Barney Frank Ought To Win The Fannie/Freddy Blame Game

I'm going to keep banging this drum until the true story is told. This is a government caused problem and the primary sponsors were Democrats and the main Democrats were Senators Chris Dodd, Barack Obama, Hillary Clinton and Rep. Barney Frank. They helped craft the legislation and culture the enabled Fannie Mae and Freddy Mac to tip the economy into crisis.

There should have been better regulation of Fannie & Freddy. President Bush tried to do it in 2003 and John McCain tried to do in 2006--only to be stonewalled by Democrats.

When you have an institution--like Fannie or Freddy--that has overt backing by the federal government, which takes away the risk of bad investments, you must--MUST--couple that with regulation that ensures these pseudo-governmental institutions do not make bad investments that put the whole economy at risk.

Democrats pushed Fannie & Freddy to buy risky mortgages and stonewalled initiatives to regulate Fannie & Freddy so they didn't meltdown.

This is what happens when Democrats' governmental philanthropic whims become public policy.

(h/t DrewM @ Ace of Spades)

UPDATE: David Boaz blogging at Cato @ Liberty hammers on some of the same things I've been writing about for the last few weeks:

A page one Washington Post headline reports, “Credit Crisis Has Given Obama a Distinct Edge.” Which must be really frustrating for McCain, because McCain did try to reform Fannie Mae and Freddie Mac back in 2006. Obama, meanwhile, as I reported at the American Spectator, received more donations from Fannie Mae in four years than any other senator (except Banking Committee chairman Chris Dodd) received in twenty years. That’s quite an accomplishment–more money from a primary creator of the financial meltdown in just four years than senior members of Congress like Nancy Pelosi, Barney Frank, Richard Shelby, Spencer, Bachus, John Kerry, and Roy Blunt got in entire 20 years that the Center for Responsive Politics tallied. And of course, Obama chose former Fannie Mae CEO James Johnson, who was found to have jiggered the books, to head his search for a vice president.

Shouldn’t somebody in the media ask Obama why he was Fannie Mae’s favorite senator?

Hey media elites, how about this: How about you do your jobs and pose this question to Barack Obama?


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Bret Baer: History Of A Crisis

(h/t Greg Mankiw)


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Stop The Bailout

The more I read the more I'm persuaded against the bailout--in pretty much any form. Greg Mankiw posted a letter from an economist who is opposed to the bailout. The entire letter bears reading because its author, Robert Shimer, does an excellent job explaining the economic ins & outs of the current crisis.

But to my mind, the most compelling graph was the last one. It reads:

In closing, let me mention one other issue that I take very seriously. I recognize that this might not matter much to my Congressman, but in my view it may be the most important issue for global welfare. The U.S. has long been a beacon of free markets. When economic conditions turn sour in Argentina or Indonesia, we give very clear instructions on what to do: balance the budget, cut government employment, maintain free trade and the rule of law, and do not prop up failing enterprises. Opponents of free markets argue that this advice benefits international financiers, not the domestic market. I have always believed (at least since I began to understand economics) that the U.S. approach was correct. But when the U.S. ignores its own advice in this situation, it reduces the credibility of this stance. Rewriting the rules of the game at this stage will therefore have serious ramifications not only for people in this country but for the future of global capitalism. The social cost of that is far, far greater than $700 billion.

I'm a free market/free trade true believer. As such, I cannot support an anti-market solution to a problem that is, to my mind, a government-caused problem. In my opinion, such action will have lasting negative consequences.


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Alternative To The Bailout: Fiscal Darwinism

From a historical perspective, here is the doubt I have about today's economic crisis:

I do not believe that policy makers understand the current economic crisis any better than policy makers did before & during the Great Depression.

All I'm saying is that our increasingly complex understanding of the economy is matched by an equally complex economy. If we truly understood our current economy better than policy makers in the past understood theirs, then we would never have market failures, because smarter policy makers would have averted them.

The corollary that flows from this theory is that I do not trust policy makers to do anything that will actually improve the situation or cause the economy to recover better or faster than a natural market correction.

