The Big Lie of the Crisis keeps rearing its ugly head.
The latest spotting: Senator Marco Rubio’s response to Obama’s State of the Union speech. When you say something like this, particularly at this late date, you’re exposing yourself as one of two things: dumb or deceptive. Pick your poison (emphasis mine):
This idea - that our problems were caused by a government that was too small - it’s just not true. In fact, a major cause of our recent downturn was a housing crisis created by reckless government policies
The straight-news press does a poor job of pointing out Rubio’s giant whopper. Actually, it does no job at all.
The Wall Street Journal quotes this falsehood straight, with no pushback, as does The Guardian and American Banker. CNN replayed the tape after hooking some Republican voters up to those dial thingies, saying, “here’s Senator Rubio’s best moment of the night, according to the frequency with his own party.”
It might be news when a senator, pushed as a frontrunner for his party’s presidential nomination in 2016, gets up on national television and spouts pure falsehoods. It might even be more newsworthy than whether he gets all cotton-mouthed and has to grab for his water bottle.
This shouldn’t be something that’s left to the opinion writers, but unfortunately it all too often is.
Fortunately, Mike Konczal pens a thorough takedown at the Washington Post’s Wonkblog. In short, overwhelming, objective evidence, not to mention common sense, tells us that private, deregulated markets, not government interference, are responsible for the housing bubble and resulting crisis.
Konczal notes that private lenders created the subprime boom; that the Community Reinvestment Act was responsible for at most 6 percent of the loans, and in reality far less; that Fannie and Freddie’s purchases of MBS weren’t responsible; and that conservatives have obfuscated the definition of subprime to make their bogus case.
On that last point, read this piece by David Fiderer, who calls out the American Enterprise Institute’s Edward Pinto, who along with Peter Wallison, has been the primary force behind the Big Lie, noting how he has recently taken in The New York Times, the Los Angeles Times, and others with misleading claims about the Federal Housing Administration.
So what’s going on here? Paul Krugman gets to the heart of the matter:
This really isn’t about the GSEs, it’s about the BSEs — the Blame Someone Else crowd. Faced with overwhelming, catastrophic evidence that their faith in unregulated financial markets was wrong, they have responded by rewriting history to defend their prejudices.
The numbers tell the story. Wall Street-backed mortgages were 4 1/2 times more likely to be seriously delinquent than Fannie Mae- and Freddie Mac-backed mortgages: http://www.thedailybeast.com/articles/2011/01/17/wall-street-not-fannie-and-freddie-led-mortgage-meltdown.html
#1 Posted by whm, CJR on Fri 15 Feb 2013 at 12:20 PM
It is preposterous to claim that the big Federal Government had little to do with the big mortgage meltdown. The government through its various housing entities established the market conditions. Fanny Mae and Freddie Mac did not throttle their lending practices in the face of a bubble. Far from it, they had the "pedal to the metal". If big government is so terrific and not to blame, why were these government hogs playing loose and free with the people's money, backing their insanity with the full faith and credit of the United States government?
The mortgage market bubble WAS a beast created by the Federal Government. Money was flowing fast and loose because the government was insuring it and pushing it! Home owenership, even for those who cannot afford it, is good, remember? The history revisionists are the collectivists engaged in the coverup. Simply consider the comments of Barney Frank and Chris Dodd, two of the biggest big government cheerleaders and their repeated comments to the Bush administration to keep hands off the mortgage markets because nothting was wrong. These two leftists damn private enterprise at the drop of a hat, and if private money was not doing the bidding of Washington at the time, they would have been telling us all about it.
#2 Posted by Ed Dykes, CJR on Sun 17 Feb 2013 at 12:45 PM
Ed - Click thru to Konczal's article. It has data and stuff!! And research also too. For example:
"Here’s some data to back that up: “More than 84 percent of the subprime mortgages in 2006 were issued by private lending institutions… Private firms made nearly 83 percent of the subprime loans to low- and moderate-income borrowers that year.”
Lots more where this came from.
#3 Posted by NEN, CJR on Mon 18 Feb 2013 at 05:39 AM
Love how the same characters keep pretending that FNM and FRE had nothing to do with this , how the Regulators who did nothing had nothing to do with this , how the CRA and its proponents , Maxine Waters , Barney Frank and Chris Dodd kept pushing for looser and looser standards , just so inner-city inhabitants could buy homes .
