American economist Thomas Sowell once said:
It is hard to imagine a more stupid or more dangerous way of making decisions than by putting those decisions in the hands of people who pay no price for being wrong.
While pointing the finger of blame is often shunned as a counter-productive or divisive practice, as Sowell pointed out, accountability for poor decisions is necessary for effective governance. How else are we to learn from the mistakes of the past and prevent their re-occurrence than to identify poor decisions and those who made them?
In that context, congress’ Financial Crisis Inquiry Commission is currently interrogating bank executives to identify the cause of the economic melt-down. However, while most of the heated interrogation is being directed toward private financial institutions, lets put the politicians on the hot seat and review the government’s role in getting us into our current economic mess.
First, a basic understanding of Fannie Mae and Freddie Mac and their role in the housing and lending market is critical in order to comprehend the root causes of the financial meltdown. In the video below, Senator Jim DeMint offers an excellent summary.
As DeMint stated, it is Congress’ responsibility to provide regulation and oversight of government sponsored entities (GSE’s) such as Fannie & Freddie. Following is a brief time-line of events as it pertains to congress and the regulation of GSE’s.
*Hat tip to Mike Costello for being “the squeaky wheel” that guided me in my research.
- April 2001 – President Bush raised red flags concerning the size of Fannie and Freddie in his 2002 budget request. He identified the “potential problem” that trouble in either institution could “cause strong repercussions in financial markets”.
- mid 2003 – Reports and hearings showed Freddie Mac “manipulated its accounting to mislead investors” and that they failed to “adequately hedge against rising interest rates”.
- July 31, 2003 – The Federal Enterprise Regulatory Reform Act (S. 1508), co-sponsored by John McCain, was introduced. President Bush subsequently recommended a massive regulatory overhaul. The bill passed the Senate Banking Committee, however with every single democrat on the committee opposing it, the bill was doomed.
- Feb. 24, 2004 – Chairman of the Federal Reserve, Alan Greenspan, warns congress that “if we fail to strengthen GSE regulation, we increase the possibility of insolvency in crisis; we put at risk our ability to preserve safe and sound financial markets in the United States”.
- Sept. 2004 – A report following an 8-month investigation by the Office of Federal Housing Enterprises Oversight (OFHEO) showed Fannie executives intentionally manipulated their accounting and overstated their earnings by $10.6 billion in order to hit targets and pocket an additional $27 million in bonuses.
- Late 2004 – During hearings, republicans expressed concern and called for swift action and more regulation, while democrats expressed anger toward OFHEO for bringing corruption at Fannie to light, suggesting there was nothing wrong and no need for increased regulation.
- Early 2005 – Regulatory legislation was re-introduced (S. 109) however with every democrat in the banking committee once again voting against it, the bill never made it to the Senate floor.
- May 2006 – John McCain signed on as a co-sponsor of the stalled bill and said that “if Congress does not act, American taxpayers will continue to be exposed to the enormous risk that Fannie Mae and Freddie Mac pose to the housing market, the overall financial system, and the economy as a whole”.
- July 2008 – After republicans re-introduced a regulation bill (S. 1100) for the third time, it finally passed. Of course by this time, “toxic assets” from years of risky and reckless leadership at Fannie and Freddie had spread through the financial system, and it was too late.
As republicans are the ones who are generally labeled as “big business sell-outs” constantly pushing for deregulation, one may reasonably ask why, in this case, the roles seemed to be reversed.
First of all, democrats were bought-off by campaign contributions from Frannie Mae and Freddie Mac. Long-time member and current chairman of the Senate Banking Committee democrat Chris Dodd made the top of the list with a purchase price of $165,400. The second top sell-out was non other than…you guessed it, then rookie senator, President Barack Obama. Other democrats making the top of the list include fellow committee member Tim Johnson, current Senate Majority Leader Harry Reid, and current Speaker of the House Nancy Pelosi.
While they were apparently not as easy to buy off, Fannie and Freddie also contributed to the campaigns of many republicans, including two who also sat on the Senate Banking Committee. Therefore, another motive moved democrats to support the scandal-infested financial institutions. This motive was most commonly presented as “affordable housing”. While those two words have a tendency to create warm fuzzies within liberals, what it really means is putting poor minorities in homes they could in no way truly afford. I wonder how liberals now feel about “affordable housing”, seeing that their compassion-based pipe dream has cost millions of Americans to loose their jobs as well as their homes due to foreclosure. Below is a great video highlighting the role Acorn, Obama, and the dems’ push for “affordable housing” directly and primarily contributed to the housing bubble and resulting collapse.
Is it no surprise that Obama and the dems strive to demonize the executives of the private financial institutions in order to keep attention away from their grievous errors that helped create and/or worsen our current economic woes? How ironic it is that the same individuals who are largely responsible for the collapse of the housing market are now the very same “leaders” who claim to offer the solution to the problem they helped cause. I didn’t know if I should laugh or cry when I visited Chris Dodd’s website and saw that he actually has the nerve to say that he “leads the fight in the Senate for financial regulatory reform”.