University of Chicago economist Casey B. Mulligan makes sense to me:

In the somewhat more recent past, economists thought that the non-financial sector in a modern economy revolved around financial markets, despite the facts that only 4 percent of the workforce was employed in the financial sector (including insurance and real estate), and even today that sector employs only 6 percent of the total. President Bush and supporters of the recent massive Wall Street bailout plan still believe Wall Street to be the center of the entire economy.

Economic research over the last couple of decades rejects this belief. It has shown that the financial and non-financial sectors experience quite independent changes, especially over the short and medium term. Take for example the promised yield on the best commercial paper. Fluctuations in this yield are critically important to persons in the financial sector (such as money market traders), but have hardly anything to do with activity outside of that sector. Since World War II, the correlation between the inflation-adjusted commercial paper yield and subsequent inflation-adjusted growth of GDP per capita is zero. That is, GDP growth has been high following high yields just as often as it has been low. It is equally hard to detect a correlation between stock returns, long term bond returns, or commodity returns and subsequent GDP growth. Quite simply, history has shown that the non-financial sector can do well when the financial sector does poorly, and vice versa.

In order to find good predictors of non-financial sector performance, and GDP growth generally, we look to the non-financial sector itself. One of those predictors is the profitability of non-financial capital, or the “marginal product of capital” as we economists call it. The marginal product of capital after-tax is a measure of how much profit (revenue net of variable costs and taxes) that each unit of capital is producing during, say, the last year. When the marginal product of capital after-tax is above average, subsequent rates of economic growth (and subsequent marginal products of capital) also tend to be above average.

Since World War II, the marginal product of capital after-tax averaged between 7 and 8 percent per year. During 2007 and the first half of 2008 – exactly the time when financial markets had been spooked by oil price spikes and housing price crashes – the marginal product had been over 10 percent per year: far above the historical average. Compare this to the marginal product of capital in 1930-33 (the years of Depression-era bank panics): 0.5 percentage points per year less than the postwar years and significantly less than in 1929. The marginal product of capital was also below average prior to the 1982 recession (in this case, far below average) and prior to the 2001 recession. Thus, the surprise was not that GDP continued to grow 2007-8 despite the bleak outlook from Wall Street’s corner of the world, but that GDP growth failed to be significantly above the average. More important from today’s perspective is that much capital in America continues to be productive, and that this will likely permit Americans to advance their living standards as they have in years past. The non-financial sector today looks nothing like it did in 1930.

The weak correlation between asset prices and non-financial sector performance and the strong profitability of today’s non-financial capital are two good reasons to scoff at the idea that the non-financial sector will collapse because of the recent events on Wall Street, and even better reasons to scoff at the Bernanke-Paulson-Bush idea that a massive bailout of financial firms is the key to avoiding a non-financial collapse. Wall Street’s woes are and will be largely limited to Wall Street. The Bush administration should not use the power of the IRS to force the rest of us to board Wall Street’s sinking ship.

Of course, six percent of the workforce is bigger than zero, so a Wall Street mess has indirect effects on the non-financial sector as it absorbs former Wall Street employees and finds alternatives to the financial services Wall Street once provided. But, as long as the government does not get in the way, the marketplace will quickly react to provide the non-financial sector with financial services, even if the main players in that marketplace are no longer named Lehman, Merrill, or Goldman. There are two basic obstacles that Washington might create in this process, both of which are included in the Bernanke-Paulson-Bush proposal. One is to pile on regulation and further impede entry by new firms that might provide financial services to the non-financial sector in the years ahead. The second is to impose a heavy tax burden on the non-financial sector to pay for Wall Street subsidies. The Treasury and the Fed should let Wall Street drown alone, to be replaced by new financial service providers who can swim as robustly as are non-financial American businesses.

(emphasis added)

This feels right--it appeals to the fiscal libertarian in me.

We may yet look back on this "bailout" and conclude, as we have in so many other instances, that the prescription was worse than the disease.


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Economic Crisis Video Primer

(h/t Power Line & Ace)


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NYT: Editorializing Its News Into Irrelevance (Moreso Than Before)

Latest NewsBusters piece is up. This time I address the NYT's coverage of a McCain aide's former employment and its front page coverage vs. $126k worth of campaign donations to Barack Obama and ... the NYT's silence.