Yet , you keep on pushing "greedy bankers" and "greedy mortgage brokers" , and the buyers were innocent rubes
Your BIG LIE , is the bigger "Big Lie"
You are an academic lightweight and a moral fraud
#4 Posted by JJ minehann, CJR on Mon 18 Feb 2013 at 08:33 PM
Maybe, maybe not. I clicked on Ryan's link, and noticed a curious omission - the timeline factor. It is incontestable, a matter of historical record that Fannie Mae and Freddie Mac blew up a couple of weeks in advance of the Lehman Bros. and others meltdown. Was this just a coincidence, or did the crisis in a government-backed entity, no matter how many or few subprime mortgages it held, have a psychological ripple effect on private banking? Economics is, after all, a behavior/social science.
The zealousness of pro-marketeers to deny that the private sector does not have its booms and busts is more than matched by the fanaticism of those who insist that there is no downside to more and more taxation, more and more regulation of economic activity, and that politics and government are likely as not to introduce perverse incentives to money-driven institutions. Markets may plunge, but drawn-out recessions and depressions are inevitably the product of the one player that can have such a massive impact on economics in the past century, the public sector. Japan, Sweden (which has reformed substantially in the past 15 years), the entire Euro zone except for Germany (which also reformed years of Social Democratic meddling), even the State of California . . . leftists usually 'win' the debating-class types of arguments, but lose when the focus is on the bigger picture.
#5 Posted by Mark Richard, CJR on Tue 19 Feb 2013 at 12:45 PM
Nobody says the federal government "had little to do" or "nothing to do" with the mortgage meltdown.
What people here on Planet Earth are saying is that the facts -- the data and, yes, the timeline -- make it clear that Fannie and Freddie were not the PRIMARY, driving causes of the mortgage meltdown, as Rubio and others claim.
Fannie and Freddie lost market share during the runup to the mortgage meltdown -- going from 55% of the mortgage market to 35% from 2003 to 2006 -- and the loans they backed were many times less likely to go bad than loans backed by Wall Street:
Serious delinquencies on Fannie/Freddie-backed loans: 6 percent.
Serious delinquences on Wall Street-backed loans: 27 percent.
Fannie and Freddie played a role in the meltdown and there's much to criticize them for. But that criticism shouldn't be used as a shield to hide the even greater role played by private sector financial insitutions that led the growth of risky lending and made far larger numbers of risky loans.
As for the CRA meme, the Orange County Register (one of the nation's most conservative newspapers) found that nearly $3 out of every $4 of subprime loans made between 2004 and 2007 were made by lenders that were EXEMPT from the law. The biggest and most aggressive subprime lenders -- Ameriquest, New Century, etc. -- simply weren't subject to CRA. They made subprime loans not because the government made them, but because these loans were wildly profitable. It's hard to fathom why folks who profess to revere the free market can't understand how profit motives drive behavior in corporate enterprises.
Those are the facts, however inconvenient for those who've embraced the-government-did-it talking point. FEELING something to be true, WANTING and NEEDING it to be so, doesn't make it true.
#6 Posted by facts, CJR on Wed 20 Feb 2013 at 11:13 AM
Over half the bailout money spent by the government to save lending institutions went to Fannie, Freddie, and the FHLA. I think the evidence is that Ryan is as guilty of under-stating the role of the public sector as Rubio is of over-stating it, making his 'Big Lie' rhetoric rather extreme. (Can professional writers please find something better than Nazi-era analogies to characterize their ideological opponents and their statements?)
'facts' does not dispute that the impending explosion of Fannie Mae and Freddie Mac was, in chronological terms, the kickoff of the housing meltdown, much as the Wall Street crash of 1929 was an early-warning sign of the Depression to follow. The housing crisis may or may not have happened even if Fannie and Freddie had not realized their obligations could not be met. Again, economics is a behavioral discipline, it is not physics. Given the public sector's huge presence in every aspect of economic life, it is difficult to parse just what was due to 'greed' (as if self-interest isn't behind almost all economic decisions from the grocery store to mortgage-hunting) vs. what was due to perverse incentives built into the system. Which is my point. Ryan protests far too much. Rubio does too, but given that Fannie and Freddie have apparently gotten off scot-free in the assignment of blame for their role in the slump (Morgenson and Rosner honorably excepted), it is understandable that Rubio wishes to remind people that public players are capable of foolishness, greed, and harmful outcomes. Tell me where you stand (and where you stood prior to Sept. 2008) ideologically, sad to say, and I'll tell you who you blame for the recession.
