It’s pretty much undeniable that the Bush administration was asleep at the switch as it allowed the current financial crisis to occur. So, naturally,the latest right-wing talking points are all about how the Democrats and the victims of mortgage fraud supposedly caused the rash of home foreclosures and ensuing credit freeze that now threatens to spread to the rest of the U.S. economy.
These bogus arguments are absurd but have to be addressed anyway, because as usual they are being repeated all over the place. I think it’s important to get the truth out before the Republicans re-write history. If they can disseminate their lies without contradiction this time, just wait until they get busy trying to blame Democrats for “losing” the unwinnable Iraq occupation.
Michael Ettlinger at the Center for American Progress summarizes the top three right-wing lies:
It’s the Fault of the Community Reinvestment Act
The Community Reinvestment Act is a law that was designed to end the practice of commercial banks of refusing to extend credit to entire, usually minority, neighborhoods—a practice called “redlining.” The CRA imposes a duty on banks to lend to borrowers in neighborhoods in which it takes deposits. The claim is that CRA forced banks into making foolish loans to risky borrowers. There are two fundamental problems with that claim:
- The CRA was passed in 1977—over 25 years before subprime loans came into vogue. So the timing is wrong.
- The CRA only covers commercial banks and savings-and-loan institutions—not other forms of mortgage-offering enterprises. Fact is, most subprime loans weren’t made by the lenders subject to CRA.
There has been much written proving CRA’s innocence in myriad ways (see links to additional resources at the end of this column). That, unfortunately, hasn’t stopped those who can’t face up to the facts from claiming, and claiming, and claiming that CRA is the root of it all.
It’s the fault of Fannie Mae and Freddie Mac
Fannie Mae and Freddie Mac are private institutions that were set up by Congress. Their primary job is to be a secondary market for mortgages. That is, a lender originates a mortgage and then sells it to Fannie or Freddie. The idea is that by providing a secondary market for mortgages, mortgage originators can originate more loans. They sell them, which gives them the capital to loan again. The essential claim of the ideologues is that these institutions led the way into the mortgage crisis by lending money to those who couldn’t afford it. They blame a law that requires Fannie and Freddie to support affordable housing and then jump to the fact that Fannie and Freddie ended up going bust and are now in conservatorship under the U.S. Treasury.
These facts do not, however, add up to any causal nexus with the mortgage crisis. This too has been rebutted thoroughly, but to touch on the most important points:
- Fannie and Freddie did not guarantee and securitize subprime loans. Such loans didn’t meet their conforming loan standards. In fact, as the subprime market was building, Fannie and Freddie lost market share because they were under stricter standards. Thus, their participation in the secondary market did not assist in the creation of the subprime market.
- It’s true, however, that Fannie and Freddie were damaged by the subprime crisis because everyone in the housing sector was damaged by falling home prices and, more significantly, the two companies branched out into a broader investment portfolio. In that portfolio were included mortgage-backed securities that hurt all of those who purchased them. Fannie and Freddie weren’t the biggest players in this and, most importantly, started this practice very late in the game. In fact, the subprime market had already started to go bad when they started their purchases (which speaks poorly for Fannie and Freddie’s decision making, but precludes them from responsibility for the crisis).
- Fannie and Freddie were supposed to be more closely supervised than other lenders—with their own regulator, which was supposed to keep a special eye on them because they are important institutions. Those regulators, who were part of the Bush administration, failed along with the rest of the Bush regulatory apparatus to stop the problem.
It’s the fault of immigrants
Finally, there’s this idea that it’s all the fault of illegal immigrants (Hispanic illegal immigrants to be specific). The Center’s David Abromowitz takes this one on deftly. The bottom line: Facts show that Hispanics received only about 20 percent of subprime loans. And, needless to say, most of them are not in the country without documentation.
