Economic Credit Crisis - Blame Democrats

Yesterday a comment from Investor Business Daily Editorials and their article Congress Lies Low To Avoid Bailout Blame was posted on this blog. The article made the claim that the Democrats in Congress must share the greatest part of the blame for the current Credit Collapse. Barney Frank, (D-MA) was quoted thus.

"These two entities — Fannie Mae and Freddie Mac — are not facing any kind of financial crisis," said Rep. Barney Frank, then 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."

This quote came in response to an attempt by President Bush to get legislation passed through Congress to tighten the regulations on both Freddy Mac and Fanny Mae.

President Bush in 2003 tried desperately to stop Fannie Mae and Freddie Mac from metastasizing into the problem they have since become.

And the result of that effort -

Bush tried to act. Who stopped him? Congress, especially Democrats with their deep financial and patronage ties to the two government-sponsored enterprises, Fannie and Freddie.

If you care to read my full comments follow this link. (Economic Credit Crisis - Who's To Blame?)

Today we have further confirmation of who's to Blame. Confirmation from Bloomberg.com and It is the Democrats! The article, How the Democrats Created the Financial Crisis, is a commentary by Kevin Hassett.

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.

However, Mr. Hassett claims the Financial Crisis is not complex at all, no matter how is appears.

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.

How was it that these two quasi-governmental institutions were able to explode?

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.

Franklin Raines was the CEO who was forced to resign as a result this accounting scandal and poor management. Mr. Raines was President Clinton's Director of the Budget.

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.

Enter Alan Greenspan and his 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.''

Now that's a pretty stern warning. But after this warning and after the Raines scandal was out of the bag, it was up to Congress to do something about it. So what did they do?

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.

However, for a bill to become law it first has to pass both the Senate and The House, not just a Committee.

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. [emphasis mine]

As this article points out, this was an irresponsible act by the Democrats. Socializing Risk and Privatizing Profits is not a smart financial idea. The history of this era will probably show the recklessness of the actions of the Democrats in the House and Senate.

...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.

Fannie Mae and Freddie Mac were making contributions to members of Congress (mostly Democrats) to influence the votes.

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.

The article ends with this paragraph. It makes sense to me.

...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.

Murky Research Note:

Kevin Hassett, director of economic-policy studies at the American Enterprise Institute, is a Bloomberg News columnist. He is an adviser to Republican Senator John McCain of Arizona in the 2008 presidential election. The opinions expressed are his own.

While Mr. Hassett may be somewhat biased, the facts presented, are to the best of my knowledge accurate.