More of the Same: NYT Does a Hatchet Job on McCain Campaign

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Political Diary Quote Of The Day

Donald Luskin, Chief Investment Officer of the consulting firm TrendMacro, in a note today to clients:

Only a fool would say that there is no risk to the banking system here. But given the apparent lack of any idea at Treasury or the Fed of how the bail-out would actually work, the terrible track record of those same authorities whose bungling of the Fannie Mae, Freddie Mac and American International Group situations only accelerated the crisis, and the onerous capital-punishing provisions being forced into the plan by Congress, at this point we are tempted to think that the world might be a better place without this particular bail-out. . . . The climate of fear in Washington could easily still force a deal in very short order. No deal would be a shock to markets at first, and it would be a shame to lose what was good about the proposed program. But if it's loaded up with mortgage forbearance mandates and punitive equity grabs, then markets will be far worse with a deal than without one.

(emphasis added)


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The Crisis: A Primer

Courtesy of Big Lizards, an instructive discussion on the how, why, where, what and all the other interrogatives we learned back in 3rd grade.

Excerpt:

Republicans see the collapse of the mortgage market as a potential catastrophe that requires emergency measures... but an aberration caused by government intrusion into the market, not an indictment of capitalism and free markets.

Democrats see it as proof positive that capitalism has been proven to be a fad that will soon pass away, like pet rocks... and a golden opportunity to reintroduce failed liberal fascist economic policies straight out of the platforms of Woodrow Wilson, Franklin Roosevelt, and Jimmy Carter.

(emphasis in original)

This is pretty much the same line I have repeated from day one: This is not a market failure. This is a cautionary tale for the central-planning-inclined, government-market-interventionists, public-policy-do-gooders; this is a lesson in unintended consequences. As though we needed another one after the ethanol/starvation debacle. Of course, this one has been stewing for a little bit longer.

Sure, giving loans to more minorities and poor people sounds good (and gets lots of Democrats elected), but when you give mortgages to people who can't afford them, well, economic crises happen.


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Fannie/Freddy Blacklist: Start With Barney Frank

(h/t Ace)


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Barack Obama's Multiple Choice Test

5I'm slow posting this, but still, funny. Reader Matt P. speculates on why it took Barack Obama so long to give out details of his plan for the bailout.

"Given the gravity of this situation, and based on conversations I have had with both Secretary Paulson and Chairman Bernanke, I have asked my economic team to refrain from presenting a more detailed blue-print of how an immediate plan might be structured until the Treasury and the Federal Reserve have had an opportunity to present their proposal." (ed. note: that's leadership, folks)

Why do you think that is?
A) He doesn't have one?
B) He wants to see what "Bush" is going to do so he can say that it's wrong?
C) His plan will only work if he puts it together (The chosen one concept)?
D) His plan is overtly socialistic and he wants the Treasury and Fed to come out with their covertly (or slightly less) socialistic plan so that his is a little more palatable when it comes to the table after theirs?
E) All of the above?

(ed. note, emphasis added)

I'm going to go with A, B, & D. Though, probably the biggest reason it took the Obama camp so long to put together a serious proposal (mostly plagiarized from John McCain) is because they spent the first few days figuring out how to spin Barack Obama's enabling of Fannie/Freddy-fueled crisis because of their generous campaign donations.


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On The Bailout

Reader Victor S. writes:

The news today said the price-tag is going to be $700 billion. (That would be about $2333 per American, and on tv today one commentator suggested the price tag might go over $1 trillion. That price of $2333 is including everybody, including children, retired, and others who do not actively contribute to the tax base. That means that for those of us who do it will be much higher.)

This bailout appears to have approval of both parties.

I understand the argument that it will hurt the economy if these companies falter and fail. But look at the obvious. It will hurt the economy to ask every person fork over $2000+ (please, again, remember that those who are paying taxes will have to cover those who don't) just to save some companies who, apparently, made some bad choices.

What I cannot figure out is why they have to rush to get this approved.

A final thought; both parties seem to be supporting the President in this. Nobody can blame their political opponents for this one.

