It has recently become popular among conservative commentators to blame our economic crisis on Fannie and Freddie Mac — quasi-government entities that supposedly contributed to the rise of subprime lending, the foundation of our current financial crisis — and the Community Reinvestment Act. This is a new version of the Reaganite cant that government is always the problem, never the solution. Private culpability must be minimized — the market can do no wrong! — and any public entities within a plausible stone’s throw of the crisis at hand must receive all the blame. We don’t have enough freedom in our markets, you see…
The problem with this blame-the-public-sector narrative is, in the case of the subprime lending crisis, that it’s simply false. I direct you to an excellent and detailed McClatchy article, which debunks these popular conservative claims. In this article, David Goldstein and Kevin G. Hall report that:
Subprime lending offered high-cost loans to the weakest borrowers during the housing boom that lasted from 2001 to 2007. Subprime lending was at its height vrom [sic] 2004 to 2006.
Federal Reserve Board data show that:
_ More than 84 percent of the subprime mortgages in 2006 were issued by private lending institutions.
_ Private firms made nearly 83 percent of the subprime loans to low- and moderate-income borrowers that year.
_ Only one of the top 25 subprime lenders in 2006 was directly subject to the housing law that’s being lambasted by conservative critics.
The “turmoil in financial markets clearly was triggered by a dramatic weakening of underwriting standards for U.S. subprime mortgages, beginning in late 2004 and extending into 2007,” the President’s Working Group on Financial Markets reported Friday.
…
This much is true. In an effort to promote affordable home ownership for minorities and rural whites, the Department of Housing and Urban Development set targets for Fannie and Freddie in 1992 to purchase low-income loans for sale into the secondary market that eventually reached this number: 52 percent of loans given to low-to moderate-income families.
To be sure, encouraging lower-income Americans to become homeowners gave unsophisticated borrowers and unscrupulous lenders and mortgage brokers more chances to turn dreams of homeownership in nightmares.
But these loans, and those to low- and moderate-income families represent a small portion of overall lending. And at the height of the housing boom in 2005 and 2006, Republicans and their party’s standard bearer, President Bush, didn’t criticize any sort of lending, frequently boasting that they were presiding over the highest-ever rates of U.S. homeownership.
Read the whole thing. This argument is further bolstered by the inconvenient fact that Fannie and Freddie were among the most sane participants in the mortgage markets thanks to — wait for it! — government regulation. As Paul Krugman points out:
Fannie and Freddie had nothing to do with the explosion of high-risk lending a few years ago, an explosion that dwarfed the S.& L. fiasco. In fact, Fannie and Freddie, after growing rapidly in the 1990s, largely faded from the scene during the height of the housing bubble.
Partly that’s because regulators, responding to accounting scandals at the companies, placed temporary restraints on both Fannie and Freddie that curtailed their lending just as housing prices were really taking off. Also, they didn’t do any subprime lending, because they can’t: the definition of a subprime loan is precisely a loan that doesn’t meet the requirement, imposed by law, that Fannie and Freddie buy only mortgages issued to borrowers who made substantial down payments and carefully documented their income.
The real cause of our crisis, as far as I can tell, is unregulated global capitalism — a dismantling of regulation and a lack of regulation of new securities/derivatives and the move in financial markets toward what is called “neoliberalism,” global integration with few capital controls.
The solution to toxic neoliberalism is not more neoliberalism. We have a choice to make. Will we allow the current neoliberal finance system to continue to exist as it does, without a complementary global and democratically-accountable regulatory apparatus adequate to the task of reigning in its excesses? Or, alternately, will we decide to rebuild firewalls between our national financial systems — essentially, a sort of return to the post-WWII Bretton Woods system — to help forestall future global economic system shocks? Or will we do nothing until the next crisis?
