How Democrats Created Financial Crisis

iVillage Member
Registered: 08-29-2008
How Democrats Created Financial Crisis
73
Mon, 09-22-2008 - 12:29pm

September 22 (Bloomberg) -- 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.

Then legislative momentum emerged for an attempt to create a ``world-class regulator'' that would oversee the pair more like banks, imposing strict requirements on their ability to take excessive risks. Politicians who previously had associated themselves proudly with the two accounting miscreants were less eager to be associated with them. The time was ripe.

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. Many who opposed the bill doubtlessly did so for honorable reasons. Fannie and Freddie provided mounds of materials defending their practices. Perhaps some found their propaganda convincing.

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.

Clinton, the 12th-ranked recipient of Fannie and Freddie PAC and employee contributions, has received more than $75,000 from the two enterprises and their employees. 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.

-Kevin Hassett

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aSKSoiNbnQY0

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iVillage Member
Registered: 08-29-2008
Mon, 09-22-2008 - 1:59pm
I think it's funny how Democrats loved McCain just a short year ago, and now they hate him with a passion. How fickle the Democrats can be, huh?
iVillage Member
Registered: 09-15-2008
Mon, 09-22-2008 - 2:04pm

Bullcrap. McCain was reprimanded for "poor judgment" by the ethics committee but not officially censured. Yet it was he who was closest personally to Charles Keating. It was McCain who took the entire family - at Keating's expense - on Abramoff-style junkets to Keating's personal luxury retreat in the Bahamas, trips for which he never reimbursed Keating until the investigators were breathing down his neck.

Three Republican Senators went to jail over the Keating Five scandal? You don't say.

You'll have to forgive me if I don't take your bloviations of "mostly uninformed and hysterical" regarding readers of DailyKos seriously, based upon stuff like the above.






But for the present age, which prefers the sign to the thing signified, the copy to the original, representation to reality, appearance to essence.....truth is considered profane, and only illusion sacred. Sacredness is in fact held to be enhanced in proportion as truth decreases and illusion increases, so that the highest degree of illusion comes to be the highest degree of sacredness.
- Ludwig Feuerbach, The Essence of Christianity, 2nd. ed., 1841


But for the present age, which prefers the sign to the thing signified, the copy to the original, representation to reality, appearance to essence.....truth is considered profane, and only illusion sacred. Sacredness
iVillage Member
Registered: 08-29-2008
Mon, 09-22-2008 - 2:10pm

I believe you just CONFIRMED what I said! Do you realize it?

(Also.... he didn't give his friend any favors....)

iVillage Member
Registered: 08-20-2008
Mon, 09-22-2008 - 2:10pm
I guess your speaking for some Republicans - I never liked him - since him and his Democratic friends and cronies bilked
iVillage Member
Registered: 09-15-2008
Mon, 09-22-2008 - 2:11pm

So.....it's your contention that people should stay true to politicians, even as those politicians themselves twist their positions into nearly-unrecognizable shells of their former selves? In the last eighteen months alone (much of it far more recent than that), John McCain has abandoned his former positions on offshore drilling, on the Bush tax cuts, on his OWN immigration bill, on standing 100% against US use of torture of the very sort he himself was subjected to, and numerous other measures, all in an effort to "win back" the Republican base (not to mention the selection of Palin as VP, for the same reason). The very issues for which he (unjustifiably, IMO, but nonetheless) won fame as a "maverick" - and thus the respect and admiration of independents and even some Democrats, are all-but-gone. That McCain is as dead as the Dodo Bird - a creature whose name, in what cannot be a coincidence, puts one in mind of many of Senator McCain's current clueless policies.

Regardless, it isn't Democrats who've changed or been fickle in their support of McCain - to the extent that Democrats really "supported" him anyway, instead of just considering him a non-lunatic GoOPer. It's McCain who has changed, nearly all of it for the worse.






But for the present age, which prefers the sign to the thing signified, the copy to the original, representation to reality, appearance to essence.....truth is considered profane, and only illusion sacred. Sacredness is in fact held to be enhanced in proportion as truth decreases and illusion increases, so that the highest degree of illusion comes to be the highest degree of sacredness.
- Ludwig Feuerbach, The Essence of Christianity, 2nd. ed., 1841


But for the present age, which prefers the sign to the thing signified, the copy to the original, representation to reality, appearance to essence.....truth is considered profane, and only illusion sacred. Sacredness
iVillage Member
Registered: 11-11-1999
Mon, 09-22-2008 - 2:13pm

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.


Republicans were in control of the Supreme Court.


Republicans were in control of the Executive branch.


Republicans controlled the Senate, 55-44. This includes all committees.


Republicans controlled the House of Representatives 232-202. This includes all committees.


If nothing was done it's because either Republicans didn't want anything done or they were too busy diagnosing patients 1,000 miles away from their Congressional offices.

dablacksox


Cynic: a blackguard whose faulty vision sees things as they are, not as they ought to be.---Ambrose Bierce, The Devil's Dictionary.

dablacksox


Cynic: a blackguard whose faulty vision sees things as they are, not as they ought to be.---Ambrose Bierce, The Devil's Dictionary.

iVillage Member
Registered: 09-15-2008
Mon, 09-22-2008 - 2:13pm

ROFL!

So, who WERE these three Republican Senators who went to jail over the Keating Five scandal?



But for the present age, which prefers the sign to the thing signified, the copy to the original, representation to reality, appearance to essence.....truth is considered profane, and only illusion sacred. Sacredness
iVillage Member
Registered: 08-29-2008
Mon, 09-22-2008 - 2:15pm
That is incorrect. McCain has not changed all of his views to win back Republicans, although I really wish he had. The only position that he has changed in off-shore drilling, which, happily he now realizes is necessary.
iVillage Member
Registered: 08-29-2008
Mon, 09-22-2008 - 2:18pm

He and his Democratic friends bilked people out of their money? When? How?

I think most Republicans who didn't like him still don't. Palin has made a big difference, though.

iVillage Member
Registered: 09-15-2008
Mon, 09-22-2008 - 2:18pm

More bullcrap.

Is it your contention that John McCain does NOT support making the Bush tax cuts permanent now? If so, I'd love to see those links. Not saying there aren't any - since McCain changes his positions as often as he changes his shirts, sometimes, and he could have said something different today than what he said yesterday. After all, he's now charging around on the hustings saying that we need to regulate Wall Street and the banks....after literally DECADES claiming to be a "proud deregulator." Don't like McCain's positions? Wait a while, he'll change them.....especially if you complain loud enough about them for him to hear....and you're either in a swing state, or waving a checkbook.






But for the present age, which prefers the sign to the thing signified, the copy to the original, representation to reality, appearance to essence.....truth is considered profane, and only illusion sacred. Sacredness is in fact held to be enhanced in proportion as truth decreases and illusion increases, so that the highest degree of illusion comes to be the highest degree of sacredness.
- Ludwig Feuerbach, The Essence of Christianity, 2nd. ed., 1841


But for the present age, which prefers the sign to the thing signified, the copy to the original, representation to reality, appearance to essence.....truth is considered profane, and only illusion sacred. Sacredness

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