(emphasis added)

Republicans are starting to push back against the bailout because it seems to be the opposite of capitalism--anti-capitalism.

The conservative in me approaches this thing with caution. I think this problem was caused by bad Democrat-influenced policy through their campaign fundraisers, Fannie Mae & Freddy Mac. But just because the problem was caused by government intervention does not, of a necessity, mean that government is best suited to "solve" the problem.

In this instance, Democrat socialists will have significantly harmed the American economy only to accrue to themselves greater control of the economy as a result.

Any believer in free markets should be very skeptical of a government solution to this problem--especially when the problem was, at its core, caused by elements of the government. The tendency in crises like these is to want to do something. That is not always the best response.

The fiscal libertarian in me says, "let the banks fail and the market will pick up the pieces." That's my ideological response.

I'm prepared to be persuaded on practical and pragmatic grounds.


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Democrats, Barack Obama & Fannie/Freddy

Who's to blame? Let AEI's Kevin Hassett tell the tale:

The financial crisis of the past year has provided a number of surprising twists and turns, and from Bear Stearns Cos. to American International Group Inc., ambiguity has been a big part of the story.

Why did Bear Stearns fail, and how does that relate to AIG? It all seems so complex.

But really, it isn't. Enough cards on this table have been turned over that the story is now clear. The economic history books will describe this episode in simple and understandable terms: Fannie Mae and Freddie Mac exploded, and many bystanders were injured in the blast, some fatally.

Fannie and Freddie did this by becoming a key enabler of the mortgage crisis. They fueled Wall Street's efforts to securitize subprime loans by becoming the primary customer of all AAA-rated subprime-mortgage pools. In addition, they held an enormous portfolio of mortgages themselves.

In the times that Fannie and Freddie couldn't make the market, they became the market. Over the years, it added up to an enormous obligation. As of last June, Fannie alone owned or guaranteed more than $388 billion in high-risk mortgage investments. Their large presence created an environment within which even mortgage-backed securities assembled by others could find a ready home.

The problem was that the trillions of dollars in play were only low-risk investments if real estate prices continued to rise. Once they began to fall, the entire house of cards came down with them.

Turning Point

Take away Fannie and Freddie, or regulate them more wisely, and it's hard to imagine how these highly liquid markets would ever have emerged. This whole mess would never have happened.

It is easy to identify the historical turning point that marked the beginning of the end.

Back in 2005, Fannie and Freddie were, after years of dominating Washington, on the ropes. They were enmeshed in accounting scandals that led to turnover at the top. At one telling moment in late 2004, captured in an article by my American Enterprise Institute colleague Peter Wallison, the Securities and Exchange Comiission's chief accountant told disgraced Fannie Mae chief Franklin Raines that Fannie's position on the relevant accounting issue was not even "on the page'' of allowable interpretations.

[...]

Greenspan's Warning

The clear gravity of the situation pushed the legislation forward. Some might say the current mess couldn't be foreseen, yet in 2005 Alan Greenspan told Congress how urgent it was for it to act in the clearest possible terms: If Fannie and Freddie "continue to grow, continue to have the low capital that they have, continue to engage in the dynamic hedging of their portfolios, which they need to do for interest rate risk aversion, they potentially create ever-growing potential systemic risk down the road,'' he said. "We are placing the total financial system of the future at a substantial risk.''

What happened next was extraordinary. For the first time in history, a serious Fannie and Freddie reform bill was passed by the Senate Banking Committee. The bill gave a regulator power to crack down, and would have required the companies to eliminate their investments in risky assets.

Different World

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.

That such a reckless political stand could have been taken by the Democrats was obscene even then. Wallison wrote at the time: "It is a classic case of socializing the risk while privatizing the profit. The Democrats and the few Republicans who oppose portfolio limitations could not possibly do so if their constituents understood what they were doing.''

Mounds of Materials

Now that the collapse has occurred, the roadblock built by Senate Democrats in 2005 is unforgivable.

[...]

But we now know that many of the senators who protected Fannie and Freddie, including Barack Obama, Hillary Clinton and Christopher Dodd, have received mind-boggling levels of financial support from them over the years.

