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More Devils, More Details

Earlier today, I talked about how I tend to be a bit more convinced by detailed explanations that vague generalities and empty statistics. While I was preparing that piece, I had one big example in mind -- but then didn't include it. It slipped my mind, but I'm going to pretend that I was actually setting up this followup piece.

Namely, the current economic crisis we might or might not be having.

There's been a lot of finger-pointing going on over just who ought to get tarred and feathered over this, and so far it's been a whole lot of smoke and very little fire. Everyone wants to say it was the other people's fault, and if we'd only listened to them, we'd be OK.

Normally, I don't go for these kinds of games. This time, though, I'm going to play along. I have a couple of reasons.

First, I'm not entirely convinced that there is a crisis, at least one of sufficient magnitude to set aside normal partisan bickering and ram through some emergency measure.

Second, most of the people doing the yelling are the ones who are also being accused of messing up the whole thing in the first place, so it's probably a good idea to keep them busy and away from trying to "fix" the real problem.

So, we have two groups of people pointing fingers (or flipping fingers) at each other. How much credibility do they each have?

First up, let's look at the Democrats. According to them, it's the Republicans' fault. After all, they held the majority in Congress for most of the time leading up to this mess, so by definition they should have done something. Also, "deregulation" has been a key element of standard Republican rhetoric, and it seems that a bit more government oversight might have helped. Finally, Phil Gramm -- a McCain economic advisor -- wrote a law back in 1999 called repealing the Glass- Steagal Act, and that law -- which tore down the wall separating commercial and investment banking.

Let's see how those hold up to some scrutiny -- not too much, as I'm no expert on these matters.

First up, the "Republicans owned Congress, so they own this" argument. Sorry, but I don't exactly recall the Republicans just steamrolling the Democrats higgledy-piggledy for the first six years of the Bush administration. In fact, I recall quite a few times when the Democrats stood up and -- even with their minority status -- managed to either significantly alter or utterly defeat some of Bush's plans. Remember the federalizing of the airport security workers? I seem to recall that that was a key argument of the Democrats, opposed by a lot of Republicans and conservatives (and folks with a smidgen of common sense), but it passed anyway. I also recall a lot of fights over Bush's judicial nominees, leading to some very bruising fights that Bush did not win.

So the idea that the Democrats were utterly powerless for those six years doesn't hold up.

Second, the mantra that "Republicans are in favor of deregulation" is also flawed. For one, I don't recall that being given much effort by the GOP. For another, it was Rebublicans who pushed -- several times -- for increased regulation on Fannie Mae and Freddie Mac, and each and every time the Democrats united behind one of their bigger cash cows (both for their campaigns and personally) to keep things hands-off.

Witness the following video from 2004:

Democrat after Democrat after Democrat arguing against increasing federal supervision of Fannie Mae and Freddie Mac in the strongest terms possible, even saying that questioning the services of Fannie Mae CEO Franklin Raines was racist.

Note that shortly after this, the highly-praised (by Democrats) Raines "retired" in an arranged departure after it was revealed that under his leadership, Fannie Mae had engaged in some grotesque violations of accounting principles and cooked their books to maximize the bonuses Raines and his top people collected -- Raines himself took home over $100 million.

How did they do this? Simple. Their bonuses were based on Fannie Mae's earnings, and they rigged the books to overreport those earnings -- by at least $6 BILLION dollars.

Finally, the soon-to-be-infamous-if-Democrats-have-their-way repeal of theGlass-Stegall Act. This, they say, is the REAL culprit. Unfortunately, there are a few problems with that theory.

First up, it passed the Senate by a vote of 90-8, meaning that a LOT of Democrats -- including John Kerry and Joe Biden, just to name a couple -- voted for repealingit.

Second, it was signed into law by Bill Clinton, who still says that it was a good law, and had nothing to do with the current situation.

Finally, it has been used in this current crisis -- when Bank of America stepped in and bought out Merrill Lynch. Had it not been for the repeal ofGlass-Steagall, Bank of America (a commercial bank) would have been forbidden to buy Merrill Lynch (an investment bank) without some serious paperwork and red tape and whatnot, and it would have been up to the government to step in -- or stand by while it collapsed entirely.

So that's that, for the Democratic arguments -- as far as I can tell. How about the Republicans?