If we don’t let our voices be heard in the halls of power, then the finance ministers and treasury secretaries and corporate back-room dealers of the world will make this decision for us. I’m an internationalist at heart, so I prefer the imposition of capital controls in the context of responsible and democratically-controlled global financial and economic integration. You may disagree — you may prefer a more Bretton Woods – style system or something completely different – but your views will not be heard if you don’t exercise your democratic rights. The only path that seems absolutely wrong-headed to me is more of the same.
What is conveniently not mentioned by these commentators that back in the first half of 2008 Fannie and Freddie were considered a possible rescue by allowing them to purchase subprime mortgages.
To me a problem is that as much as people want to have their voices heard, there is not enough time to collect the feedback with these decision need to be made. The new Congress takes office on Jan 3 and the new President on Jan 20 but by then it may be too late.
Comment by John — October 11, 2008 @ 11:17 pm
John: I don’t understand your comment above as well as I would like. Did Fannie and Freddie end up purchasing subprime mortgages, thereby contributing to this problem?
Thanks to Lee for finding some statistics and facts to help me make sense of this stuff.
The right-wingers are saying this whole financial crisis erupted because Fannie Mae and Freddie Mac were encouraged by the government to give risky loans to people who clearly couldn’t pay them back.
The left-wingers are saying the crisis erupted because private lenders issued risky mortgages to people who couldn’t pay them back, not because of any government involvement but because they hoped to make a quick buck on commission and figured the housing bubble would never burst, thereby protecting their investment.
The right-wing story calls for less government involvement in the markets, and the left-wing story calls for more involvement in the way of regulation to protect against irresponsible lending/borrowing.
If only one of the top 25 subprime lenders in 2006 was subject to this government “encouragement,” then isn’t it obvious that the left-wing story is basically correct and the right-wing story is basically misleading?
Comment by Ian — October 12, 2008 @ 9:55 am
What John seems to be saying is that Fannie and Freddie were considered to be vehicle through which to save the market — further support for the argument of my post.
A note too: the narrative that the private unregulated market is responsible for the crisis isn’t a left-wing narrative per se, any more than the claim that global warming exists is inherently left wing. It’s the narrative of pretty much all credible economists I’ve heard speak on the matter. It’s just what the facts happen to be.
Only the WSJ opinion page seems to have contrary opinion, but its bias is well known.
Comment by Lee — October 12, 2008 @ 12:20 pm
I would say it’s not fair to the left wing to deny that the argument that global warming exists is a left-wing argument. By the criteria you set down, it sounds like an argument is only properly called “left wing” when it turns out to be false. The fact that pretty much all credible economists you’ve heard speak support a left-wing viewpoint is no reason to stop calling it left-wing — it’s a reason to start crediting the left with being right about a major issue.
But this is just semantics. I agree with your basic point that these arguments don’t reflect a left-wing bias — any scientist who honestly studies the issue of global warming will end up siding with those “on the left” because that’s where science leads them, regardless of their political leanings otherwise.
Comment by Ian — October 12, 2008 @ 12:49 pm
I agree — the left should get credit for being correct about this; and obviously I tend to think that the left is systematically correct on a number of economic and foreign policy issues, otherwise I wouldn’t have the politics I do. But what the left should get credit for, in this case, is accepting the facts and basing their political convictions on the facts.
My only point is that these economic facts are agreed on by people who might not necessarily consider themselves “on the left” but rather just investigators — scientists, academics — without a particular developed political philosophy. I think a lot of climate scientists were unprepared for how political the content of their research would be.
Comment by Lee — October 12, 2008 @ 1:01 pm
Ian: My point was what Lee said, back in March or so people thought if “we” allowed Fannie and Freddie to buy subprime mortgages it would solve the prices. Now, if you think about it, that’s not too different from Paulson’s first plan about buying toxic assets from banks.
A problem is that, as you two state, that every report and theory must be categorized by the media as either “left” or “right” when the right division is “right” and “wrong.”
Comment by John — October 13, 2008 @ 11:53 am