Arousing Housing Carousing

(Opinion alert)

Given the recent government takeover of Fannie Mae and Freddie Mac, I think it's finally time for me to blog on the housing crisis. I will be dispelling the myth that this crisis was created by Bush, or by any Republican.

In defense of those on the left

In the following paragraphs, I will explain to you why this housing crisis is the fault of liberals. I will use facts to prove it.

However, please take note: liberals are not evil. They accidentally caused this crisis, but they had the best intentions for America. The crisis they have now caused comes after years of good home-buying markets for millions of Americans, and we can thank the left for that.

That said, let's talk about how badly the left has screwed things up.

By now, everybody has heard that Freddie Mac and Fannie Mae, the nations two largest mortgage brokers, have been taken over by the government in order to avert a sudden, drastic economic depression. When this happened, Sparky called me up and shoved it in my face. "You see!", he said, "This is the perfect proof that capitalism is evil, Andrew! This is why we need someone like Barack Obama--someone who will take control and stop letting these companies ruin lives!".

Of course, Sparky is an ignoramus. Actually, this incident gives the perfect argument for capitalism. Here is why.

(Fact time)

The Bad Seeds

First of all, Freddie Mac and Fannie Mae were created by the government--Mae in 1938 (as part of the New Deal) and Mac in 1970 (in order to help break Mae's monopoly and liquidate markets). The idea behind these and other government sponsored enterprises (GSEs) is to increase credit availability in the economy. Their GSE status has always given them an implicit involvement with the government and a false sense that they couldn't go under.

The first problem: The two FMs were created to promote the use of credit, not responsible savings practices.

The second problem: The two FMs promise money that they do not have. They operate by selling bonds to investors. These bonds are guaranteed. The FMs pay for these bonds by buying thousands of mortgages, assuming the credit risk, and hoping that the profit made off interest will cover the bonds they have given out.

Obviously, these two companies were doomed to failure from the beginning. There is nothing the government could have done (except for not creating them in the first place) to get out of this mess. The republicans did try, though...

Barney and Friends

As Michael Graham points out in a recent blog post, it was the democrats who kept building up this avalanche.

A recent Wall Street Journal article points out that in 2000, Rich Baker (a Republican) proposed a bill which would regulate the FMs' oversight and stop bad lending practices. The bill was shot down by democrats.

In fact, the largest opponent of lending regulation has been democratic congressman Barney Frank. As early as 1992, he opposed lending regulation. He was the strongest opponent of the 2000 bill, and even said that there is "no federal liability there whatsoever". In 2002 he said, "I do not regard Fannie Mae and Freddie Mac as problems". Well, they are a problem now. The federal government has now assumed their trillions of dollars of debt, $200 billion of which will be paid directly by the taxpayers. In the words of Mr. Frank, "good luck on that". Yeah.

Mr. Frank probably isn't worried. The two FMs have already been pouring $500 million per year into a trust fund that he set up, for use by politicians like him.

Wall Street Journal link
More WSJ Resources

Bill's Bills

In defense of Mr. Frank, Bill Clinton had a lot more to do with this crisis than he did.

There is little doubt amongst economists that two large factors contributing to today's subprime mortgage crisis were repeal of the Glass-Steagall Act and enactment of the Community Reinvestment Act.

After lobbying with over $200 million, Citigroup and other financial leaders were able to motivate the repeal of the Glass-Steagall Act in 1998. In essence, this move reduced regulation of the trade of securities and debt. This repeal was signed by Bill Clinton.

Source: Editorial (1999-11-15), "Breaking Glass-Steagall", The Nation

The Community Reinvestment Act forced banks to give loans to those that they normally would not have. The idea was that this would boost housing sales. It did. And now those unworthy buyers are defaulting. Again, this act was signed by Bill Clinton.

White house link

Business Week link
Drexel University link

Learning from our mistakes

(Opinion alert)

• The new deal fixed lots of problems for a while, but it got America addicted to credit and eventually was one cause of today's housing crisis.
  
  
• The democrats gave in to lobbying and special interests and as a result, the crisis was not averted when it could have been.
  
  
• Bill Clinton chose to give credit to those who were not worthy of it, rather than forcing them to rightfully earn it.

From now on, let's keep the government small! Let's stop it from growing! Things like government-run health care will be great for a few years, but then in fifty more they will blow up just like these GSEs. Doy!