There’s been a lot of buzz about this, how the four Republicans on the commission charged with reporting on the causes of the financial crisis (Douglas Holtz-Eakin, Peter J. Wallison, Bill Thomas, and Keith Hennessey) have changed the facts to suit their Republican (anti-regulation) ideology.
First, they did this:
Last week, reports Shahien Nasiripour of The Huffington Post, all four Republicans on the commission voted to exclude the following terms from the report: “deregulation,” “shadow banking,” “interconnection,” and, yes, “Wall Street.” Krugman
Yes, the Republicans on the commission voted to not use the words Wall Street and deregulation, on a report about how Wall Street went bankrupt and how deregulation may have played a part. They didn’t even want the report to have the language capacity to evaluate a particular facet of the financial crisis.
Here is their argument on why government was the problem:
- Regulatory capital requirements involving mortgages were lower than other investments
- the government encouraged the private market to serve under-qualified borrowers through regulatory, legal, and moral pressure
- The largest investors in the mortgage industry were the government companies of Fannie Mae and Freddie Mac.
These three charges all ignore reality. They are so wrong and so many evaluations have determined that it was deregulation, that this has surprised a great many people. I think the econ blogging world has literally exploded. As Bethany McLean says via Brad DeLong:
(1 and 2) Capital requirements (money you needed on-hand to get a mortgage) was lower than other investments, because private lenders like Countrywide and Wall Street firms wanted to bundle those mortgages into securities and make larger profits. These private entities lobbied the government to enact the policy Republican lawmakers are now criticizing it for making. It is impossible for the government to force private financial firms to accept conditions the firms were asking for whether through legislation, regulation, or moral pressure. Now, if these Republicans were saying that private companies shouldn’t have gotten their way and this caused the crisis, then this logic makes sense. But that’s not what they’re saying. These Republicans are against regulating the financial sector, and saying government action created the fiscal crisis. But the government action was to make the mortgage sector more free market and less regulated in absolute capital requirements.
(3) Freddie and Fannie, the government-run companies that supplied mortgages, had regulations they were supposed to follow, where their balance sheets were supposed to have a significant proportion of median-income level customers. Middle-income Americans are supposed to be able to afford houses. However, with inequality at Robber Baron-esque levels, perhaps it was a foolish expectation that Americans can actually afford houses. But wait, if government regulations forced government mortgage companies to go with the safe bet, but the safe bets couldn’t afford the prices of the housing bubble, how could it be the fault of the government?
However, Freddie and Fannie executives, like all financial firm executives at that time, bragged about how they were ignoring these requirements as much as possible.
I leave you with this awesome quote from Bethany:
The GOP report—oops, primer—provides a calculatedly incomplete account of how bad mortgages found their way onto the balance sheets of financial firms. There’s an interesting dissection of the kinds of risk that banks took—but no mention of the reason they took those risks…. As for the ways the risky mortgages were packaged into supposedly safe securities, all readers get is a whitewash…. [No] mention of the Street’s failure to investigate the underlying mortgages, despite its promises to investors that it was doing so. Oh, and here’s the line about the credit-rating agencies like Moody’s and Standard and Poor’s, which made fortunes by stamping triple-A ratings on bundles of bad mortgages:“The credit rating agencies made many of the same mistakes as mortgage investors, and ratings on MBS proved to be severely inflated.”
Er, the mortgage investors were relying on the credit-rating agencies to do their job by assessing risk accurately. Anyone with even a rudimentary understanding of the 2008 crisis knows that. But apparently it never came up in those “hundreds of interviews” financed by taxpayer dollars….
We should all just submit to our financial titans and accept their reality, even if it’s contrary to all honest objectivity. These Republicans are certain to get a nice payoff. If the citizenry who lost their life savings, and jobs when the financial firms stopped lending to their companies, submit to Republican fantasy, can Wall Street get us cushy jobs too? Orzag doesn’t even have a position named for him, because the position The Advisor Who Tells Us How to Get Around the Regulations He Created, is a really long job title.
Wall St Partnerships for everybody!