How Democrats Created Financial Crisis
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| 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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http://en.wikipedia.org/wiki/Keating_Five#Glenn_and_McCain:_cleared_of_impropriety_but_criticized_for_poor_judgment
"Earlier this year, the Boston Globe summarized McCain's close relationship with Keating and his decision to intervene with federal regulators on his behalf:
McCain met Keating in 1982, during McCain's successful run for Congress, and soon began accepting offers from Keating to fly McCain's family on a corporate plane to Keating's house in the Bahamas. McCain did not pay for most of the trips until years later, when the matter became public.
Keating, meanwhile, complained regularly to McCain that a proposed regulation would hurt his business. Known as the "direct investment" rule, it limited the amount that savings-and-loan institutions could invest from their assets. In 1985, after having "heard frequently from Charlie on the matter," McCain decided that Keating's complaints "were sound enough to warrant our assistance." He cosponsored a resolution sought by Keating, but it failed to postpone the regulation, McCain wrote in his autobiography.
By then, Keating was one of McCain's most important benefactors; McCain received $112,000 in campaign donations from Keating and his Lincoln associates, mostly between 1982 and 1986."
FYI
Like I said, if anyone - Republican, Democrat or Martian, had enough evidence against any one of the Keating Five to launch a criminal investigation, they could have - and, in that climate, with THOSE guys - they WOULD have. Especially if the Republicans had been able to dig up anything truly criminal on Cranston or DeConcini.
But. They. Didn't.
Oh, and? Regarding Hassett and his oh-so-independent "article?" I should have made my intentions more clear when I said "paid staffer." I don't have any specific information regarding whether Hassett's been paid anything by McCain. Often, staffers are, sometimes - if they're "advisors" and don't work full-time, they're not. My intention was not to show that he was salaried (or even on retainer), but instead to show that he was part and parcel of the McCain campaign. Heck, his own BIO at AEI lists the man as "....a senior economic adviser to the McCain 2008 presidential campaign." Which was my real point, not whether - or how much - compensation he'd ever received. The larger point, that he is literally PART of the McCain campaign, stands (and is in fact reinforced by his own AEI bio).
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.
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
Are you genuinely trying to tell me that the American Enterprise Institute does not favor candidates from one party over the other, as a rule? Sure, they're officially "non-partisan," for tax purposes mostly, and I suppose it's theoretically possible that if some Democrat out there behaved and spoke exactly like most of the Republicans, the AEI would support him or her.....but how often does that happen? OK, OK...Joe Lieberman, LOL. How often BESIDES that? ;o)
I find it nothing short of hilarious that you consider huffingtonpost an outlet which isn't even worth READING because it's so horribly biased (talk to alicia about that one, LOL), but AEI to be some sort of dispassionate, almost snopes-ian arbiter of fiscal policy whose only goal as an institution is sensible capitalism. Really, that's laugh-out-loud funny.
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
And you know this.....how, exactly? Little green men (with little green footballs) told you?
Or you actually have EVIDENCE of them lying repeatedly, enough to make a statement like the above? You wouldn't be surprised to learn that "this is all a lie" - because you WANT it to be? Or because you have actual evidence that it IS?
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
http://www.sourcewatch.org/index.php?title=American_Enterprise_Institute
From this site, and there are others out there about the American Enterpise Institute:
The American Enterprise Institute for Public Policy Research (AEI) is an extremely influential, pro-business right-wing think tank founded in 1943 by Lewis H. Brown. It promotes the advancement of free enterprise capitalism, and succeeds in placing its people in influential governmental positions. It is the center base for many neo-conservatives.
The AEI is a neo-conservative, and neo-conservative could easily translate into right wingnut.
And all your links in your article by kelley are just links to other neo-con sites, just so you understand
Sorry, but you can't use information from a left-wing activist to discredit a non-partisan site. OMG! It's worse than I thought!
"CMD has stated that it is not affiliated with a political party, but that it does not pretend to lack opinions or a point of view."
Well, I wonder what the opinions from a left wing activist are? That every organization that is not a far left extremist group is a "right wing think tank". It would seem so.
Edited 9/23/2008 8:47 am ET by chillychillychilly
Actually I do. I have done some research on some pretty convincing sounding stories from those kinds of sites. With just the smallest amount of due diligence it is easy to tell where truth ends and propaganda begins.
Here is an example of the last time someone actually coaxed me into researching info from one of those hysterical left wing propaganda sites:
http://messageboards.ivillage.com/iv-elpoliticsto/?msg=16459.165
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