Conclusion
I’d like to say “nice try” to those who are attempting to shift the blame for the mess we’re in to whatever programs, institutions, or people they find handy. But, really, they’re so far off the mark that one can’t even give them points for cleverness. All they have going for them is bombast– they say it confidently and often and hope it sticks even if it is dishonest. It would really serve the debate better for them to stick to their ideological guns. It would be an excellent time to have serious discussion over the appropriate level of supervision over the various markets that comprise our economy.
Check out Ettlinger’s complete post and his sources for more information.
What really happened: In the 1990s, after the Republicans took control of Congress, Senator Phil Gramm and an army of lobbyists were able to enact the Gramm-Leach-Bliley Act which largely deregulated the banking industry and allowed banks to merge with securities firms. John McCain strongly supported and voted for the bill, which passed with a veto-proof majority. After that, Gramm slipped an amendment into an omnibus appropriations bill which deregulated the trading of financial instruments and allowed banks and brokers to trade mortgages as if they were stocks and bonds. Passed without any debate in either the House or Senate, this opened up the floodgates to massive trading of sub-prime mortgages.
More here: Foreclosure Phil. “Who’s to blame for the biggest financial catastrophe of our time? There are plenty of culprits, but one candidate for lead perp is former Senator Phil Gramm.”
Just to annoy jdberger, you can also refer to my One Utah post from last December: A Rising Tide Lifts All Yachts.
#1 by Bob S. - October 3rd, 2008 at 06:06
Richard,
Let’s take on your disasters :
What was the exact warning that Bush received? Was it that Al-Qaeda on 9/11 is going to hijack planes and fly them into World Trade Center Tower 1 & 2, the Pentagon and Try for the White House!! Heck, No!!
The warning was along the lines of Al-Qaeda is up to something— like we didn’t know that all the way back to the 1st WTC attack under Clinton — and it might involve planes. Of course under the Clinton administration, the restrictions on sharing information between intelligence agencies was enforced by Jamie Gorelick.
What do you expect him to do? Rush to the White House and order an immediate attack on a foreign country ? Were appropriate steps taken, no but I’m not sure that anything could have prevented it without wholesale changing of the regulations and rules that NOTHING that had happened so far justified.
Again, what do you expect him to do? Fly to the Trade Center and climb stairs trying to get people out? Or should he move to a place where communications are secure. Many of the policies and procedures are in place prior to Bush or Clinton, those are automatic and should be done to protect the president, regardless of who is in the office.
The both true and untruth in that statement, in my opinion. Al-Qaeda is an umbrella organization; I will agree that more groups have joined that organization. I disagree they are stronger then before and a greater threat. I do think they are more desperate then every but if they could have attacked on American soil successfully they would have. Attempts have been made and blocked.
I might actually agree with you on this, but had it worked out it would have been one of the most successful decisions. Of course, Iraq is in complete collapse, Ba’ath Loyalist have taken over……(What, nothing like that has happened yet?)….strike that.
How about we let it play out before we declare it the worst?
I agree that he planned it and the planning didn’t cover the post invasion and regime change scenarios as well as it should have. That is the biggest blunder. I think the Defense and State Departments didn’t plan together and that is Bush’s fault.
I disagree that he lied, based on the evidence at the time he stated what we truly believed. What many other countries in the world believed.
So, your point is what? Times change, combat scenarios change. There has never been a war like this one. The other combats were against countries with defined borders, following (mostly) established rules of conduct. This is a war against an enemy that does not follow the Geneva Convention. Get them to agree to that and meet in the field, then we’ll see how long the fighting lasts.
War is hell, this war is no different. I feel sorry for the refugees and the families that lost loved ones. The people I talk to that have been there all say the same thing. Most of the people on the streets in Iraq are glad we came and took out Hussien.
As far our reputation, I would like America to be respected but will settle for being feared.
I always like this one…each bigger and worse disaster is called this, until the next one. A city almost wiped out. Of course Bush was at fault for not recognizing the corruption in the Corp of Engineer, Louisiana, New Orleans, etc; that happened prior to his administration and rooting it out. Of course, that corruption lead to most of the problems with the levee system that failed, but it’s still Bush’s fault, right?