The Republicans have a whole chain of logic that sums up their story. It starts with Jimmy Carter and the Community Reinvestment Act of 1978, the expansion of that program by the Clinton administration in 1998, and the thwarting of Republican plans to rein in Fannie Mae, Freddie Mac, and the whole subprime mortgage field several times in the past few years.

That's been spelled out enough before, so I won't repeat the specifics. The only thing new I've learned is that there was a "stick" along with the "carrot" to encourage banks to make bad mortgages -- that they could be sued for not complying with the CRA sufficiently.

So, in 2003, President Bush put forth a plan to impose MORE regulations on Fannie Mae and Freddie Mac, with his people advising that if nothing was done, they could end up collapsing and taking down a huge chunk of our economic strength and stability with them. The regulations were defeated.

In 2004, the House held hearings on Fannie Mae and Freddie Mac (see the above video) -- possibly in connection with the Bush proposal of 2003, I'm not sure -- and denounced the proposed regulations as racist, class warfare, mean-spirited, unneeded, harmful, and quite possibly involved in causing the heartbreak of psoriasis. Franklin Raines was singled out by the Democrats for heaps and heaps of praise and strenuous defense -- mere months before he just barely beat a criminal indictment and ended up paying millions in fines for accounting frauds.

In 2005, several senators -- including John McCain and my own senator, John Sununu, along with Elizabeth Dole and a couple of other Republicans -- tried one final time to impose some serious regulations on Fannie Mae and Freddie Mac, warning that the situation with them had grown even worse since the last attempt, and the damage their collapse would trigger would be absolutely devastating to the nation. Once again, the plan went down in flames amid Democratic protests that there was no real problem, and this was all because Republicans hated poor people and wanted to keep them poor.

Now that that has pretty much come to pass, I find myself trying to figure out the Democrats' take on the Republicans' predictions coming to pass. So far, it's a tossup -- they keep vacillating between utter denial, saying "nobody could have predicted it" when so many obviously did, and saying that it was these vague Republican ideals of "an ownership society" and "Wall Street Greed" and "the culture of corruption" and "the push for deregulation" that all got together (probably in a smoke-filled room) and plotted the whole thing out.

The notion that their lofty idealism and desires could have blinded them to dire consequences of well-meaning bad ideas. They simply don't seem to think it possible that their good intentions (which are all that matter, after all) could have been paving the road to fiscal hell.

Looking purely at the record, I'm going to go out on a limb and trust the Republicans to have a better grasp on how to fix the problem. More specifically, Republicans like John McCain and John Sununu. They saw the present mess coming years ago, they tried like hell to head it off, and they warned us all of just what has happened. Since I don't have enough expertise to have a truly informed opinion, I'll defer to them.

And I'm saying that as someone whose 401K has already lost almost 8% of its value in the last month. (Whoops, almost 5$ -- just had a mini-bounceback from yesterday. Yay, Vanguard!)

One thing I've learned from this, though -- my long-standing policy of "if you don't understand an issue, just find out where Barney Frank stands and take the opposite side" still holds true. Frank is on record for years saying that what just happened never will, that Fannie Mae and Freddie Mac are very sound and solid and healthy, and anyone who would even think of looking at them more closely is a horrible human being. Thanks, Barney, for being such a reliable touchstone.

Correction: Gramm didn't author the Glass-Steagall Act, he authored the bill repealing it. The fact that the act didn't have Gramm's name in it should have been a tipoff to me that I had it wrong, but I managed to miss that. Thanks, Rheinman, for correcting me.)


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Comments (20)

A quibble with terminology:... (Below threshold)

A quibble with terminology:

Glass-Steagal was the 1933 banking act that established seperation between commercial and investment banking. The 1999 act repealing it was titled Gramm-somebody-somebody after the sponsors of that legislation

Other than that, good artic... (Below threshold)

Other than that, good article. The Pubbies need to be hammering this in over and over again. The MSM is already showing surveys that say the majority of Americans believe this is the Republican's fault. This is no time for us to ignore partisanship. The Democrats, led by Pelosi, certainly aren't.

I would hope the final bill does not preclude "witch hunts" against those responsible.

Umm...two corrections: actu... (Below threshold)

Umm...two corrections: actually Phil Gramm helped craft Gramm-Leach-Bliley, which replaced Glass-Steagal in 1999.

And, the people doing the yelling are mostly not the folks that got us into this mess, at least on Wall Street. Most of those people have already been fired. And I don't think people like Steve Forbes and Ben Bernanke had much to do with the origins of this crisis.

