a simple test, I would challenge -- Chris Cox is an old friend of mine. I would challenge him tomorrow morning, take the gamble. Suspend it for two weeks and see what happens. If it works beautifully if the markets reliquidify, if we suddenly have dramatically less of a problem, then don't reimpose it. but if it turns out to be a problem, two weeks later, you have the authority to put it back in.
But take the gamble of helping America tomorrow. Don't cut a deal that moves the country into even more corruption and even more big government. You know, the Democrats at one point in this negotiation had a proposal to give left-wing community groups $20 billion as part of the price for passing this. I can't imagine what they're going to try to charge on Thursday.
...the first thing they ought to do tomorrow morning is suspend mark to market, which the administration can do internally without any bill. The second thing they should do is rewrite the bill.
But I would rewrite it to move it towards being a lending authority, not a purchasing authority and to enabling people to have a work-out, not a bailout..."
Thursday, October 2, 2008
Who Caused the Economic Crisis?
Who Caused the Economic Crisis?
http://www.factcheck.org/elections-2008/print_who_caused_the_economic_crisis.html
October 1, 2008
MoveOn.org blames McCain advisers. He blames Obama and Democrats in Congress. Both are wrong.
Summary
A MoveOn.org Political Action ad plays the partisan blame game with the economic crisis, charging that John McCain’s friend and former economic adviser Phil Gramm “stripped safeguards that would have protected us.” The claim is bogus. Gramm’s legislation had broad bipartisan support and was signed into law by President Clinton. Moreover, the bill had nothing to do with causing the crisis, and economists – not to mention President Clinton – praise it for having softened the crisis.
A McCain-Palin ad, in turn, blames Democrats for the mess. The ad says that the crisis “didn’t have to happen,” because legislation McCain cosponsored would have tightened regulations on Fannie Mae and Freddie Mac. But, the ad says, Obama "was notably silent" while Democrats killed the bill. That’s oversimplified. Republicans, who controlled the Senate at the time, did not bring the bill forward for a vote. And it’s unclear how much the legislation would have helped, as McCain signed on just two months before the housing bubble popped.
In fact, there’s ample blame to go around. Experts have cited everyone from home buyers to Wall Street, mortgage brokers to Alan Greenspan.
Analysis
As Congress wrestled with a $700 billion rescue for Wall Street's financial crisis, partisans on both sides got busy – pointing fingers. MoveOn.org Political Action on Sept. 25 released a 60-second TV ad called "My Friends’ Mess," blaming Sen. John McCain and Republican allies who supported banking deregulation. The McCain-Palin campaign released its own 30-second TV spot Sept. 30, saying "Obama was notably silent" while Democrats blocked reforms leaving taxpayers "on the hook for billions." Both ads were to run nationally.
And both ads are far wide of the mark.
MoveOn.org Ad:
"My Friends' Mess"
Narrator: We all know the economy is in crisis, but who's responsible?
McCain: My friends. My friends. My friends.
Narrator: John McCain's friend Phil Gramm wrote the bill that deregulated the banking industry, and stripped the safeguards that would have protected us.
McCain asked Gramm to help write his economic plan.
John McCain's friend Rick Davis lobbied for Fannie and Freddie for years, "defending" them against stricter regulation. And now? He runs McCain's presidential campaign.
And John McCain himself? He's stood by "deregulation" time and time again.
McCain: I think the deregulation was probably helpful to the growth of our economy.
Narrator: And now that the markets are in meltdown? John McCain's friend George Bush wants hardworking Americans to write the biggest blank check in history, bailing out the Wall Street firms and the Washington lobbyists who got us into this mess. Main Street giving Wall Street $700 billion and getting nothing in return? It's outrageous.
Americans shouldn't have to foot the bill for mistakes that John McCain and his friends made.
Narrator: MoveOn.org Political Action is responsible for the content of this advertisement.
Blame the Republicans!
The MoveOn.org Political Action ad blames a banking deregulation bill sponsored by former Sen. Phil Gramm, a friend and one-time adviser to McCain's campaign. It claims the bill "stripped safeguards that would have protected us."
That claim is bunk. When we contacted MoveOn.org spokesman Trevor Fitzgibbons to ask just what "safeguards" the ad was talking about, he came up with not one single example. The only support offered for the ad's claim is one line in one newspaper article that reported the bill "is now being blamed" for the crisis, without saying who is doing the blaming or on what grounds.
