September 30, 2008

One Theory

This video contains rather long samples of copyrighted music, which is probably the reason why it keeps getting taken down. If it were edited and re-posted without music, it might be a little less entertaining but would still hit every bit as hard in its accusation.

By all means, watch it, as long as it doesn't get taken down. But here's the gist -- back in the 1970's, Congress passd, and President Carter signed into law, the Community Redevelopment Act. It provided incentives to banks to provide affordable mortgages to low-income families so that home ownership could increase and more people could participate in the wealth-generating activity of making mortgage payments and accumulating equity in residential real estate. A well-intentioned idea. A good idea. But it did not have a dramatic impact on the housing market because only a small number of potential borrowers fit into the CRA's regulated loan criteria.

Then, in 1995, Congress made substantial amendments to the CRA. The relevant portions of the amendments included a mandate that certain amount of loans be to low-income buyers looking for "affordable mortgages." This was coupled with deregulation of the terms that the CRA loans could offer. The loans were made available to more people, who were less creditworthy than the earlier regulations would have permitted, and banks were told that they had to write some of these loans or face various kinds of penalties or miss out on various kinds of incentives. The loans were to be funded by a trillion dollars of government-backed money sold through securitized instruments made available to the market through Fannie Mae.

The result became, in a few years, what turned into a ten-year running joke among internet users -- banks and mortgage brokers competing very aggressively with one another for loans to people with moderate incomes. In order to make the loans "affordable," (according to the video) the loans incorporated things like interest-only and adjustable-rate terms, so that for a period of time, the mortgage payments were very low.

As a result, more people could take out these loans and buy houses. Demand for housing increased significantly, and as demand increased, so did prices. Where before, housing prices roughly kept pace with inflation, after 1995, a housing price bubble began to inflate.

Here is where the video turns partisan. Somewhere around 2003, it says, the White House began to sense trouble brewing and called for regulation of these loans, specifically the creation of a new agency within the Treasury Department to oversee affordable loans guaranteed and securitized by Fannie Mae and Freddie Mac. The video says that Democrats killed that proposal in Congress, and the political leaders of that effort received huge campaign contributions from Fannie Mae, Freddie Mac, and their executives. And in 2005, John McCain sponsored a bill to regulate low-income loans but was shot down, again by Democrats receiving large contributions from these government-sponsored enterprises, including freshman Illinois Senator Barack Obama. Then there is some populism about the banking executives, their lucrative compensation pacakages and golden parachutes, and discussion of malfeasance and financial irregularities concerning these people -- many of whom are advising Senator Obama.

So the conclusion is -- Bush and McCain had been in favor of regulating this segment of the market all along, but Democrats prevented them from doing so. Maybe they did it because they were corrupted, maybe they did it because they were well-intentioned but misguided about using the amended CRA to benefit lower-income people. But the Republicans have been on the right side of the issue all along and if the GOP had won those earlier battles in favor of regulation, the current financial crisis would not be nearly so bad as it is now or maybe could have been avoided altogether.

Now, I realize that the conventional wisdom right now is that free market-loving Republicans are reflexively opposed to regulation of things and statist Democrats are reflexively advocates of regulation. But that is not only a gross oversimplification, but by the Second Bush Adminsitration, the economic ideologies of both parties left over from the end of the Cold War era had basically gone out the window. Bush II deficit-spent like a drunken sailor and the Republican Congress cried "Huzzah!" at the idea. Bush II signed on to the creation of Medicare Part D, the Pharmaceutical Industry Suckling At The Public Teat Act of 2005. Bush II and its docile Republican Congress -- with the near-unanimous assent of Democrats -- invoked national security to impose the most intrusive financial disclosure regulations of any kind known in American history, in the form of the USA PATRIOT Act and its follow-up, PATRIOT II. We can debate about whether any or all of these things were necessary, advisable, or have worked net benefits for the country another time. The point is, none of these things made the market any freer.

And Democrats are every bit as corruptible as Republicans, and we've seen plenty of examples in recent years of Members of Congress of both parties getting caught taking money where they shouldn't -- sometimes in the form of cold, hard bricks of Benjamins, wrapped in aluminum foil and stored in the freezer. That one was a Democrat, as I recall, but by the time it happened, it hardly mattered what party the guy was in. He had influence and it was for rent. And Fannie Mae likely did not relish the thought of being regulated in what seemed like a very profitable segment of its activities. So it also seems entirely plausible to me that certain Members of Congress got corrupted back when real estate financial giants were awash with money.

