The Roots of the Financial Crisis - Failure of Government
Friday, October 3rd, 2008 By David Owsiany
Watching coverage of the vice-presidential debate last night and listening to the chortling class discuss the financial crisis, I have been struck by the constant refrain that the current economic situation was caused by the failure of the free market.
The cause of this recent crisis, however, was not primarily a market failure. The seeds of the current crisis - bad mortgages - were planted nearly a decade ago when the federal government attempted to use government sponsored entities to achieve political and social goals. This 1999 New York Times article, which has recently made the rounds again via those of us who want to remind the governing class of their responsibility in creating the current mess, sheds light on the thinking back then. The author, Steven A. Holmes, noted that “Fannie Mae, the nation’s biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people.” Holmes then explained Fannie Mae’s plan to achieve the Clinton administration’s objectives:
Fannie Mae, the nation’s biggest underwriter of home mortgages, does not lend money directly to consumers. Instead, it purchases loans that banks make on what is called the secondary market. By expanding the type of loans that it will buy, Fannie Mae is hoping to spur banks to make more loans to people with less-than-stellar credit ratings. Fannie Mae officials stress that the new mortgages will be extended to all potential borrowers who can qualify for a mortgage. But they add that the move is intended in part to increase the number of minority and low income home owners who tend to have worse credit ratings than non-Hispanic whites.
Interestingly, even back then, there were warnings that this approach could backfire. In the same New York Times article, Peter Wallison of the American Enterprise Institute warned that this attempt to extend home loans to people with poor credit resembled the savings and loan crisis of the 1980’s. Wallison told the reporter, “‘If they fail, the government will have to step up and bail them out the way it stepped up and bailed out the thrift industry.”
I have many issues with John McCain. His so-called campaign finance reform law is one of the most egregious restrictions of political speech in American history and has given rise to the “527 groups” that so many people detest. McCain’s role with the “gang of fourteen” has done little to significantly improve the ugly judicial confirmation mess in the Senate. But on the issue of Fannie Mae and Freddie Mac, McCain warned of the coming crisis more than two years ago when arguing in favor of legislation reforming government sponsored entities. McCain told the nation and his colleagues:
If Congress does not act, American taxpayers will continue to be exposed to the enormous risk that Fannie Mae and Freddie Mac pose to the housing market, the overall financial system, and the economy as a whole.”
So the next time you hear Obama, Biden, or some media talking head thundering about the failure of the marketplace, they may just be deflecting from the real issue: the failure of government.
Tags: Fannie Mae, Free Markets
