If we are pointing fingers, and it seems as though everyone is, about the mess we call our economy, then read this and point away....
Shortly before the House rejected the $700-billion “bailout” of the U.S. financial system, Speaker Nancy Pelosi accused Republicans of causing the problem. She said, “They claim to be free-market advocates, when it’s really an ‘anything goes’ mentality: no regulation, no supervision, no discipline.” The timing of Pelosi’s remarks was curious: One would think the moments before a tense vote in which Republican support is essential would be a time to avoid partisan attacks. Not our Nancy.
Pelosi’s timing was off, but we agree in part with her assessment. An “anything goes” mentality toward two firms in particular contributed substantially to the financial meltdown. “No regulation, no supervision, no discipline” is definitely the right way to describe the attitude that allowed Fannie Mae and Freddie Mac to grow into unstable behemoths that helped inflate the housing bubble and left taxpayers holding a mountain of bad debt.
Of course, the “free-market advocates” pilloried by Pelosi long ago recognized the risks Fannie and Freddie posed to the financial system. Fannie and Freddie are government-sponsored enterprises (GSEs). As long as they’ve been around, investors have assumed that the U.S. government would never let them fail. Their implied taxpayer backing allowed them to borrow at low rates and maintain debt-to-equity ratios that would have caused concern at other firms.
Direct and indirect government subsidies allowed the GSEs to grow huge. Starting in 1970, they doubled the amount of mortgage debt on their books every five years — from $15 billion in 1970 to over $5 trillion when they finally collapsed. Free-market advocates warned that Fannie and Freddie’s heedless growth was, to quote Alan Greenspan, “placing the total financial system of the future at a substantial risk.” But the GSEs built an impressive lobbying machine to keep would-be regulators at bay.
Over the past ten years, Fannie and Freddie spent over $200 million on lobbying and campaign contributions. Democrats Chris Dodd, John Kerry, and Barack Obama — the top recipients of Fannie and Freddie largesse — have all broken the $100,000 mark. It should come as no surprise that Senate Democrats were the key obstacle to reforming Fannie and Freddie when Congress had a chance in 2005, before the mortgage crisis spiraled out of control.
Fannie and Freddie’s defenders in the House were no better. Massachusetts Democrat Barney Frank maintained that Fannie and Freddie did not pose a risk to the financial system, even as they helped inflate the housing bubble by subsidizing mortgage debt. Then, when the bubble finally burst, Frank tried to loosen Fannie and Freddie’s constraints so they could reinflate it. They might have succeeded if they hadn’t collapsed, requiring a bailout from taxpayers that could cost as much as $200 billion.
Fannie and Freddie were not the only irresponsible players whose behavior led to the mortgage meltdown. The Federal Reserve held interest rates too low for too long, making mortgage debt look like a better investment than it was. The Community Reinvestment Act, championed by Democrats, coerced banks into lowering their credit standards to meet diversity targets. And certainly, Wall Street deluded itself into thinking that relentless securitization could make risk disappear. But Fannie and Freddie were definitely the biggest players, and the Democrats’ “anything goes” mentality allowed their worst excesses to go unregulated, unsupervised, and undisciplined.
Reprinted from the National Review Online