The bill in question is the Gramm-Leach-Bliley Act, which was passed in 1999 and repealed portions of the Glass-Steagall Act, a piece of legislation from the era of the Great Depression that imposed a number of regulations on financial institutions. It's true that Gramm authored the act, but what became law was a widely accepted bipartisan compromise. The measure passed the House 362 - 57, with 155 Democrats voting for the bill. The Senate passed the bill by a vote of 90 - 8. Among the Democrats voting for the bill: Obama's running mate, Joe Biden. The bill was signed into law by President Clinton, a Democrat. If this bill really had "stripped the safeguards that would have protected us," then both parties share the blame, not just "John McCain's friend."
The truth is, however, the Gramm-Leach-Bliley Act had little if anything to do with the current crisis. In fact, economists on both sides of the political spectrum have suggested that the act has probably made the crisis less severe than it might otherwise have been.
Last year the liberal writer Robert Kuttner, in a piece in The American Prospect, argued that "this old-fashioned panic is a child of deregulation." But even he didn't lay the blame primarily on Gramm-Leach-Bliley. Instead, he described "serial bouts of financial deregulation" going back to the 1970s. And he laid blame on policies of the Federal Reserve Board under Alan Greenspan, saying "the Fed has become the chief enabler of a dangerously speculative economy."
What Gramm-Leach-Bliley did was to allow commercial banks to get into investment banking. Commercial banks are the type that accept deposits and make loans such as mortgages; investment banks accept money for investment into stocks and commodities. In 1998, regulators had allowed Citicorp, a commercial bank, to acquire Traveler's Group, an insurance company that was partly involved in investment banking, to form Citigroup. That was seen as a signal that Glass-Steagall was a dead letter as a practical matter, and Gramm-Leach-Bliley made its repeal formal. But it had little to do with mortgages.
Actually, deregulated banks were not the major culprits in the current debacle. Bank of America, Citigroup, Wells Fargo and J.P. Morgan Chase have weathered the financial crisis in reasonably good shape, while Bear Stearns collapsed and Lehman Brothers has entered bankruptcy, to name but two of the investment banks which had remained independent despite the repeal of Glass-Steagall.
Observers as diverse as former Clinton Treasury official and current Berkeley economist Brad DeLong and George Mason University's Tyler Cowen, a libertarian, have praised Gramm-Leach-Bliley has having softened the crisis. The deregulation allowed Bank of America and J.P. Morgan Chase to acquire Merrill Lynch and Bear Stearns. And Goldman Sachs and Morgan Stanley have now converted themselves into unified banks to better ride out the storm. That idea is also endorsed by former President Clinton himself, who, in an interview with Maria Bartiromo published in the Sept. 24 issue of Business Week, said he had no regrets about signing the repeal of Glass-Steagall:
Bill Clinton (Sept. 24): Indeed, one of the things that has helped stabilize the current situation as much as it has is the purchase of Merrill Lynch by Bank of America, which was much smoother than it would have been if I hadn't signed that bill. ...You know, Phil Gramm and I disagreed on a lot of things, but he can't possibly be wrong about everything. On the Glass-Steagall thing, like I said, if you could demonstrate to me that it was a mistake, I'd be glad to look at the evidence. But I can't blame [the Republicans]. This wasn't something they forced me into.
No, Blame the Democrats!
McCain-Palin 2008 Ad: "Rein"
Narrator: John McCain fought to rein in Fannie and Freddie.
The Post says: McCain "pushed for stronger regulation"..."while Mr. Obama was notably silent."
But, Democrats blocked the reforms.
Loans soared. Then, the bubble burst. And, taxpayers are on the hook for billions.
Bill Clinton knows who is responsible.
Clinton: I think the responsibility that the Democrats have may rest more in resisting any efforts by Republicans in the Congress or by me when I was President to put some standards and tighten up a little on Fannie Mae and Freddie Mac.
Narrator: You're right, Mr. President. It didn't have to happen.
McCain: I'm John McCain and I approve this message.
