That’s a question a lot of voters are asking about the current finance crisis. Of course, the more immediately pressing question is how they’re going to put Humpty Dumpty back together again. (One member of Congress, at least, is acting like a leader.)
And yet the questions of how this happened and who let it happen are important ones. Since Fannie Mae and Freddie Mac were created and backed by the government, it’s reasonable to ask what decisions of the government laid the groundwork for the problem, who proposed solutions, and who blocked them. After all, do we really want to keep in office the people who helped create the greatest financial crisis since the Great Crash of 1929?
The straight answer to the question of "who" is "the Democrats." By pressing for cheap credit for marginal homebuyers and encouraging Fannie and Freddie to buy these bad mortgages, which were then sold into the market on the assumption they were safe, Democrats under Clinton laid the groundwork for a crisis. (The Republicans are not wholly clean, of course, because many took credit for the resulting home-buying boom. See update, below) Democrats then blocked three Republican attempts to reform and rein in the worst abuses at Fannie and Freddie in 2001, 2003, and 2005, the first two lead by the Administration and the last by Senators McCain and Hagel. Again, all three were blocked by Democrats as a party. (Correction: Not wholly true. Again, see the update, below.)
First, read this Bloomberg article that summarizes how we got into this mess:
The clear gravity of the situation pushed the legislation forward. Some might say the current mess couldn’t be foreseen, yet in 2005 Alan Greenspan told Congress how urgent it was for it to act in the clearest possible terms: If Fannie and Freddie “continue to grow, continue to have the low capital that they have, continue to engage in the dynamic hedging of their portfolios, which they need to do for interest rate risk aversion, they potentially create ever-growing potential systemic risk down the road,” he said. “We are placing the total financial system of the future at a substantial risk.”
What happened next was extraordinary. For the first time in history, a serious Fannie and Freddie reform bill was passed by the Senate Banking Committee. The bill gave a regulator power to crack down, and would have required the companies to eliminate their investments in risky assets.
If that bill had become law, then the world today would be different. In 2005, 2006 and 2007, a blizzard of terrible mortgage paper fluttered out of the Fannie and Freddie clouds, burying many of our oldest and most venerable institutions. Without their checkbooks keeping the market liquid and buying up excess supply, the market would likely have not existed.
But the bill didn’t become law, for a simple reason: Democrats opposed it on a party-line vote in the committee, signaling that this would be a partisan issue. Republicans, tied in knots by the tight Democratic opposition, couldn’t even get the Senate to vote on the matter.
That such a reckless political stand could have been taken by the Democrats was obscene even then. Wallison wrote at the time: “It is a classic case of socializing the risk while privatizing the profit. The Democrats and the few Republicans who oppose portfolio limitations could not possibly do so if their constituents understood what they were doing.”
Again, read the whole thing.
Next, take a look at this video report from FOX’s Jim Angle. It precedes the one I embedded earlier.
The case couldn’t be clearer: we are in this mess largely because Congress failed to exercise proper regulation over Fannie and Freddie, and that failure occurred because of obstruction by Democrats like Representative Barney Frank and Senators Chris Dodd, Charles Schumer, and Barack Obama.
Remember that on election day.
LINKS: The outraged Sister Toldjah.
UPDATE: Department of Fair is Fair. Ed Morrissey points out the congressional Republicans hand a hand in creating this mess:
A few clarifications should be made. This video lays all of the blame
on Democrats, which is a natural reaction in an election year, but that
lets a lot of Republicans off the hook. In 2003, the Bush
administration tried to stop the runaway train of Fannie Mae and
Freddie Mac, and Republicans controlled both chambers of Congress.
Democrats alone didn’t stop this. No one filibustered the Bush
administration’s bill in the Senate; it didn’t have the votes to pass
anyway. Likewise in 2006, when Chuck Hagel, John McCain, John Sununu,
and Elizabeth Dole attempted to fix Fannie and Freddie, Republicans
controlled Congress and did nothing to pass this bill. Democrats
blocked it, but without some help from Republicans, both efforts would
have passed easily.
I still hold the Democrats largely responsible, as their appointees ran Fannie Mae (and advise Barack Obama), and their members were the largest recipients of
bribes donations from Fannie and Freddie, and sweetheart mortgage deals from shady lenders, such as Countrywide. Still this is a needed reminder that no one’s hands are clean in this fiasco, including ours for electing these schmucks.