Looking For Villians? Take Your Pick
“Success has a thousand fathers; failure is an orphan”. So goes the old saying, one I’m fond of quoting. Everyone now wants us to think they were prescient enough to see this calamity coming; no one wants to admit to contributing to it. Obama and McCain assure us that each saw the warning signs at the same time that the other didn’t. The White House is putting out press releases about their own warnings. The Democrats blame Republicans and deregulation, while the Republicans blame (for a change) greedy Wall Street types.
But there’s plenty of blame to go around: let’s share, as we were taught as kids. In no particular order, here is the Rogues Gallery of the 2008 Credit Crisis:
1. Alan Greenspan. The great Greenspan comes in for some hits in today’s New York Times for resisting government regulation of derivatives. But Greenspan did not act alone; among other opponents of stricter derivative regulations was:
2. Robert Rubin. When the head of the Commodity Futures Trading Commission proposed new regulations on derivatives, Clinton’s Treasury Secretary spearheaded a campaign to not only defeat the regulations, but to defang the commission and strip her of all power (same article as above).
3. The Clinton Administration in general, and Democratic lawmakers in both the Clinton and Bush years. Despite the unfair, yet successful, campaign by Democrats to pretend they are not the party in power in Congress, nor did they ever, ever, ever contribute a single iota to this completely Bush-caused catastrophe, the facts are against them. It was Clinton and his fellow Democrats who pushed Fannie Mae and Freddie Mac – hard – to take on more risk and buy more loans made to poorer households, ability to repay be damned.
Capitol Hill bore down on [former Fannie Mae head] Mr. Mudd as well. The same year he took the top position [2004], regulators sharply increased Fannie’s affordable-housing goals. Democratic lawmakers demanded that the company buy more loans that had been made to low-income and minority homebuyers.
“When homes are doubling in price in every six years and incomes are increasing by a mere one percent per year, Fannie’s mission is of paramount importance,” Senator Jack Reed, a Rhode Island Democrat, lectured Mr. Mudd at a Congressional hearing in 2006. “In fact, Fannie and Freddie can do more, a lot more.”
Which leads us to, from the same article:
4. Barney Frank. Despite Frank’s current attempt to portray himself as the defender of the little guy from corporate greed, here’s a choice quote to chew on:
“I’m not worried about Fannie and Freddie’s health, I’m worried that they won’t do enough to help out the economy,” the chairman of the House Financial Services Committee, Barney Frank, Democrat of Massachusetts, said at the time. “That’s why I’ve supported them all these years — so that they can help at a time like this.”
5. The Bush Administration in general, and Paulson and Bernanke in particular. Bush has not, to my knowledge, directly contributed to the crisis with any particular decision, but his subordinates certainly have, and the buck stops with him. Furthermore, his attempts at talking the country off of the ledge have been a complete failure to this point.
Of course, it doesn’t help that he has to contend with Chicken Big and Chicken Little in the guise of Paulson and Bernanke. One would assume that the nation’s top economic officials would see part of their job as exercising a calm, steadying influence when the markets get choppy. Not these two; nope, when the going got rough, they screamed bloody murder, holding Congressional leaders hostage with talk of financial Armageddon. Then, when markets worldwide predictably panicked in reaction, these two geniuses stoked the flames with constantly shifting bailout proposals and directives totaling well over a trillion dollars in taxpayer liability that have not only been completely ineffective, but that have INCREASED the danger to the world economic situation by painting a picture of a crisis so deep that it can’t be stopped. When markets are shaky, and expectations so low, we have EVERYTHING to fear from fear itself, and no one has made more people more fearful about their futures than our two major honorees (Paulson gets bonus points for lobbying the SEC for more risk-taking leeway in a meeting in 2004 as CEO of Goldman Sachs).