The McCain-Palin campaign fired back with an ad laying blame on Democrats and Obama. Titled "Rein," it highlights McCain's 2006 attempt to "rein in Fannie and Freddie." The ad accurately quotes the Washington Post as saying "Washington failed to rein in" the two government-sponsored entities, the Federal National Mortgage Association ("Fannie Mae") and the Federal Home Loan Mortgage Corporation ("Freddie Mac"), both of which ran into trouble by underwriting too many risky home mortgages to buyers who have been unable to repay them. The ad then blames Democrats for blocking McCain's reforms. As evidence, it even offers a snippet of an interview in which former President Clinton agrees that "the responsibility that the Democrats have" might lie in resisting his own efforts to "tighten up a little on Fannie Mae and Freddie Mac." We're then told that the crisis "didn't have to happen."
It's true that key Democrats opposed the Federal Housing Enterprise Regulatory Reform Act of 2005, which would have established a single, independent regulatory body with jurisdiction over Fannie and Freddie – a move that the Government Accountability Office had recommended in a 2004 report. Current House Banking Committee chairman Rep. Barney Frank of Massachusetts opposed legislation to reorganize oversight in 2000 (when Clinton was still president), 2003 and 2004, saying of the 2000 legislation that concern about Fannie and Freddie was "overblown." Just last summer, Senate Banking Committee chairman Chris Dodd called a Bush proposal for an independent agency to regulate the two entities "ill-advised."
But saying that Democrats killed the 2005 bill "while Mr. Obama was notably silent" oversimplifies things considerably. The bill made it out of committee in the Senate but was never brought up for consideration. At that time, Republicans had a majority in the Senate and controlled the agenda. Democrats never got the chance to vote against it or to mount a filibuster to block it.
By the time McCain signed on to the legislation, it was too late to prevent the crisis anyway. McCain added his name on May 25, 2006, when the housing bubble had already nearly peaked. Standard & Poor's Case-Schiller Home Price Index, which measures residential housing prices in 20 metropolitan regions and then constructs a composite index for the entire United States, shows that housing prices began falling in July 2006, barely two months later.
The Real Deal
So who is to blame? There's plenty of blame to go around, and it doesn't fasten only on one party or even mainly on what Washington did or didn't do. As The Economist magazine noted recently, the problem is one of "layered irresponsibility ... with hard-working homeowners and billionaire villains each playing a role." Here's a partial list of those alleged to be at fault:
The Federal Reserve, which slashed interest rates after the dot-com bubble burst, making credit cheap.
Home buyers, who took advantage of easy credit to bid up the prices of homes excessively.
Congress, which continues to support a mortgage tax deduction that gives consumers a tax incentive to buy more expensive houses.
Real estate agents, most of whom work for the sellers rather than the buyers and who earned higher commissions from selling more expensive homes.
The Clinton administration, which pushed for less stringent credit and downpayment requirements for working- and middle-class families.
Mortgage brokers, who offered less-credit-worthy home buyers subprime, adjustable rate loans with low initial payments, but exploding interest rates.
Former Federal Reserve chairman Alan Greenspan, who in 2004, near the peak of the housing bubble, encouraged Americans to take out adjustable rate mortgages.
Wall Street firms, who paid too little attention to the quality of the risky loans that they bundled into Mortgage Backed Securities (MBS), and issued bonds using those securities as collateral.
The Bush administration, which failed to provide needed government oversight of the increasingly dicey mortgage-backed securities market.
An obscure accounting rule called mark-to-market, which can have the paradoxical result of making assets be worth less on paper than they are in reality during times of panic.
Collective delusion, or a belief on the part of all parties that home prices would keep rising forever, no matter how high or how fast they had already gone up.
The U.S. economy is enormously complicated. Screwing it up takes a great deal of cooperation. Claiming that a single piece of legislation was responsible for (or could have averted) is just political grandstanding. We have no advice to offer on how best to solve the financial crisis. But these sorts of partisan caricatures can only make the task more difficult.
–by Joe Miller and Brooks Jackson
Sources
Benston, George J. The Separation of Commercial and Investment Banking: The Glass-Steagall Act Revisited and Reconsidered. Oxford University Press, 1990.
Tabarrok, Alexander. "The Separation of Commercial and Investment Banking: The Morgans vs. The Rockefellers." The Quarterly Journal of Austrian Economics 1:1 (1998), pp. 1 - 18.
Kuttner, Robert. "The Bubble Economy." The American Prospect, 24 September 2007.
"The Gramm-Leach-Bliley Act of 1999." U.S. Senate Committee on Banking, Housing and Urban Affairs. Accessed 29 September 2008.