We all benefited from the housing boom. The housing sector is such a large part of our economy that it probably more than any other, helped us recover from the dot com bubble and 9/11.

In fact, keeping the housing market from collapsing now will still benefit us greatly. The effects of the ongoing credit crunch will soon begin to be felt in sectors outside finance, if something isn't done and done quickly. That means a cessation of investment activity, and small and medium-sized businesses failing or at least seriously cutting back not because of insolvency but because of the cutoff of day-to-day working credit.

To avoid a replication of the 3-year collapse of the economy that occurred between 1929 and 1933 (look at a chart of the Dow for that period to see what I mean), liquidity needs to be restored soon. The credit markets are still showing that we are in trouble, so there is still work to be done.

I appreciate the analysis t... (Below threshold)

I appreciate the analysis that is presented in this article, but have a small problem. It seems as though, without some form of deregulation, there would be no problem with the anti-redlining laws that conservatives keep blaming for the crisis. The truth of the matter is probably that both parties are at fault, and the way that the two ideologies mixed was a disaster.

Also, saying the republicans should be the ones to fix it, well, Paulson is Bush's man, and this plan is not terribly popular. And frankly, you will have a hard time passing a hard line right wing bill in this congress.

Food for thought.

Anti-redlining laws are one... (Below threshold)

Anti-redlining laws are one thing, but using them to push lenders into making loans which were extremely risky is another. Allowing Freddie Mac and Fannie Mae to get involved with these bad loans was mismanagement of these two entities. It was criminal to cook the books and Raines and Johnson collected multimillions without so much as a peep from the Dems.

the mantra that "Republi... (Below threshold)

the mantra that "Republicans are in favor of deregulation" is also flawed. For one, I don't recall that being given much effort by the GOP.

You don't recall that, so it's a flawed argument? You don't think Republicans have pushed for deregulation? Jay, do you know anything? Have you been anywhere? No wonder you people love Palin; she's the only person who makes you look smart -- and that, my friend, ain't saying much.

astigaffe~"and tha... (Below threshold)


"and that, my friend, ain't saying much."

Now that you have described your comment, what did you think of the post?

I still think they both ble... (Below threshold)

I still think they both blew it. The Dems took bribes and the Rebubs (along with Clinton) didn't try hard enough to reform the corruption that was building with Fannie and Freddie.

LaMedusa - that was a cleve... (Below threshold)

LaMedusa - that was a clever way of saying it was both parties fault in that it was all the democrats fault. There is some blame to lay at the feet of the republicans in their positive acts.

Feel free to cite some exam... (Below threshold)

Feel free to cite some examples of those, Okami. I agree that there's plenty of blame to go around -- care to help me point the blamethrower in the right direction?


astigafa Said"You ... (Below threshold)
retired military:

astigafa Said

"You don't recall that, so it's a flawed argument? You don't think Republicans have pushed for deregulation? Jay, do you know anything? Have you been anywhere? No wonder you people love Palin; she's the only person who makes you look smart -- and that, my friend, ain't saying much. "



JT, a good barometer for th... (Below threshold)

JT, a good barometer for this situation is: If the liberals say the blame is on both party's, you can rest assured the dem's were in the wrong. Had this been a republican problem mostly, you would never here such a comment. ww

Okambi~"LaMedusa - t... (Below threshold)

"LaMedusa - that was a clever way of saying it was both parties fault in that it was all the democrats fault."

Are you sure? If the republicans weren't trying hard enough, there may be a reason for it. Blame for positive acts? I have yet to see that.

<a href="http://www.cnn.com... (Below threshold)
retired military:


"The current mess would never have occurred in the absence of ill-conceived federal policies. The federal government chartered Fannie Mae in 1938 and Freddie Mac in 1970; these two mortgage lending institutions are at the center of the crisis. The government implicitly promised these institutions that it would make good on their debts, so Fannie and Freddie took on huge amounts of excessive risk.
Worse, beginning in 1977 and even more in the 1990s and the early part of this century, Congress pushed mortgage lenders and Fannie/Freddie to expand subprime lending. The industry was happy to oblige, given the implicit promise of federal backing, and subprime lending soared."


