Writing at Bloomberg News, economic analyst Kevin Hassett unravels the story behind the recent financial meltdown (H/T Rossputin). An opportunity to avert the crisis came in 2005 with the introduction of legislation to provide a “world-class regulator” of government-sponsored mortgage loan institutions Fannie Mae and Freddie Mac. Then-Federal Reserve Chairman Alan Greenspan noted that failure to address the problem was “placing the total financial system of the future at a substantial risk.'”
Here’s the key passage from Hassett’s article (though you should really read the whole thing – it’s not terribly long):
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.
Hassett highlights the fact that many Democratic politicians benefited greatly from the groups lobbying against the remedy. For example, the Obamessiah has received $125,000 during his brief career from Fannie Mae and Freddie Mac employees and PACs. With judgment like this, why should we trust Barack Obama now?
For all his faults, Hassett also points out that the Republican candidate for President, John McCain, “was one of the three cosponsors of S.190, the bill that would have averted this mess.” Of course, neither side shoulders the blame alone. Republican Congressional leaders, foreshadowing their 2006 defeats, failed to show enough leadership to push the issue over Democratic opposition. Without the real sense of imminent disaster, they were doing what politicians tend to do. But by no means should we blame the “free market”.
Of course, there are other major fiscal problems underlying recent developments, but the subprime mortgage meltdown via Fannie Mae and Freddie Mac is the immediate cause. It’s instructive to see where the respective Presidential candidates have stood. If John McCain were in the White House, we at least have a reasonable expectation that he could exert more leadership behind a solution like the 2005 bill he co-sponsored. With Barack Obama in charge, however, it looks like all we could “hope” for is a little spare “change,” while the lobbyists help pay his bills.
Besides being an “economics analyst”, Kevin Hasset is also an advisor to John McCain, which might explain why he didn’t bother to mention Phil Gramm’s role in legalizing the very financial instruments at the heart of the mess or Rick Davis’s role in spreading cash around Washington for Fannie and Freddie. This is a bi-partisan mess.
Oh, and lets not forget Fannie and Freddie were just one of the many interconnected firms at the center of this mess.
Erm, make that two of the many.
To your 1st comment: No disagreement that it’s a bipartisan mess. There are Democrats and Republicans that have their fingerprints on this one. Yes, while Hasset doesn’t tell the whole story here, there is no denying the accuracy of the facts he does present.
More importantly, where is the press coverage of the fact that Barack Obama in his 3+ short years in the U.S. Senate has been on the take from Fannie & Freddie more than all but two other Senators? Is this hope and change?
Perhaps even more significant is the contrast in leadership between the two candidates that this situation has fostered.
To your 2nd comment: You are downplaying the significant leading role of Fannie & Freddie in this crisis.
I’m not downplaying anything. Without Countrywide, Ameriquest and their sub-prime friends issuing the bad debt and structuring them into CDO’s to hide the risk, the ratings agencies rating them safe without knowing if they truly were, and Lehman, Bear Stearns and everyone else on Wall Street buying just as much of this bad debt as Fannie and Freddie did, this would not be a crisis. Fannie and Freddie aren’t the center of this crisis – I’d say the ratings agencies who either lied about or didn’t understand the risk they were claiming deserved A+ ratings, and the regulations around the ratings process, are the real problem here – they are just the largest victim (after the taxpayers of course)