Posted by
Always To The Right on Tuesday, September 16, 2008 1:22:53 PM
The credit crisis and the lack of oversight over
government-subsidized lenders like Fannie Mae and Freddie Mac occurred
on the watch of George Bush, and many blame his economic team for their
lack of oversight in the collapse. Barack Obama has made this point
one of his major campaign themes, arguing that John McCain would
provide more of the same failures that Bush did. However, what many do
not recall is that Bush wanted to tighten oversight with a new
regulatory board for Fannie Mae, Freddie Mac, and other government
recipients for the express purpose of addressing bad loan practices —
and Democrats blocked it.
The New York Times reported this five years ago:
The Bush administration today recommended the most
significant regulatory overhaul in the housing finance industry since
the savings and loan crisis a decade ago.
Under the plan, disclosed at a Congressional hearing today, a new
agency would be created within the Treasury Department to assume
supervision of Fannie Mae and Freddie Mac, the government-sponsored
companies that are the two largest players in the mortgage lending
industry.
The new agency would have the authority, which now rests with
Congress, to set one of the two capital-reserve requirements for the
companies. It would exercise authority over any new lines of business.
And it would determine whether the two are adequately managing the
risks of their ballooning portfolios.
The plan is an acknowledgment by the administration that oversight
of Fannie Mae and Freddie Mac — which together have issued more than
$1.5 trillion in outstanding debt — is broken. A report by outside
investigators in July concluded that Freddie Mac manipulated its
accounting to mislead investors, and critics have said Fannie Mae does
not adequately hedge against rising interest rates.
This should have been a no-brainer, right? With hindsight, we can
see that the Bush administration had accurately diagnosed the problem
in the lending market and had a plan to address it. Fannie Mae and
Freddie Mac reluctantly supported the plan. However, Democrats
objected (emphases mine):
Among the groups denouncing the proposal today were the
National Association of Home Builders and Congressional Democrats who
fear that tighter regulation of the companies could sharply reduce
their commitment to financing low-income and affordable housing.
”These two entities — Fannie Mae and Freddie Mac — are not
facing any kind of financial crisis,” said Representative Barney Frank
of Massachusetts, the ranking Democrat on the Financial Services
Committee. ”The more people exaggerate these problems, the
more pressure there is on these companies, the less we will see in
terms of affordable housing.”
Representative Melvin L. Watt, Democrat of North Carolina, agreed.
”I don’t see much other than a shell game going on here,
moving something from one agency to another and in the process
weakening the bargaining power of poorer families and their ability to
get affordable housing,” Mr. Watt said.
Sounds a little like the Democratic denial of problems in Social Security, doesn’t it? Nothing to see here, no crisis on the horizon. Everybody just move along, now. The Democrats had forced lenders to assume more risk at lower interest rates in the 1990s, as IBD points out today, and they didn’t want to countenance an end to their populist policies
The Bush administration isn’t blameless in letting this get out of
hand, but clearly the origins of the disaster and the efforts to keep
bad policies in place fall on the Democrats in this case.
Update: John Lott points me to a March column
he wrote at Fox News explaining the underlying causes of the debacle.
Forcing lenders to make questionable loans and blocking tougher
regulation of the government-supported entities was a recipe for
collapse, and Lott explained it six months before it happened.