#7 Posted by Mark Richard, CJR on Wed 20 Feb 2013 at 12:53 PM
Anybody who can use logic and count higher than 10 fingers and 10 toes should able to realize that Fannie and Freddie do not equal the entire Crash of 1929. Fannie and Freddie were just one player in a massive crash that also involved nearly all of Wall Street, nearly of all America's big banks, America's largest insurance company and banks and companies from the UK, Ireland, Iceland, Germany and dozens of other countries around the world.
Talking about who crashed when is meaningless -- silly really -- in terms of identifying the primary drivers of the mortgage meltdown.
Bear Stearns, for example, crashed and burned months before Fannie and Freddie fell, sending ripples throughout Wall Street that were still echoing by early September, making it hard, for example, for Lehman Brothers to borrow the money it needed to bolster its balance sheet. So why wouldn't Bear be the primary villain?
Saying Bear or Fannie and Freddie caused the crash is like saying that the assassination of Archduke Ferdinand was the main cause of WWI -- or a match was the primary cause of a conflageration in a factory where paint thinner, gasoline and explosives were stored in unsafe conditions.
If AIG, the big private-label mortgage lenders, big banks and Wall Street players had had their houses in order, Fannie and Freddie's problems would have caused a mild to medium market fluxuation, rather than the biggest crash in generations.
It took years to build up the conditions that led to the financial meltdown. Lehman Brothers had been a leader in subprime leading since the mid-1990s, long before Fannie and Freddie had even a dipped a toe in subprime, and Lehman spent the years leading to the crash cranking out massive volumes of securities backed by mortgages originated by sketchy subprime mortgage lenders (as well as engaging in huge volumes of risky commercial real estate deals).
It's worth noting, by the way, that the housing meltdown started in 2006, nearly two years before the financial meltdown and the Fannie and Freddie bailout. It was a slow moving crisis that, for example, helped cause the crash of a Bear-run hedge fund way back in 2007.
Fannie and Freddie got in trouble for two main reasons (1) they backed a lot of bad loans (though they backed bad loans at far lower rate than Wall Street). (2) their only market -- housing/mortgages -- crashed and nearly disappeared. Food Lion and Kroger would quickly find themselves in big trouble if people stopping eating store-bought food (or cut their consumption by, say, 75%). The U.S. government has poured money into Fannie and Freddie in part because it has used them as a backstop to help keep the mortgage market from disappearing completely.
Some big banks (though not all: think Lehmam, WaMu, etc.) survived the crash better (and we able to make better use of the bailouts that they, too, received from the government) because they were more diversifed. They could fall back on fee income from checking, credit cards, etc., and draw on liquidity from other parts of their business. As the general economy -- but not so much the housing market -- began to slowly improve in 2008 and 2009, the banks were able to milk massive profits out of non-mortgage sectors.
Now you can raise legitimate questions about whether it was/is wise to have government-sponsored companies like Fannie and Freddie with such a narrow market focus, and you can argue about whether it was wise to put massive amounts of taxpayer money into the Fannie-Freddie backstop for the mortgage market. But in no way -- not on Planet Earth anyway -- does that somehow provide "evidence" that Fannie and Freddie were the main cause of the housing and financial meltdowns.
#8 Posted by facts, CJR on Wed 20 Feb 2013 at 07:21 PM
facts, you are arguing with a straw man. Re-read, please. Nowhere do I assert that the blowup of Fannie and Freddie 'caused' the slump. Nowhere do I say that Fannie and Freddie 'equal' the stock market crash of '29. Rubio is over-stating his case. But so is Ryan.
Usually these crises are 'wholistic' - the entire system is out of whack, it isn't just a few villains. Bear Stearns collapsed earlier than Fannie and Freddie, correct. There were underlying problems with the encouragement of bad loans - on the part of 'greedy' marketeers, but also on the part of 'liberal' do-gooders. But the crisis was really kicked into high gear with the blowups of Fannie and Freddie, and it is historically irresponsible for Democrats and their sympathizers in the press to pretend otherwise, as has happened, as a transparent way of letting favored politicians like Barney Frank off the hook for their fair share of historical blame. They didn't 'cause' the slump. Their problems were a symptom of a lot of bad decisions. I just object to the simple-minded notion that 'greed' caused the slump. People are always 'greedy.
