Wednesday, October 01, 2008

The Blame Game

Obama says the financial crisis is like a house fire - we need to put it out before worrying about who started it. McCain has taken the same position. They are both wrong. Right now, the arsonist is grabbing the fire hoses.

It is important to know why this crisis has happened so we can fix it. The Democrats pushed Fannie Mae and Freddie Mac to make risky loans to people with poor credit. Knowing that risky investments have a higher reward than safer investments and that they were protected by the guarantee of a bailout should things go badly, Fannie and Freddie made a lot of bad loans. President Bush and other Republicans, including Senator McCain, pushed for more regulation of Fannie and Freddie's lending practices, knowing the taxpayer could be on the hook for the loans. Democrats opposed them, afraid that regulation would harm the greater social good of "affordable housing." It didn't hurt that Fannie and Freddie showered them (Obama was a top recipient) with millions in campaign contributions. Now the Democrats have the gall to blame Republicans and the media is letting them get away with it.

Although the Federal Reserve bears some blame for keeping interest rates too low, a disaster of this magnitude doesn't happen without Fannie and Freddie and the Democrats who decided they knew how to loan money better than bankers.

A couple good articles: NRO, Thomas Sowell.


Kyle Hommes said...

What about the fact that these loans were being bought and sold by different investors thanks to deregulation, or the 65% of sub-prime loans that were given to people who could have gotten prime loans?

Certainly Democrats pushing lenders to give loans to the poor looks bad now that we are in a crisis, but I don't think they are any more to blame than Republicans who helped to pass policies that made it possible for corporations to trade the loans or the corporations that used predatory lending tactics to get more of them.

The Democrats can be blamed for urging the loans, and certainly were off base when it came to the regulations proposed by Bush, but there was a Republican congress when the legislation was proposed, and the Democrats didn't give any loans or manage them. If I encourage someone to shoot someone else, I am not guilty of murder. The corporations made the loans, and mismanaged them.

Jon Vander Plas said...

I guess I haven't made this point very well. Fannie and Freddie were not free market organizations, they are Government Sponsored Entities (GSE's). What happened is not a failure of the free market, but a failure of government. Fannie and Freddie had an implicit guarantee of a government bailout should things go badly. This divorced them from the risk of making bad loans but they kept any profits. Add this to the pressure from Democrats (Community Reinvestment Act) to make bad loans. Risky investments pay a higher return, so they pursued risky investments to increase their profits. The Republicans, including Bush and McCain tried to correct this, but were opposed by the Democrats in Congress. Yes, they should have pushed harder, but they were afraid of being called racists and enemies of the poor who were benefiting from this "affordable housing."

For the free market to function properly, there must be consequences for bad decisions. The Democrats removed the consequences and now are blaming these problems on the free market that they meddled with.

How would giving these people prime loans instead of sub-prime loans helped the banks? Then they would have loaned out more money at lower interest rates, making their portfolios even riskier.

Kyle Hommes said...

Sub-prime loans end up with higher interest rates and have more penalties built in. A lower rate doesn't matter for 2 years if the rate is higher for 28 years.

I am not trying to say that the Democrats do not deserve blame, I just don't think they deserve all the blame, or that the Republicans deserve none.

I found the entry on to be very thorough and even handed. It placed the blame on a lot of different people and agencies including both the Clinton and Bush administrations.