Yawn, heard it before…guess people haven’t heard of modern communications, right? So Bush was absolutely isolated from the world, nope.
This one really gets me ticked off….most of those people would have been saved with prompt action from the City and State officials.
Did the city adequately plan for refugees and those seeking shelter? NO
The failure doesn’t lie solely with the Federal government. FEMA isn’t a first response agency and shouldn’t be.
I’ll agree with portions of this, but again it’s not all Bush’s fault. Is the federal government moving as fast as they should, no. But to blame it solely on Bush ignores the city, parish and state roles and that is simply wrong.
#4 - We just finished arguing this, I’ll not repeat myself.
#2 by Richard Warnick - October 3rd, 2008 at 08:22
Bob S.– You should let yourself off the hook. I don’t expect you to defend every incompetent decision by President Bush and his administration. Just saying…
In the case of Hurricane Katrina, modern communications failed President Bush and Secretary Chertoff. At least 24 hours after the levees breached, neither was informed of the disaster. Bush, unlike practically everybody else, couldn’t be bothered to turn on CNN. His aides later had to make a DVD compendium of news coverage for him to watch so he could catch up.
#3 by Bob S. - October 3rd, 2008 at 08:33
Richard,
It wasn’t modern communications that failed Bush and Chertoff, it was people.
I notice that out of all the fisking that is the only point you can bring up.
Let’s face it, the Bush administration hasn’t been the complete disaster you and the other liberals here have made it out to be. Yes, it’s been bad enough, but if someone sneezes in Timbuktu, it’s not all Bush’s fault.
Let’s focus on the number of senators, including to my disappointment the two from Texas, who voted for the Pork laden bail out plan. Let’s get them out of office if they don’t learn who they are supposed to be serving.
#4 by Richard Warnick - October 3rd, 2008 at 08:44
Bob S.– I was going easy on you, because it’s a waste of time to argue all the details of the last eight years.
You say it wasn’t communications that failed, it was people. I say it was bad leadership. Bush and Chertoff were in an information vacuum because underlings were afraid to bring them the bad news. They were among the last to know about the disaster in New Orleans.
Bush screwed up worse than any other President in U.S. history. End of story.
I agree with you that the bailout plan deserves to be defeated, but the pork is a side issue (except for the rum subsidy, I say order a round of drinks for the House– they need some liquid courage!) The fatal flaw has been identified by Paul Krugman: NO EQUITY STAKE, NO DEAL.
Buying worthless assets is a mistake, it adds trillions to the National Debt and carries a tremendous moral hazard. If there is a bailout, we ought to purchase equity to re-capitalize the financial giants we bail out.
#5 by jdberger - October 3rd, 2008 at 10:05
Richard - you didn’t answer the question. GLBA and CFMA weren’t solely Republican bills. GLBA passed with 90% of the Senate and was signed by a Dem president. There weren’t 90 Republican Senators in 1999.
You FAIL.
CFMA was first introduced in the House. It was introduced in the Senate by Richard Lugar, NOT Phil Gramm.
FAIL AGAIN
President Clinton signed that one, too.
Triple FAIL.
Would you like to try again, Richard?
#6 by Richard Warnick - October 3rd, 2008 at 10:23
jd– Always good for a laugh.
#7 by jdberger - October 3rd, 2008 at 10:35
Oh - and can you give me a brief explanation of the CFMA, what it did and how it related to Mortgages, Richard?
I’m terribly interested.
#8 by Richard Warnick - October 3rd, 2008 at 10:44
jd– See post above.
#9 by jdberger - October 3rd, 2008 at 10:48
But the trading of financial instruments was already allowed through the CFTC. Why was the CFMA needed, Richard?
#10 by jdberger - October 3rd, 2008 at 10:48
Oh - and if it was passed without debate, doesn’t that mean that there wasn’t any disagreement?