Anyway, good exchange overall and I appreciate your insights, with which I generally agree. Including the part about Fannie and Freddie being 'the main cause of the housing and financial meltdowns'. But they played an not-insignificant part - psychological impact again - and Ryan's 'Big Lie' meme is stricly overkill, for the obvious (to his faithful readers) ideological reasons.
#9 Posted by Mark Richard, CJR on Thu 21 Feb 2013 at 08:25 AM
MR,
I agree: you were more nuanced in your comment that I suggest in my response. You didn't say that Fannie and Freddie were the primary cause. And I agree that the there's certainly no argument that Fannie and Freddie played a role in the meltdown. And I agree that "greed" wasn't the only factor at play; folly, self-deception, fraud, bad government policies, lax law enforcement, and perverse incentives were contributing factors too.
I still have problems with this, though:
"the impending explosion of Fannie Mae and Freddie Mac was, in chronological terms, the kickoff of the housing meltdown, much as the Wall Street crash of 1929 was an early-warning sign of the Depression to follow."
I still say that equating the Fannie/Freddie implosion with the 1929 crash doesn't make sense. Fannie/Freddie was a subset of the 2008 financial markets crash and not a seperate event.
More importantly, Fannie and Freddie were not "in chronological terms" the psychological "kickoff" of the housinng meltdown. They imploded in the fall of 2008. The housing meltdown "kicked off" in mid-2006 as housing prices flattened and then started falling. Subprime mortgages and securities started going bad in large numbers in the fall of 2006. The meltdown in housing/mortgages picked up speed in early 2007 and by October 2007, Henry Paulson -- and a myriad of other officials and financial journalists -- were talking about the "ongoing housing correction."
The only way Fannie and Freddie's implosion could have kicked off the housing crisis -- psychologically or otherwise -- is if they had built a time machine and gone back to May 2006 and melted down then.
To say that their implosion kicked off the housing meltdown is like saying the Battle of Verdun (1916) kicked off Word War I.
#10 Posted by facts, CJR on Thu 21 Feb 2013 at 01:54 PM
facts, we're about done, but my point that Rubio's overstatements were matched by Ryan's is something I'll stick with. Calling the serious role Fannie and Freddie played in the weakening of the housing market during the very period you review a 'big lie' is only excusable if Ryan would apply a similar label to the simple-minded narrative that the meltdown was caused by capitalistic 'greed'. Even the Left's abuse has liver spots on it. As you indicate, there were underlying problems with the housing market that were becoming evident in 2006-07.
My recollection, confirmed by revisitation to the chronology of events, is that the Fannie/Freddie blowup occurred in early September 2008, and that the bankruptcy of Lehman Bros. followed a week later. The recession proper kicked in that quarter. Hence my connection between Fannie and the dreadful events of Sept. 2008. A lot of economic historians feel, as Schumpeter wrote, that 'we were holding up fairly well in the first half of 1931', or words to that effect, but in the second half of 1931 'the ground gave way beneath our feet'.
It's too big an event to ascribe to one event or bank.
Finally, if Ryan can get so lathered up over Marco Rubio or Lloyd Blankfein, I wonder why he is not also upset that Barney Frank has skated in the eyes of the press, or wondered why Jim Johnson is not indicted. All the blame must, due to ideology, be ascribed to 'deregulation' and the 'private sector'. The world's more complicated than that.
#11 Posted by Mark Richard, CJR on Thu 21 Feb 2013 at 05:03 PM
Mark,
Your history is just way off. The crisis began in late 2006/early 2007 as markets realized that housing prices could go down, egregious subprime boiler rooms like New Century went belly up, and credit-default swaps started to go completely haywire. In June 2007, Bear Stearns hedge funds went bust, showing everyone who still didn't believe it that the fallout would not be "contained." In August 2007, the financial system began to seize up in earnest, auction-rate securities couldn't get a price. In March 2008, there was a run on Bear Stearns, which was bailed out by the Federal Reserve and tacked on to JPMorgan. IndyMac went bust during the summer. Giant banks during all this are taking tens of billions of dollars in writedowns. Lots of us knew Lehman was full of it in the spring.
