Monday, July 04, 2011

Unraveling the propaganda from the reality in the housing bubble

Dean Baker, one of the few economists who is not enthralled with Friedmanite or Hayekian dogma, does a good job of explaining once again that the housing bubble was driven by the top guys on Wall Street--and that the Community Reinvestment Act of 1978 did not cause the great crisis. Baker also takes on the nonsense that Fannie Mae and Freddie Mac drove the bubble when in fact they were late to the bubble party. See also this CBO report on Fannie Mae and Freddie Mac and start with the chart at page 6 that is designated Figure 1-1.

Still, there are some things Dean did not speak about that makes his explanation less than 100% of the reality. In 2005, just as the bubble was finally being seen as something that would eventually burst, Freddie Mac and Fannie Mae decided, in the face of threats from Republicans, and more friendly prodding from Democrats, to take on and insure the bundles of secured mortgages that were previously outside their realm because they had been deemed too risky or too large. The Republican Congress and the Bush Administration in 2003 and 2004 had touted private home ownership (remember the Ownership Society?) and laws were passed to further loosen the markets. The Bushies and Republicans wanted to replace Freddie Mac and Fannie Mae as they saw it as irrelevant in a growing private housing market, which led the Democratic Party members to defend the two entities as the Democratic Party leaders were awash in the entities' big campaign contributions. The Democratic Party Congressmen, with so much in contributions, simply said there was nothing wrong with the two institutions and took a what-me-worry view of the bubble-- though there was plenty of bi-partisanship fingerprints on the growing debacle...* And let's not forget that Republicans targeted Fannie Mae and Freddie Mac at least in part because they were giving more to Democratic Party candidates and incumbents than Republicans...

*By the way, this is what makes me nervous about Democrats saying the same thing about Medicare, when in fact there is some reason to worry if there is no investment inside the US and we don't make anything as workers anymore inside the US. Doing nothing and saying Republicans want to kill Medicare is not really helpful because, while Republicans (and often Obama) do want to kill Medicare, neither Dems nor Reeps want to do anything about improving the economic fortunes of most Americans--which would do far more to strengthen Medicare, and even Social Security.

Finally, let's understand that Bush Jr.'s 2003 proposal to re-organize Fannie Mae and Freddie Mac did not want to change the implicit guaranty of the two organizations (see the next to last paragraph of the article). The administration just wanted to have more direct control in the Treasury, even though, as noted above, the Treasury Department under Bush Jr. was promoting the expansion of precisely the type of toxic mortgages that fed the bubble. And let's understand the Kabuki dance in Congress where reform in 2005 did not occur because of an amendment that was not really all that significant and where the Republicans chose not to bring the legislation to the floor.

This is all part of the Property Party (the Democratic and Republican wings) activities that have so undermined the economic health of our nation. George Will's article in the July 1, 2011 Washington Post, which is what Dean Baker was critiquing, is just so much partisan nonsense from a propagandist of the highest order. Will does not want people to understand what happened. He just wants people to blame the Democratic Party...

(Edited and fixing a couple of links)

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