#11 by Richard Warnick - October 3rd, 2008 at 10:59
I don’t think either bill was needed, they were both reckless and irresponsible. CFMA was passed without debate because Phil Gramm sneaked it into a must-pass omnibus appropriations bill.
#12 by Bob S. - October 3rd, 2008 at 11:27
Richard,
Please tell me what special powers the Republicans have to make the Democrats abandon their responsibilities.
You’ve stated before in many different variations this time “sneaked” into, “got the Democrats to”.
Come on, either the Republicans are better at the political games (I doubt it, both parties seem well matched), the Republicans have special powers (CIA experiments with mind control paid off for them?), The Democrats are absolutely lousy at their jobs (again, I doubt it) or the Democrats go along with the plans because that is how the game is played or —Your explanation?
#13 by jdberger - October 3rd, 2008 at 11:32
Absolutely GLBA was needed. If you disagree, please explain why.
And CFMA resolved an SEC/CFTC conflict.
And Lugar presented the bill, not Gramm.
Amendments to bills are often debated. A $1/hr minimum wage increase was debated when introduced by Rep. Traficante. Rep. Vitter tried to add a bill increasing special ed funding by over $1 billion. It was briefly debated and failed.
You’re ludicrous assertion that CFMA was “snuck” into the Consolidated Appropriations Act is devoid of reality. Unless, of course, you are claiming that the Democrats in Congress are so vapid as to not pay attention when they vote on things. And the President was equally stupid. Are you?
Presidents have vetoed “must pass” appropriations bills before. GW vetoed one that had one itty bitty line regarding troop withdrawal timelines.
Geez, Richard. Demand some backbone from these folks.
#14 by Richard Warnick - October 3rd, 2008 at 11:32
Bob S.– All of the above. The Republicans are better at political/legislative games and the Democrats are lousy at their jobs.
But your argument boil down to a plea for Democrats to thwart bad Republican policies or accept responsibility for them. Probably the Dem politicians think, give them enough rope and they’ll hang themselves. Both parties are wrong, but I would logically hold the Republicans responsible for Republican policies.
#15 by jdberger - October 3rd, 2008 at 11:33
The Dems are finger pointing weasels?
(Not to let the Repubs off the hook - they like to cry and point fingers, too)
#16 by Bob S. - October 3rd, 2008 at 11:45
Richard,
One of your chief complaints is that Bush has had 8 years to correct the problems and failed to do so, right?
So, if Clinton was president for 8 years, control of Congress has gone back and forth, etc, etc; doesn’t that mean the Democrats have just as much responsibility to correct problems?
Not all of these problems have occurred just since Bush has been president. Certainly, since 2006 the Democrats in Congress should have tried to correct the problems right? Or do you count writing letters (ala Obama) to be sufficient action?
Here is the difference, I hold Congress and the President responsible for congressional policies, laws, regulations. It’s not a political party issue, it’s an out of control government, not listening to the people issue.
I fight here for the republicans because of comments just like the one above. I see both parties at fault, but only see the authors and liberal commenters blaming the republicans.
#17 by Richard Warnick - October 3rd, 2008 at 12:04
Bob S.– You are starting to sound like John McCain: blaming the Democrats, and in the next breath claiming that this is no time for finger-pointing. The party in power should accept the blame for its own policies. Republicans have controlled the White House, the Congress or both for 26 of the last 28 years.
The most amusing non-sequitur from Governor Palin last night was when she made the claim that talking about the Bush administration is dwelling in the past. Bush is the President right now, and still has almost four months to go amid an unfolding economic catastrophe that will complete his legacy as the Worst President Ever.
Paul Krugman writes “the economy is now hostage to the Treasury Department’s blunders.”
#18 by Bob S. - October 3rd, 2008 at 12:30
Richard,
What part of “Congress is to blame” hard to understand? Are democrats part of congress?