Bartiromo, Maria. "Bill Clinton on the Banking Crisis, McCain and Hillary." Business Week, 24 September 2008.
Standard and Poor's. "Case-Schiller Home Price History." Accessed 30 September 2008.
"Understanding the Tax Reform Debate: Background, Criteria and Questions." Government Accountability Office. September 2005.
Bianco, Katalina M. "The Subprime Lending Crisis: Causes and Effects of the Mortgage Meltdown." CCH. Accessed 29 September 2008.
http://www.factcheck.org/elections-2008/print_who_caused_the_economic_crisis.html
October 1, 2008
MoveOn.org blames McCain advisers. He blames Obama and Democrats in Congress. Both are wrong.
Summary
A MoveOn.org Political Action ad plays the partisan blame game with the economic crisis, charging that John McCain’s friend and former economic adviser Phil Gramm “stripped safeguards that would have protected us.” The claim is bogus. Gramm’s legislation had broad bipartisan support and was signed into law by President Clinton. Moreover, the bill had nothing to do with causing the crisis, and economists – not to mention President Clinton – praise it for having softened the crisis.
A McCain-Palin ad, in turn, blames Democrats for the mess. The ad says that the crisis “didn’t have to happen,” because legislation McCain cosponsored would have tightened regulations on Fannie Mae and Freddie Mac. But, the ad says, Obama "was notably silent" while Democrats killed the bill. That’s oversimplified. Republicans, who controlled the Senate at the time, did not bring the bill forward for a vote. And it’s unclear how much the legislation would have helped, as McCain signed on just two months before the housing bubble popped.
In fact, there’s ample blame to go around. Experts have cited everyone from home buyers to Wall Street, mortgage brokers to Alan Greenspan.
Analysis
As Congress wrestled with a $700 billion rescue for Wall Street's financial crisis, partisans on both sides got busy – pointing fingers. MoveOn.org Political Action on Sept. 25 released a 60-second TV ad called "My Friends’ Mess," blaming Sen. John McCain and Republican allies who supported banking deregulation. The McCain-Palin campaign released its own 30-second TV spot Sept. 30, saying "Obama was notably silent" while Democrats blocked reforms leaving taxpayers "on the hook for billions." Both ads were to run nationally.
And both ads are far wide of the mark.
MoveOn.org Ad:
"My Friends' Mess"
Narrator: We all know the economy is in crisis, but who's responsible?
McCain: My friends. My friends. My friends.
Narrator: John McCain's friend Phil Gramm wrote the bill that deregulated the banking industry, and stripped the safeguards that would have protected us.
McCain asked Gramm to help write his economic plan.
John McCain's friend Rick Davis lobbied for Fannie and Freddie for years, "defending" them against stricter regulation. And now? He runs McCain's presidential campaign.
And John McCain himself? He's stood by "deregulation" time and time again.
McCain: I think the deregulation was probably helpful to the growth of our economy.
Narrator: And now that the markets are in meltdown? John McCain's friend George Bush wants hardworking Americans to write the biggest blank check in history, bailing out the Wall Street firms and the Washington lobbyists who got us into this mess. Main Street giving Wall Street $700 billion and getting nothing in return? It's outrageous.
Americans shouldn't have to foot the bill for mistakes that John McCain and his friends made.
Narrator: MoveOn.org Political Action is responsible for the content of this advertisement.
Blame the Republicans!
The MoveOn.org Political Action ad blames a banking deregulation bill sponsored by former Sen. Phil Gramm, a friend and one-time adviser to McCain's campaign. It claims the bill "stripped safeguards that would have protected us."
That claim is bunk. When we contacted MoveOn.org spokesman Trevor Fitzgibbons to ask just what "safeguards" the ad was talking about, he came up with not one single example. The only support offered for the ad's claim is one line in one newspaper article that reported the bill "is now being blamed" for the crisis, without saying who is doing the blaming or on what grounds.
The bill in question is the Gramm-Leach-Bliley Act, which was passed in 1999 and repealed portions of the Glass-Steagall Act, a piece of legislation from the era of the Great Depression that imposed a number of regulations on financial institutions. It's true that Gramm authored the act, but what became law was a widely accepted bipartisan compromise. The measure passed the House 362 - 57, with 155 Democrats voting for the bill. The Senate passed the bill by a vote of 90 - 8. Among the Democrats voting for the bill: Obama's running mate, Joe Biden. The bill was signed into law by President Clinton, a Democrat. If this bill really had "stripped the safeguards that would have protected us," then both parties share the blame, not just "John McCain's friend."