There are, of course, many other culprits: the idiotic Charles Schumer, another king of inducing market panics with overwrought hysterics; Nancy Pelosi and Harry Reid, for their totally ineffective leadership of the most do-nothing of do-nothing Congresses, and lest we forget, the Wall Street lenders who came up with these wonderful trick mortgages and increasingly exotic derivative packages to package them in, and the consumers who lacked the discipline to avoid them, despite what most have been certain knowledge that they were unaffordable.
I’ve got a plan to get out of this crisis, though, fear not, and it only involves two steps.
1. Put Paulson and Bernanke on a slow boat to China, with no cameras, no phones, and no Internet connection, so they will quit scaring the living hell out of the entire world; and
2. Let the damn thing play out. There IS a bottom out there, somewhere, and at some point, the market will level out as bargain hunters step in, and value investors take big stakes. The free market is not dead, and nationalization of the world’s financial industry IS socialism, plain and simple.
Back off, Washington – and keep your mouths shut…
It is so damn obvious what is needed, is it not? Leadership. I won’t disagree with you on the way you’ve allocated the slices of the blame pie, even though there may be some quibbles about the way you’ve divided it. I would ask that we move on, pick ourselves up, dust ourselves off, and say, “wow, that sucks” and get to work leading the nation out of this all-out panic.
The bailout did not work, in the short term, as a stop for the panic. The leadership, such as it has been, has failed as well by reacting every day with a new tweak, a new proposal, a new cure, rather than with a calming voice saying, “relax, the plan needs time to work”. McCain and Obama have each missed a tremendous opportunity to differentiate themselves.
Who will step forth to lead us? Who will instill the calm that is so badly needed? I fear the answer will continue to be no one from government and industry. Thus we must each lead in our own way by refusing to panic, refusing to play the part of chicken-little, and by simply doing what we do best, whatever that might be. If everyone were to do the same perhaps we can get back to something resembling stability.
Meanwhile, it appears a voter registration storm is a brewin’:
http://www.ibdeditorials.com/IBDArticles.aspx?id=308358130652174
Greenspan was a powerful voice, but he was not in charge of making regulations to govern the financial sytem. Blaming the lax regulatory environment, which led to this mess, on him is bizarre. I suppose a case could be made that the housing bubble was precipitated by his interest rate policies. But that’s not the argument being made.
Robert Rubin is a somewhat more plausible target, but even so, the case against him is weak.
If you want to explore the origin of the lax regulatory environment, how about focussing on specific acts of deregulation that got us to where we are?
How about the Commodity Futures Modernization Act. This, rather famously, legalized Credit Default Swaps (and exempted them from regulation).
Or Gramm-Leach-Bliley? Or Ney-Kanjorski? Or …
As to Fannie and Freddie, I realize these are the focus of the McCain Campaign’s ire. McCain “wrote a letter” about them. The letter was about accounting irregularities at these firms, not about their lending practices, but let’s not let the facts get in the way.
But Fannie and Freddie were not then, and are not now engaged in the subprime mortgage market. Their collapse was precipitated by the general collapse of the housing bubble (plenty of defaults on “prime” mortgages), and their inability to raise capital to cover these losses.
A lot of people, at least at first, thought Fannie and Freddy would be insulated from the subprime mess and were big enough to absorb any losses they might nonetheless incur. This was wrong, but hardly blameworthy. (Hence I think you knock against Frank is unfair.) Certainly, there were mistakes at Fannie and Freddie, but it’s hard to see how any business, with 100% exposure to the mortgage market, would not have suffered very badly during the crisis.
Finally, your faith that the market will work things out, without further assistance, is quite refreshing. I’d be a little more sanguine if the TED spread were not 446 basis points (historically, it has fluctuated between 10 and 50 basis points). I’d be a little more sanguine if the $1.8 trillion commercial paper market were actually functioning at the moment (it only continues to exist because the Fed has stepped in, and offered to buy). At this point, the selloff on the stock market (“there IS a bottom out there…”) is a mere epiphenomenon.
The vast majority of toxic mortgages were not written until 2003 and 2004, and the credit crisis didn’t occur until late 2007. Blaming Clinton and Rubin for events which took place years after they left office is unfair, as they were not in power to change course once warning signs developed.