I don't know exactly what criticisms might be levied at the argument. There are some problems I see right away.

First of all, Republicans controlled Congress in 1995, 2003, and 2007. Especially later in the process, Republicans did so with fairly slim margins, and a large minority does have the power to kill some proposals, unless the majority really flexes its muscle on the issue. So it's not impossible to say that the Democrats (then in the minority in Congress) could have killed these regulatory proposals -- especially since the proposals were to regulate economic activity, something that Republicans traditionally would not have much of an appetite for doing, at least according to the conventional wisdom about who likes regulation and who doesn't. And Bush II could have used some of his executive authority to impose a degree of regulation on the loans without consulting Congress through his power to issue executive orders -- something that he has demonstrated a penchant for doing in other contexts, but did not do in this arena.

Second, there are probably plenty of Republicans who got corrupted, too. For every Democratic Congressman with bricks of cash in his freezer, there is a Republican Congressman getting a blowjob on his brand-new yacht at Gangplank Marina, with yacht, slip, and blowjob all paid for through campaign dollars donated by a profitable business regulated by the Congressman's subcommittee.

Third, it's not clear exactly how hard either Bush or McCain pushed for these new regulatory laws, whether they did so to forestall different kinds of regulation proposed by Democrats (if Democrats had proposed such regulation at all), or whether the laws proposed by Bush or McCain were shams to create a tissue of oversight without actually changing anything.

Fourth, Barack Obama's legislative inexperience is something of a shield here. Obama is not one of the architects of the amendment to CRA and really had nothing to do with it, one way or the other. At most, he probably thought it was a good idea at the time. But then again, so did a lot of people, from both parties. Not even this partisan video points to evidence of Republican resistance to the amendments to CRA in 1995.

Finally, never attribute to malice what can be adequately explained by stupidity. Rather than assume that Democratic politicians were rapaciously exploiting their own constituencies to enrich themselves and their buddies while intentionally exposing the nation to a reckless risk, it seems more logical to me that they honestly believed that making some kind of home ownership vehicle available to low-income people would help alleviate poverty and work a net improvement in the national economy. What happened can rather easily be explained as an unintended consequence of a benign but not-fully-thought policy.

With all of that said, the video does raise an important point -- the government's interference with and participation in the housing market was a significant precipitating cause of the housing bubble, and the "reform" enjoyed more substantial political support from Democrats than Republicans. And there is plenty of evidence that they resisted attempts to soften the landing when the bubble inevitably burst. So if the question is who's to blame for the mess we're in, Democrats should belly up to the bar and prepare to eat a healthy portion of it.

Neither McCain nor Obama has demonstrated any appreciable leadership on the issue as of yet. In the debate on Friday, they both made noises about appreciating the gravity of the situation but neither of them had any sort of a solution or even any inkling that the financial problems this raises would require them to alter their agendas once in office. Either or both of them still have opportunities to step up to the plate and start being actual leaders in this crisis, as I wrote yesterday. But it's just not happening, so far as I can see. Both of them are hestitating and trying to figure out what the right long-term policy is and how to reconcile advocating that sure-to-be-unpopular policy with their short-term political advantage. That's not leadership by any meaningful definition.

But here's the thing. It happened on Bush's watch. And even if the Democrats are more to blame about creating the problem, they seem to have done more yesterday to try and solve it than Republicans did. So Obama, at least, doesn't need to lead yet. He can surf this one out, because a bad economy and a stalemated government is a net advantage to the Democrats. Which means, as Reynolds and I concurred yesterday, my bottle of scotch fell in to substantial jeopardy when House Republicans couldn't muster enough party discipline to get even a third of the membership to vote with their own President.

So although I enjoyed the video, it ultimately only reinforces what I said yesterday. McCain needs to step up and find a pair on this one. If he doesn't or can't, then maybe he doesn't deserve to be President after all.


zzi said...

there's 9 million video on you tube with music and they ban this one?

zzi said...

please add s to video