If they are and can not point to every effort, not just token efforts but every effort, every trick, every rule used to stop the problems then they are part of the problem.
Period, end of Story.
Just like the republicans are part of the problem. Period End of Story.
I’ll say it again, I fight here against the characterizations, just like the one you are trying to pass off here, that ONLY the republicans are to blame. I do point out the democrats failure to act or prevent because so many people here think that Darth Cheney has used the Force to gain control of Congress. It hasn’t happened.
Love how you lump everything together to it appears the Republicans have controlled nearly everything nearly every second of the time. Not what has really happened, has it?
#19 by jdberger - October 3rd, 2008 at 12:30
Ah, yes. Krugman. He’s really quite good at hindsight.
But, I don’t quite recall him sounding the alarm more than a year ago. Nothing beyond the same old partisan bitching.
Of course, he wasn’t such a whiner when he was happily pocketing money consulting for Enron, was he?
And yes, Bob and I do point fingers at Dems, because if we didn’t folks like you would get away with promoting absolute falsehoods. We’re just trying to help out, Richard.
We care. We really do.
#20 by Leo Brown - October 3rd, 2008 at 21:25
Bob,
You wrote:
“Question, what would have the press said when Bush required financial institutions to reduce sub prime loans or implement higher criteria?
You and I know he would have been pilloried for being against “the poor getting houses”.
I don’t believe that. Subprime loans are often predatory loans. They are often weapons used against the poor. The lenders take the money and the house. When was anyone ever pilloried for opposing subprime loans? Moreover, President Bush never lacked the courage to stand up to critics on the left, and right-wing talk radio would back him up, as usual.
”Even with that, he’s tried, can you deny that?”
When did he try?
“Given the “blame ” both sides, wouldn’t be just as much moral hazard to elect the democrats?”
Given that the GOP has been sitting where the buck stops for eight years and in charge of Congress for six years, do you really think the blame is equal?
Do you really think if the Dow was hitting 16,000 and unemployment falling that the GOP wouldn’t claim the credit?
Do you really think that if the Bush economic record had occurred under the Clinton administration, that the GOP wouldn’t beat him over the head for it?
The GOP game is to pretend they haven’t been in power and find someone else, anyone, to spread blame to, at least when things go wrong. But I do blame the Democrats for one thing, and that is for not being liberal enough, for being too much like the GOP, for not standing up more to the GOP.
As for Clinton, I never voted for Clinton, and never supported the Clinton restoration. The problem is the whole conservative zeitgeist of dismantling the New Deal. The problem with Clinton is that he went along with that zeitgeist and acted too much like a conservative, though Robert Rubin did the crises during his tenure fairly well. For example, he provided loan guarantees to Mexico to stabilize a crisis. A stitch in time can save nine.
You think of government regulation as a sledgehammer. I think the free market has been acting like a sledgehammer. Every time we deregulate the markets (think back to the savings and loan crisis), we are reminded why we had to have regulations in the first place. Every time the financial services industry comes up with something new and creative, the government needs to keep up. Without fancy means to securitizing the bad debts, the lending institutions would never have been able to inflate the bubble as far as they did.
As for poor little ACORN, the question is not how many lawsuits were filed, but why they were filed and what was the outcome? When did a judge ever force a bank to make a loan that was manifestly below prudent limits? I have posted, and you have never refuted, that CRA loans had a relatively low rate of delinquency. You keep assuming that bad loans were only going to the poor. You have no quantification for your argument, just the assumption that the blame must fall somewhere other than the people on whose watch the wreck occurred. You haven’t explained how ACORN managed to bring down banks in Europe. But somehow conservatives believe it must all be the fault some liberal group somewhere, especially a little group they don’t like, when the conservatives have been running the show since President Reagan.
#21 by jdberger - October 3rd, 2008 at 22:20
Leo - I’m with you most of the way here - but the following statement confuses me…
The European markets are pretty highly regulated (more than they are here) - and last time I checked, the Republicans can’t vote in European legislatures (though Barack apparently believes that European citizens can vote in US elections) -
So - if the European banks failed - how was this the fault of the Republicans?