It would be like a doctor who prescribes a course of treatment and the patient switches doctors. The new doctor had seven years to monitor the patient and change the treatment. If any problems develop, it’s under his watch.
I would also point out that if you are going to assign blame for the problems at Freddie and Fannie, the largest share should go to OFHEO, the agency which was responsible for the GSE’s until recently. OFHEO is part of HUD. So the lion’s share of blame would go not to the administration which left town seven years ago, but to the administration which has been responsible since 2001.
More fiddling while rome burns. ~8010 at today’s finish, yeah, I think we need to spend more time blaming people.
Good ol’ Peter – always can be relied on to keep on the partisan blinders, always impervious to evidence – you would make a great Pope.
Jacques, I never intended my list to be comprehensive, but rather illustrative of two things: (1) plenty of mistakes were made on both sides of the aisle over the last decade or more that contributed mightily to the current predicament, and (2) the fact that current champion of the little guys such as Frank (I could have easily chosen Chirs Dodd, with his sweetheart mortgage deal from Countrywide) were big fans of the greedy bastards before things went south.
Fannie and Freddie did not own ’subprime’ mortgages, true, but they vastly, vastly increased their exposure to ‘Alt-A’ under pressure from largely Democratic voices in Washington. And Greenspan might not have been in charge of the agencies that would have or should have regulated, but for decades, he was THE undisputed voice on all things economic…
Finally, Jacques, you mock me for putting my faith in the markets – I mock anyone who puts their faith in a government over $10 trillion in debt…
You could be right, Mark.
If you see yields on Treasuries rise, as the market continues to crater, then you’ll know the jig is finally up. When the “flight to safety” stops meaning “buy Treasuries,” then this country, with its $10 trillion debt will be truly f****d.
There was a hint of this, today. Hopefully, just a bunch of large hedge funds dumping Treasuries to raise cash, and not a sign of things to come.
Anyway, things have moved beyond Paulson/Bernanke. We’re now talking about concerted action by the G7 Finance Ministers. And, yes, even the Financial Times says bank nationalizations (“socialism”, as you would have it) are inevitable.
Isn’t it socialism to nationalize industries? Whats unfair about that statement?…
But my point about the trust in a government with a $10 trillion debt wasn’t so much whether to trust them to make debt payments, but rather whether we should be putting our eggs in a crisis related to outrageous debt practices into the basket belonging to the king of outrageous debt practices…
It’s completely fair.
Albeit, these nationalization will surely be temporary. As (say) the Swedes did, Western governments will sell off their shares in the banks, once the crisis has safely passed.
But (to summarize that Financial Times article), in the short term, nationalization is the only mechanism for recapitalizing the financial sector, and getting credit flowing again. (Well, there was the Paulson “throw buckets of money out the window and hope the right people pick it up” mechanism, but even Paulson seems to have largely given up on that idea.)
Hey, I wish Paulson wasn’t the guy in charge. I wish George “27%” Bush wasn’t the guy on the White House Lawn, trying to calm the markets and reassure everyone that they have matter under control. I, and I’m sure at least 73% of the people listening, can’t get over the uncanny resemblace to his reassurances about how swimmingly things were going in Iraq.
But we’re stuck with those two until January, and the world economy isn’t going to wait.
Desperate times call for desperate measures. If “socializing” the banking industry in the short term serves to stabilize the markets and, therefore, protect all of our savings, 401k, and market investments, and prevents a recurrence of the sorts of things that happened during the Depression (25% unemployment for example), then I say have at it. I don’t know if those things would happen, but the market being down to 8000 from ~13000 one year ago is as much falling sky as I think we should have to endure.
Nope – not 13,000, but from 14,122 at the high…more later in another post, though, on this topic…
Worse still. Btw, I have very little confidence that the same government, and its agents, that contributed so mightily to this crisis is capable of guiding us out of it.