The truth is, however, the Gramm-Leach-Bliley Act had little if anything to do with the current crisis. In fact, economists on both sides of the political spectrum have suggested that the act has probably made the crisis less severe than it might otherwise have been.
Last year the liberal writer Robert Kuttner, in a piece in The American Prospect, argued that "this old-fashioned panic is a child of deregulation." But even he didn't lay the blame primarily on Gramm-Leach-Bliley. Instead, he described "serial bouts of financial deregulation" going back to the 1970s. And he laid blame on policies of the Federal Reserve Board under Alan Greenspan, saying "the Fed has become the chief enabler of a dangerously speculative economy."
What Gramm-Leach-Bliley did was to allow commercial banks to get into investment banking. Commercial banks are the type that accept deposits and make loans such as mortgages; investment banks accept money for investment into stocks and commodities. In 1998, regulators had allowed Citicorp, a commercial bank, to acquire Traveler's Group, an insurance company that was partly involved in investment banking, to form Citigroup. That was seen as a signal that Glass-Steagall was a dead letter as a practical matter, and Gramm-Leach-Bliley made its repeal formal. But it had little to do with mortgages.
Actually, deregulated banks were not the major culprits in the current debacle. Bank of America, Citigroup, Wells Fargo and J.P. Morgan Chase have weathered the financial crisis in reasonably good shape, while Bear Stearns collapsed and Lehman Brothers has entered bankruptcy, to name but two of the investment banks which had remained independent despite the repeal of Glass-Steagall.
Observers as diverse as former Clinton Treasury official and current Berkeley economist Brad DeLong and George Mason University's Tyler Cowen, a libertarian, have praised Gramm-Leach-Bliley has having softened the crisis. The deregulation allowed Bank of America and J.P. Morgan Chase to acquire Merrill Lynch and Bear Stearns. And Goldman Sachs and Morgan Stanley have now converted themselves into unified banks to better ride out the storm. That idea is also endorsed by former President Clinton himself, who, in an interview with Maria Bartiromo published in the Sept. 24 issue of Business Week, said he had no regrets about signing the repeal of Glass-Steagall:
Bill Clinton (Sept. 24): Indeed, one of the things that has helped stabilize the current situation as much as it has is the purchase of Merrill Lynch by Bank of America, which was much smoother than it would have been if I hadn't signed that bill. ...You know, Phil Gramm and I disagreed on a lot of things, but he can't possibly be wrong about everything. On the Glass-Steagall thing, like I said, if you could demonstrate to me that it was a mistake, I'd be glad to look at the evidence. But I can't blame [the Republicans]. This wasn't something they forced me into.
No, Blame the Democrats!
McCain-Palin 2008 Ad: "Rein"
Narrator: John McCain fought to rein in Fannie and Freddie.
The Post says: McCain "pushed for stronger regulation"..."while Mr. Obama was notably silent."
But, Democrats blocked the reforms.
Loans soared. Then, the bubble burst. And, taxpayers are on the hook for billions.
Bill Clinton knows who is responsible.
Clinton: I think the responsibility that the Democrats have may rest more in resisting any efforts by Republicans in the Congress or by me when I was President to put some standards and tighten up a little on Fannie Mae and Freddie Mac.
Narrator: You're right, Mr. President. It didn't have to happen.
McCain: I'm John McCain and I approve this message.
The McCain-Palin campaign fired back with an ad laying blame on Democrats and Obama. Titled "Rein," it highlights McCain's 2006 attempt to "rein in Fannie and Freddie." The ad accurately quotes the Washington Post as saying "Washington failed to rein in" the two government-sponsored entities, the Federal National Mortgage Association ("Fannie Mae") and the Federal Home Loan Mortgage Corporation ("Freddie Mac"), both of which ran into trouble by underwriting too many risky home mortgages to buyers who have been unable to repay them. The ad then blames Democrats for blocking McCain's reforms. As evidence, it even offers a snippet of an interview in which former President Clinton agrees that "the responsibility that the Democrats have" might lie in resisting his own efforts to "tighten up a little on Fannie Mae and Freddie Mac." We're then told that the crisis "didn't have to happen."
