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The Tentacle


October 3, 2008

Congress and The Rattlesnake Part 3

Kevin E. Dayhoff

On May 13, 2008, Democratic presidential nominee Barack Obama compared the current housing crisis in the U.S. to the Great Depression in a campaign stop in Missouri.

 

Ever the expert, Senator Obama also knows that the current economic meltdown is the fault of Arizona Senator John McCain – and President George W. Bush.

 

However, The New York Times said on Sept. 25, 2008: “Senator John McCain … warned two years ago that Congress should rein in Fannie Mae and Freddie Mac, the giant mortgage finance companies, before their financial risk-taking threatened the economy, and Senator Barack Obama did not.”

 

At the time, Senator McCain said, in part: “I join as a cosponsor of the Federal Housing Enterprise Regulatory Reform Act of 2005… to underscore my support for quick passage of GSE regulatory reform legislation. 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.”

 

As far as President Bush’s efforts, on September 11, 2003, The New York Times reported: “The Bush administration today recommended the most significant regulatory overhaul in the housing finance industry since the savings and loan crisis a decade ago. Under the plan, disclosed at a Congressional hearing today, a new agency would be created within the Treasury Department to assume supervision of Fannie Mae and Freddie Mac …”

 

What happened to the 2003 efforts? According to “Doug Ross at Journal,” “Democrats on the House Financial Services Committee blocked efforts at fixing Fannie and Freddie. Rep. Barney Frank (D., MA) said, ‘Fannie Mae and Freddie Mac... are not facing any kind of financial crisis…’”

 

Let’s not overlook H.R. 2575 – The Secondary Mortgage Market Enterprises Regulatory Improvement Act. According to Mr. Ross: “In 2003, the effort to rein in Fannie began in earnest with a GOP bill…The bill would have strengthened an independent regulator that did not have to kowtow to the political establishment. Like most efforts aimed at reformation of Fannie, the committee votes were typically on the straight party line.”

 

Mr. Ross also calls to our attention that Representative Frank responded: “I think it is clear that Fannie Mae and Freddie Mac are sufficiently secure so they are in no great danger... I don't think we face a crisis; I don't think that we have an impending disaster. ...Fannie Mae and Freddie Mac do very good work, and they are not endangering the fiscal health of this country.”

 

Yes, this is the same Representative Frank who was quoted in September 16, 2008, press release by Democrat House Speaker Nancy Pelosi: “The American people deserve to know how eight years of Republican government failed to protect their homes, pensions, college saving plans, and other long-term investments. We cannot afford four more years of the Bush Administration’s mismanagement of our economy.

 

“The Bush Administration’s eight long years of failed deregulation policies have resulted in our nation’s largest bailout ever, leaving the American taxpayers on the hook potentially for billions of dollars.…”

 

To hear Speaker Pelosi and the Democrat leadership in Congress, the Bush administration did nothing for the last eight years to stave off the current economic mess.

 

Hmmm, this of course is inconsistent with a press release the White House posted on September 19, 2008, “Just the Facts: The Administration’s Unheeded Warnings About the Systemic Risk Posed by the GSEs,” in which it stated:

 

“For many years the President and his Administration have not only warned of the systemic consequences of financial turmoil at a housing government-sponsored enterprise (GSE) but also put forward thoughtful plans to reduce the risk that either Fannie Mae or Freddie Mac would encounter such difficulties.”

 

President Bush publicly called for GSE reform 17 times in 2008 alone before Congress acted. Unfortunately, these warnings went unheeded, as the President's repeated attempts to reform the supervision of these entities were thwarted by the legislative maneuvering of those who emphatically denied there were problems.”

 

The statement then went on to list the efforts dating back to April 2001.

 

Writing for The Village Voice, Wayne Barrett says that the roots of the current crisis can be traced to the years even before 2001.

 

“There are as many starting points for the mortgage meltdown as there are fears about how far it has yet to go, but one decisive point of departure is the final years of the Clinton administration, when a kid from Queens without any real banking or real-estate experience was the only man in Washington with the power to regulate the giants of home finance…

 

“Andrew Cuomo, the youngest Housing and Urban Development secretary in history, made a series of decisions between 1997 and 2001 that gave birth to the country's current crisis. He took actions that – in combination with many other factors – helped plunge Fannie and Freddie into the subprime markets without putting in place the means to monitor their increasingly risky investments. He turned the Federal Housing Administration mortgage program into a sweetheart lender with sky-high loan ceilings and no money down…”

 

However, many non-partisan scholars and economists agree that the very roots of the current economic mess began 30 years-ago with the 1977 Community Reinvestment Act.

 

In his September 26 column, Charles Krauthammer may have had the final say on the matter: “For decades, starting with Jimmy Carter's Community Reinvestment Act of 1977, there has been bipartisan agreement to use government power to expand homeownership to people who had been shut out for economic reasons or, sometimes, because of racial and ethnic discrimination. What could be a more worthy cause? But it led to tremendous pressure on Fannie Mae and Freddie Mac – who in turn pressured banks and other lenders – to extend mortgages to people who were borrowing over their heads.

 

“That's called subprime lending. It lies at the root of our current calamity.”

 

Kevin Dayhoff writes from Westminster: E-mail him at: kdayhoff@carr.org

 



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