Just wonderin’.
#22 by Leo Brown - October 4th, 2008 at 07:43
JD,
A good question and it goes right to the heart of the matter. In the deregulated financial and securities markets, new financial instruments like CDO’s, collateralized debt obligations were invented. A CDO is a debt security collateralized by a variety of debt obligations including bonds and loans of different maturities and credit quality. CDO’s originated in the 1990’s when financial institutions began moving debts off their balance sheets. (Remember Enron? Remember the telecom meltdown?). I recommend the book Liar’s Poker: Rising Through the Wreckage on Wall Street for background.
Risk was spread, and supposedly reduced, by the use of derivatives. Derivatives are financial instruments whose values depend on the value of other underlying financial instruments. This includes default credit swaps (CDS’s). The CDS market exploded over the past decade to more than $45 trillion in mid-2007. This is roughly twice the size of the U.S. stock market. This is credit gone wild. This isn’t just a few poor folks getting home loans. This was a gigantic credit feeding frenzy. It includes credit cards and all sorts of loans as well as mortgages. What began as a potentially dangerous idea became an extremely dangerous bubble, and the regulators were asleep at the switch for a decade. Even as recently as a few months ago, we were repeatedly assured that the fundamentals were sound. But the fundamentals were not sound. Things had gotten out of hand, and no one still knows, no one can yet put their arms around, how bad things are. Is $700 billion enough? No one knows. That is the scary part.
These instruments are so complicated and so hard to value that people’s eye glaze over when you talk about them. There is even a market for the market for CDO’s of CDO’s (CDO squared). Who can determine was a CDO squared is worth?
Foreign banks and sovereign wealth funds figured the fundamentals of the world’s largest economy (the good old USA) were sound and bought a fair amount of our new fangled financial instruments. We can’t default of them now without bringing down the world economy.
With such complicated instruments and unregulated markets, bad investments got spread around the world like so much toxic waste, and no one can yet figure out how toxic they are because they are so complicated. If a bad loan, however, had stayed with the originating bank, then it would be relatively easy to value and the loss would be limited to the originating institution. Moreover, the bank or the other lending institution would have had a much greater incentive not to originate risky loans. You probably have received in the mail politicizations for credit cards. You probably have seen TV programs offering wealth with no money down. You probably have seen internet ads for mortgages. Now we know where all that ended up. We just can’t figure out how bad it is, how much is good debt and how much is bad.
Ironically, the current mortgage system was rebuilt after the Savings and Loan meltdown, which was caused by the deregulation of the system that was built after the meltdown of the Great Depression.
#23 by Richard Warnick - October 4th, 2008 at 09:08
Thanks for your comments, Leo. You’re educating all of us.
#24 by jdberger - October 4th, 2008 at 11:34
Bingo.
If you can’t explain the security in simple terms on one piece of paper - either you don’t trade it or you trade it at completely your own risk (not sure how to enforce that last part).
#25 by Richard Warnick - October 4th, 2008 at 12:49
It’s interesting that last week President Bush demanded immediate action from Congress or else the economy was going down the tubes. After the congressional leadership fell for his fear factor tactics (not for the first time), Bush tells us that nothing at all will be done for at least a month because now is the time for “careful analysis and deliberation”!
Democrats fooled again. They should have told Bush to wait until after Election Day! When will they ever learn?
#26 by Leo Brown - October 4th, 2008 at 13:00
The fix was in. After the bill failed in the House the first time, you can bet that every Chamber of Commerce official was on the phone to their GOP representative.
The problem is now market psychology. Nothing may be done for a month officially, but the psychological effect is immediate.
We also exported the idea of highly leveraged, unregulated, and complicated financial instruments around the world, and some countries may now be in deeper than we are. Iceland is bailing out banks that are bigger than its GDP.