In other words, the crisis was long in the tooth by the time Fan and Fred were de-privatized. Their nationalization certainly rattled markets, but Lehman was insolvent regardless. The catastrophic screwup was Paulson and Bush letting Lehman go belly-up. It was literally too big and interconnected to fail.
Of course, Fannie and Freddie contributed to the housing bubble, as we've been saying for years. But without the Wall Street cluster, there would have been no giant bubble and financial crisis. Fan/Fred's market share nosedived during the rapacious part of the bubble and it was the profit motive that caused them to try to compete with Wall Street-- not government diktat.
Fact is, the bubble was driven almost entirely by Wall Street and private markets. This isn't even controversial on Wall Street.
#12 Posted by Ryan Chittum, CJR on Fri 22 Feb 2013 at 01:14 AM
Ryan, I don't have time for an extended response, which would eventually deteriorate into semantics anyway. What timeline of mine are you referring to? It is not in dispute that the 'meltdown' as normally defined happened in Sept. 2008, though of course it was long in the making, and that Fannie and Freddie were the first to melt. You're kind of shifting what I wrote to fit a different narrative - you might as well assert (as many do) that the 'crisis' began with the repeal of Glass-Steagall back in the 1990s. By your narrative, nothing could have been done by 2006 or 2007 to avoid the meltdown - is this correct? The context is that the economic recovery was sluggish in 2001-2004 from the brief dot-com recession of 2001, and everyone, including the government, both parties, were encouraging risky lending.
My point, which I guess I must reiterate, is that Fannie and Freddie were big players in the mortgage market, necessitating a large percentage of federal bailout money. The performances of Fannie and Freddie, though quasi-public sector institutions, and their executives, suggest that the entire mortgage system was loaded with twisted incentives and rules and expectations. You have had a lot to say within my hearing about Angelo Mozila and Countrywide, whose toxic mortgages were bought by Fannie and Freddie, but not about James Johnson and Franklin Raines, who bought them.
Everyone bought into the notion that housing prices would continue to rise. I can't help noting that Paul Krugman thought (2002) a 'housing bubble' would act as a stimulous to the sluggish economy that existed in the years prior to 2006. The causes of the crisis were myriad. The Obama Administration is currently blaming the rating agencies in courts of law. Sometimes there are no easy heroes or villains - though Johnson is about the sleaziest character I've encountered in accounts of the crisis. In omitting the role played by Fannie and Freddie, some journalism is playing partisan politics. Rubio may overstate his case. Is he unique in that regard? Anyone who says 'this' or 'that' 'caused' the housing crisis and recession is overstating, or as Ryan would have it, telling a Big Lie.
#13 Posted by Mark Richard, CJR on Fri 22 Feb 2013 at 01:12 PM
Question:
Did Fannie/Freddie fail because of bad loans they made or bad investments?
#14 Posted by garhighway, CJR on Mon 25 Feb 2013 at 12:35 PM
"What timeline of mine are you referring to?"
Ryan is referring to the timeline where you say explicitly that "the impending explosion of Fannie Mae and Freddie Mac was, in chronological terms, the kickoff of the housing meltdown."
Had you said, "the September 2008 financial crisis" you would have at least had the timeline right, though the cause and effect would still be a risible point.
But you didn't say that. You said the housing crisis, which had been going on two years before Fannie and Freddie went under.
#15 Posted by facts, CJR on Tue 26 Feb 2013 at 12:50 AM
Facts, I refer you to the first paragraph of my previous post. And also to Ryan's characterization of Rubio's remark as a Big Lie - as if Rubio specifically stated that Fannie/Freddie were the cause of the slump. Even people on the Left have faulted 'reckless government policies' as 'a major cause' of the housing crisis, citing the Fed and 'deregulation', so Ryan is guilty of over-eagerly reading into Rubio's insistence. Does anyone doubt that the political sector was encouraging borrowing? They're doing it with the student loan program, too, another lending crisis waiting to happen. I'm sure if and when it does, worshippers of the State (not an intrinsically 'progressive' orientation, having as much in common with Hobbes and Louis Quatorze as with 'social democracy' - hard to tell the difference these days) will blame capitalism.
#16 Posted by Mark Richard, CJR on Tue 26 Feb 2013 at 06:50 PM