“The housing bubble that burst in 2007 and led to a financial crisis can be traced back to federal government intervention in the U.S. housing market intended to help provide homeownership opportunities for more Americans.”
This is the opening line from a 26 page minority report from the House Committee on Oversight and Reform. Over the last couple of years politicians have been pointing their fingers at everyone but themselves. This report will really open your eyes to the dangers of government intervention into private industry. You can click here to read this report aptly named The Role of Government Affordable Housing Policy in Creating the Global Financial Crisis of 2008.
The report concisely addresses numerous aspects of the problem to include the history of government intervention, political philosophy, Fannie and Freddie, and the corruption and illegal activities of the GSEs and our representatives. The 2 topics that really caught my eye were the political philosophy that got us into this mess and the corruption in the system.
The document did not really cover the passing of the Community Reinvestment Act passed under Jimmy Carter, but it did address the modifications made under the Clinton administration. In 1992, Congress passed the Federal Housing Enterprises Financial Safety and Soundness Act. This act created 3 sets of quotas for Fannie and Freddie; one for “low and moderate-income families … low-income families in low-income areas and very low-income families.” Congress also granted HUD the ability to increase these quotas. This allowed the Clinton and Bush administration to increase home ownership by allowing people to buy homes that should not have qualified. In 1995 the Clinton administration made additional changes to the CRA and issued its National Homeownership Strategy. These changes put pressure on the 2 big GSEs to loosen their lending standards. The report says “The impact of this reform was that regulators would no longer rate banks based on their efforts to lend to customers using equitable procedures but rather on the volume of their lending.” This obviously was a huge mistake. The politicizing of the housing issue is noted as a major factor in the crisis because anytime politicians have control over anything they try to use it to get votes, which is exactly why we do not need government intervention in private industry. These lending practices were bad in themselves, but when you add no oversight into the mix you get disaster. Fannie and Freddie were the only public companies not regulated by the SEC or any other government agency. And the risk was continually played down. Everyone knows about the Barney Frank comments, but this report pointed out another I thought was interesting.
“one paper coauthored by now-Director of the Office of Management and Budget Peter Orszag, concluded that the chance was minimal that the GSEs were not holding sufficient capital to cover their losses in the event of a severe economic shock. The authors suggested that ‘the risk to the government from a potential default on GSE debt is effectively zero,’ and that ‘the expected cost to the government of providing an explicit government guarantee on $1 trillion in GSE debt is just $2 million.”
Like the report stated, Orszag is now a member of Obama’s economic team. And like Obama’s other advisers, they are all protégé’s of Robert Rubin. Clinton’s economic adviser and the brain behind all of these liberal economic policies.
Another major point was the political muscle of the GSE’s during this time. Corruption and illegal practices were the norm. Until President Bush ended the practice, several board members were appointed by the President himself. It was these board members who ignored management’s plans to manipulate their books to increase profits and hide liabilities. Among the board members at this time was Rahm Emanuel. He was compensated very well to the tune of $320,000 for a little over a years work. I am sure that helped his decision to keep his mouth shut. Even after investigations revealed everything that was going on, nothing was done. Efforts by the Bush administration and several Congressmen to regulate Fannie and Freddie were defeated, mainly by amendments meant to water down the legislation; added by those financially supported by Fannie and Freddie. These 2 giants basically had revolving doors with Congressmen and their staffs. If you worked in Congress and supported their irresponsible agenda then you would almost certainly find them working for the GSEs later, and vice versa. The report reveals that Fannie and Freddie paid lobbyists to lobby for them and paid others not to lobby against them. They used political intimidation against those trying to regulate them to include sending lobbyists to Congressmen’s’ districts to directly spread false claims to their constituents, ending home buying forums in these districts, and having members transferred to different committees. One congressional staffer described them this way.
“Fannie has this grandmotherly image, but they’ll castrate you, decapitate you, tie you up and throw you in the Potomac. They’re absolutely ruthless.“
We should learn a few things from this report. One is that the housing philosophy embraced by Obama and many Congressmen from both side of the aisle over the last few decades is flawed. At least Clinton and some of his staff have admitted these mistakes. Obama was still pushing these ideas as he was getting elected President and even had former Clinton era GSE CEOs Franklin Raines and Jim Johnson (who implemented these irresponsible policies) as advisors. The second is that government intervention is not a good thing and it does not work. Close industry relationships with the government only lead to corruption and unfair competitive advantages for these companies over private ones. Such will be the case when the government gets involved with universal healthcare as well. Liberals believe that a government should get involved with every aspect of your life to protect you from your own stupidity. This report shows that it just does not work. So if someone wants to argue that government intervention is a good thing, let them read it and decide for themselves.
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Showing he really is oblivious to how his own political philosophy contributed to the collapse, Obama made the following statement today at the G8 summit.
“Reckless actions by a few have fueled a recession that spans the globe”
Unless, of course, he was talking about himself.
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