Throughout his political career, Obama has gotten more than $125,000 in campaign contributions from employees and political action committees of Fannie Mae and Freddie Mac, second only to Dodd, the Senate Banking Committee chairman, who received more than $165,000.

[...]

The private profit found its way back to the senators who killed the fix.

There has been a lot of talk about who is to blame for this crisis. A look back at the story of 2005 makes the answer pretty clear.

Oh, and there is one little footnote to the story that's worth keeping in mind while Democrats point fingers between now and Nov. 4: Senator John McCain was one of the three cosponsors of S.190, the bill that would have averted this mess.

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Causes Of The Crisis: Democrats & Barack Obama

All you need to know about who is actually responsible for the Fannie/Freddy-fueled crisis.

(Hint: It's not President Bush or John McCain)

Even more on the Democrats' economic bomb.


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More On Barack Obama & Fannie Gate

The more I think about Barack Obama's baseless attempts to pin today's crisis on some nebulous economic philosophy shared by President Bush and John McCain, the angrier I get--especially because it is abundantly clear that Barack Obama was part of the problem, while President Bush & John McCain separately tried to pass reforms that would have avoided or alleviated the crisis.

Barack Obama talks about 'more of the same;' he offers Americans more of the same type of politician they've seen in this country since the beginning. He is the type of politician who will dutifully look the other way and stonewall important change and reform so long as you make a sizeable donation to his campaign.

Obama is just another corrupt, Chicago machine politician, trying to blame the people whose reform efforts he helped to quash. Obama is no agent of change, he is an agent of corruption and obstruction.

Also, check out RD's take at Pendulum Politics.


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More On Fanniegate

Just how good of friends are Democrats & Fannie Mae (I mean besides the fact that several former Clinton admin peeps have held leadership positions at Fannie and made tens of millions)? I repeat, in case you got distracted by the corruption oozing from the Fannie-Dem, multi-level relationship. There I go again, getting distracted from the original question.

One more try: How close are Democrats and Fannie Mae?

They're family:

(h/t Ace)

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Barack Obama's Fannie-gate Scandal Deepens

This is starting to get ridiculous (starting?). Barack Obama has done a good job in recent days of staying on message and delivering talking points about how it is the "shared economic philosophy" of President Bush and John McCain that is responsible for the current crisis.

Except that he doesn't ever provide a single specific example.

And the reason? There are none. The truth is that as far back as 2003, President Bush tried to pass reform legislation that would have eased the threat posed by Fannie & Freddy. I can't pin this one on Barack Obama, as he was not yet in Congress in 2003, but it is an easy thing to blame Democrats generally and the Congressional Black Caucus specifically for stonewalling changes and reforms that could have eased, if not headed off altogether, the problems we now face.

John McCain wanted to change things in 2006. He met the same resistance President Bush did 2 years earlier, but by this time Barack Obama was part of the stonewalling problem and receiving large amounts of campaign donations from both institutions. I repeat what I wrote yesterday: in less than 4 years, Barack Obama has become the #2 recipient of campaign donations from Fannie & Freddy.

As it turns out, each and every one of the distressed financial institutions has been donating to Barack Obama in far greater amounts than John McCain.

The lesson here is not that we need Barack Obama to solve the problem he helped create or that we need more regulation. We need to eliminate the market-distorting legislation and regulations that encouraged Fannie & Freddy to make such bad loans. This, more than a lack of oversight or regulation, caused the current financial crisis.

Like I learned in high school leadership from Mr. Tobery, when you point the finger at someone else, there are three fingers pointed back at yourself.


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Reader Emails/Comments, Obama Teaches Sex, &c.

As many of you noticed, I shut down comments a few weeks back. I did this for a couple of reasons, but mostly because I did not feel that the discussion there was productive on any level. Typically I would post something, some of you would try and discuss it (Berns, the Pendulum Politics guys, Matt (B. & L.), Spikers, Reasonable Raisin, non-apoplectic BT, etc.) and then the haters would hi-jack it by making spurious & scurrilous attacks on me. Some of you played an unfortunate game of Jekyll & Hyde.