"Sept. 30 (Bloomberg) -- In the debate on Sept. 26, Democratic presidential nominee Barack Obama argued that the current crisis in the financial markets is the result of Republican deregulation. The advertising from his campaign has been saying the same thing, and this claim is becoming a fixed element in the talking points of Democratic candidates this year.
The credibility of the charge depends on ignoring several important facts:

-- There has been a great deal of deregulation in our economy over the last 30 years, but none of it has been in the financial sector or has had anything to do with the current crisis. Almost all financial legislation, such as the Federal Deposit Insurance Corp. Improvement Act of 1991, adopted after the savings and loan collapse in the late 1980s, significantly tightened the regulation of banks.
It is correct to say that there has been significant deregulation in the U.S. over the last 30 years, most of it under Republican auspices. But this deregulation -- in long-distance telephone rates, air fares, securities-brokerage commissions, and trucking, to name just a few sectors of the economy where it occurred -- has produced substantial competition and innovation, driving down consumer costs and producing vast improvements and efficiencies in our economy.
The Internet, for example, wouldn't have been economically possible without the deregulation of data-transfer rates. Amazon.com Inc., one
of the most popular Internet vendors, wouldn't have been viable without trucking deregulation.
-- Republicans have favored financial regulation where it was necessary, as in the case of Fannie Mae and Freddie Mac, while the Democrats have opposed it. In 2005, the Senate Banking Committee, then under Republican control, adopted a tough regulatory bill for Fannie and Freddie over the unanimous opposition of committee Democrats. The opposition of the Democrats when the bill reached the full Senate made its enactment impossible.
Barack Obama did nothing; John McCain endorsed the bill in a speech on the Senate floor.
-- The subprime and other junk mortgages that Fannie and Freddie bought -- and the market in these mortgages that their buying spawned --
are the underlying cause of the financial crisis. These are the mortgages that the Treasury Department is asking for congressional authority to buy. If the Democrats had allowed the Fannie and Freddie reform legislation to become law in 2005, the entire financial crisis might have been avoided. Policies that center on deregulation are probably hard for the voting public to grasp, and that has allowed Democratic candidates to spread the idea that there is a connection between deregulation and the current crisis. But an Obama victory, based in part on the claim that deregulation has caused the financial crisis, will create a mandate for new regulation where it isn't necessary and will do harm to our economy.
(Peter J. Wallison is the Arthur F. Burns Fellow in Financial Policy Studies at the American Enterprise Institute. The opinions expressed are his own.)

Jay - the biggest example o... (Below threshold)

Jay - the biggest example of where some blame could be shifted towards the Republicans is the Commodity Futures Modernization Act passed in 2000 which allowed the virutally unregulatable trading of mortgage backed securities. It was this that allowed those toxic mortgages to change hands to quickly, and to have no real discernible value, so the firms were forced to use the market-to-market valuations.

Typical Congress at work, t... (Below threshold)
DJ Drummond:

Typical Congress at work, that one. I'm sure you know, Okami, that the Act you mentioned was built into HR4577, and this act - along with pretty mcuh everything else in it - was nevered debated in either chamber of Congress.


Seems both republicans and democrats at the time, thought it was just wonderful. Lots of pork, which is the fave food of every growing Congressman and Senator.

okami, it is called mark to... (Below threshold)

okami, it is called mark to market. *sigh*

Anyway, appropo of nothing whatsoever, but maybe something after all, I have been listening to Barbara Milkuski of Maryland give her all for the cause on the Senate floor.

She is likely a nice enough lady and certainly she is an experienced politician of the Democratic Liberal persuasion. Yet I could not help but think of Larry the Cable Guy's Grandmother hanging around the bait shop in "clothing" that had no pockets while I watched her talk.

If you don't know the joke, don't look for me to enlighten you.

Regardless of the facts and... (Below threshold)

Regardless of the facts and the verifiable accuracy of all the ways and times the Dems have refused to believe that their passionate desire to be "fair" was leading to chaos - trust me when I tell you that the Kool-Aid drinkers out there won't buy it for one second and will heap all calumny upon the Republicans who were trying to avert catastrophe. This isn't as easy to accomplish as it once was, thanks to the Internet - but still they will give it one mighty effort!

Gayle, it never matters to ... (Below threshold)

Gayle, it never matters to me what the lefty loons think. What is important to me is what I know. The left are loons for a reason and that is they cannot reason. Just bark. Parrot. Follow. ww

Somewhat enlightening non-p... (Below threshold)

Somewhat enlightening non-partisan view of this issue







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