It's true that key Democrats opposed the Federal Housing Enterprise Regulatory Reform Act of 2005, which would have established a single, independent regulatory body with jurisdiction over Fannie and Freddie – a move that the Government Accountability Office had recommended in a 2004 report. Current House Banking Committee chairman Rep. Barney Frank of Massachusetts opposed legislation to reorganize oversight in 2000 (when Clinton was still president), 2003 and 2004, saying of the 2000 legislation that concern about Fannie and Freddie was "overblown." Just last summer, Senate Banking Committee chairman Chris Dodd called a Bush proposal for an independent agency to regulate the two entities "ill-advised."
But saying that Democrats killed the 2005 bill "while Mr. Obama was notably silent" oversimplifies things considerably. The bill made it out of committee in the Senate but was never brought up for consideration. At that time, Republicans had a majority in the Senate and controlled the agenda. Democrats never got the chance to vote against it or to mount a filibuster to block it.
By the time McCain signed on to the legislation, it was too late to prevent the crisis anyway. McCain added his name on May 25, 2006, when the housing bubble had already nearly peaked. Standard & Poor's Case-Schiller Home Price Index, which measures residential housing prices in 20 metropolitan regions and then constructs a composite index for the entire United States, shows that housing prices began falling in July 2006, barely two months later.
The Real Deal
So who is to blame? There's plenty of blame to go around, and it doesn't fasten only on one party or even mainly on what Washington did or didn't do. As The Economist magazine noted recently, the problem is one of "layered irresponsibility ... with hard-working homeowners and billionaire villains each playing a role." Here's a partial list of those alleged to be at fault:
The Federal Reserve, which slashed interest rates after the dot-com bubble burst, making credit cheap.
Home buyers, who took advantage of easy credit to bid up the prices of homes excessively.
Congress, which continues to support a mortgage tax deduction that gives consumers a tax incentive to buy more expensive houses.
Real estate agents, most of whom work for the sellers rather than the buyers and who earned higher commissions from selling more expensive homes.
The Clinton administration, which pushed for less stringent credit and downpayment requirements for working- and middle-class families.
Mortgage brokers, who offered less-credit-worthy home buyers subprime, adjustable rate loans with low initial payments, but exploding interest rates.
Former Federal Reserve chairman Alan Greenspan, who in 2004, near the peak of the housing bubble, encouraged Americans to take out adjustable rate mortgages.
Wall Street firms, who paid too little attention to the quality of the risky loans that they bundled into Mortgage Backed Securities (MBS), and issued bonds using those securities as collateral.
The Bush administration, which failed to provide needed government oversight of the increasingly dicey mortgage-backed securities market.
An obscure accounting rule called mark-to-market, which can have the paradoxical result of making assets be worth less on paper than they are in reality during times of panic.
Collective delusion, or a belief on the part of all parties that home prices would keep rising forever, no matter how high or how fast they had already gone up.
The U.S. economy is enormously complicated. Screwing it up takes a great deal of cooperation. Claiming that a single piece of legislation was responsible for (or could have averted) is just political grandstanding. We have no advice to offer on how best to solve the financial crisis. But these sorts of partisan caricatures can only make the task more difficult.
–by Joe Miller and Brooks Jackson
Sources
Benston, George J. The Separation of Commercial and Investment Banking: The Glass-Steagall Act Revisited and Reconsidered. Oxford University Press, 1990.
Tabarrok, Alexander. "The Separation of Commercial and Investment Banking: The Morgans vs. The Rockefellers." The Quarterly Journal of Austrian Economics 1:1 (1998), pp. 1 - 18.
Kuttner, Robert. "The Bubble Economy." The American Prospect, 24 September 2007.
"The Gramm-Leach-Bliley Act of 1999." U.S. Senate Committee on Banking, Housing and Urban Affairs. Accessed 29 September 2008.
Bartiromo, Maria. "Bill Clinton on the Banking Crisis, McCain and Hillary." Business Week, 24 September 2008.
Standard and Poor's. "Case-Schiller Home Price History." Accessed 30 September 2008.
"Understanding the Tax Reform Debate: Background, Criteria and Questions." Government Accountability Office. September 2005.
Bianco, Katalina M. "The Subprime Lending Crisis: Causes and Effects of the Mortgage Meltdown." CCH. Accessed 29 September 2008.
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