It wasn't so much the attacks themselves that bothered me as much as it was the fact that these attacks completely derailed the dialogue and scared away thoughtful and reasonable commenters.

So I thought, "you know what, there are lots of truther message boards out there, OL&L doesn't need to be one. Let the haters exercise their free speech elsewhere." Unlike what Columbia University did for Ahmadinajad, I feel no need to provide a platform for vile anti-intelligence. Let them roll in the mud over at dKos, Democratic Underground and Huffington Post. They'll feel more at home there anyway.

That said, I may occasionally open up some posts for comments, though they will be strictly monitored by me or others, designated with a special assignment to root out stupidity and asininity.

Thus far, my bet seems to be paying off, as my readership stats have climbed steadily since this change. I won't say correlation=causation, but, absent a better explanation, I'm going with it.

The other positive benefit has been the good emails with tips and comments I have received. Keep on sending them.

Victor S. wrote, regarding my post on the Mankiw list, which showed Barack Obama and other Democrats to have received large campaign donations from Fannie/Freddy:

Did you go down that Mankiw list a little further? You didn't have to go very far to find Utah's own (I first found out about your blog on byutv) Bob Bennett at #6.

It's true, Bennett & other Republicans have received donations from Fannie & Freddy--but none of them are high on the list--meaning, none of them have received nearly as much as the Democrats at the top.

And, since I first took a look at the numbers, another important detail has come to my attention: Whereas the rest of the list have been in the Senate for a number of years, Barack Obama has only been there 4 years. Thus, despite his short time in Senate, he has managed to climb to the #2 spot on the list of Fannie/Freddy donations. Why might that be?

If the MSM has any conscience left whatsoever, they will investigate Obama's role in looking the other way while Fannie & Freddy got themselves into trouble.

Finally, the reason you're probably reading this post to begin with: Obama teaches sex ed. Why? Because it's funny.


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Barack Obama: Stonewalling Important Change

Fannie and Freddy didn't get to where they are without a little help from enablers in Congress--especially in the Senate. And these enablers didn't go un-rewarded. Greg Mankiw outs the biggest recipients of donations from Fannie & Freddy. The biggest beneficiaries might surprise you. Or maybe not.

Top Recipients of Fannie Mae and Freddie Mac Campaign Contributions, 1989-2008

1. Dodd, Christopher J, D-CT
2. Kerry, John, D-MA
3. Obama, Barack, D-IL
4. Clinton, Hillary, D-NY

This is exactly the type of political corruption Obama rails against time and again. But when it came to actually doing something, he looked the other way in favor of campaign donations. This is the politics he learned in Chicago.

Senator Obama reaped the rewards of stonewalling reform that would have averted the bailout, will he now reap the political punishment? Obama's co-conspiracy to look the other way helped cause the housing crisis he now blames on President Bush.

Talk about lipstick on a pig; in Barack Obama, the old, corrupt politics are made new. Or, at least, given a fresh coat of paint.

(h/t RD @ Pendulum Politics)


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Fannie/Freddie Fail

The inevitable finally happened. The Federal government seized Fannie Mae and Freddy Mac. I'm not an expert on these sorts of things so I will make just one observation:

Despite what you may read elsewhere, this was not a failure of the free market.

The backing given these companies by the federal government guaranteed their debts thereby distorting the market. When an institution is not forced to account for risk, it makes very irresponsible decisions. In this instance, the risk-less decisions made by the two mortgage lenders distorted the whole market and set us up for the problems the market now faces.

The best solution would be for the government to take control of Fannie & Freddy and break them up and sell off the various parts. This may require putting them both into some sort of receivership.

As important as solving the problem is, it is also important that people keep their heads and not lose faith in the free market. This was another government failing, not a market failure.

UPDATE 2:17pm MDT: Greg Mankiw weighed in on the bailout and for the most part, reflects the perspective I gave above--though obviously, he writes it better:

The problem is far from over, as the future of these institutions and a large segment of the financial system is still to be determined. The worrisome part is that this future will be determined by a political system that both created the GSEs and failed to provide sufficient oversight, even when many economists suggested reform was needed. To believe that the Congress will do a good job of it would be the triumph of hope over experience.

This was a government problem, not a market problem.


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