It’s common to hear that the current financial crisis was caused by government meddling, specifically the Community Reinvestment Act. This is a Big Lie.
It’s important to fight these sorts of lies; they cripple our ability to fix the problem and to avoid a repeat in the future. Never mind holding guilty parties responsible, we need to have an accurate model of the way the world works.
Read that article and spread the word. It’s important.
Update: Comments are closed, even though I don’t have a plug-in that would allow me to turn them off without deleting comments already posted. Take the discussion elsewhere, please.
I’m responding because I agree this is important. Specifically: “we need to have an accurate model of the way the world works.” Sadly, your linked article fails to do that.
This is the truth: GSEs played some role in the housing bubble. Here is Larry Summers, talking about Fannie and Freddie after the bubble burst:
“What went wrong? The illusion that the companies were doing virtuous work made it impossible to build a political case for serious regulation. When there were social failures the companies always blamed their need to perform for the shareholders. When there were business failures it was always the result of their social obligations. Government budget discipline was not appropriate because it was always emphasized that they were “private companies.” But market discipline was nearly nonexistent given the general perception — now validated — that their debt was government backed. Little wonder with gains privatized and losses socialized that the enterprises have gambled their way into financial catastrophe.”
Larry Summers was Secretary of the Treasury under President Clinton and later served as President of the Council of Economic Advisers for President Barack Obama. He’s an excellent economist and, if he has any political leanings, they are to the left. And yet here he is basically outlining the “Big Lie”.
And let’s talk more about deregulation. Who was it that opposed stricter regulations of Fannie and Freddie? Well, one of their biggest defenders is and was Barney Frank. In 2003, during the Bush years, he said this:
“These two entities — Fannie Mae and Freddie Mac — are not facing any kind of financial crisis,” said Representative Barney Frank of Massachusetts, the ranking Democrat on the Financial Services Committee. ”The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing.”
So we’ve got Larry Summers pointing out the obvious–that perceived government sponsorship of mortgages through GSEs Fannie and Freddie was a contributing factor in the bubble–and Barney Frank rallying Democrats to oppose stricter regulation of corporations. (Fannie and Freddie are, after all, for-profit institutions who have given out hundreds of thousands of dollars in campaign contributions over the years.)
On the other hand we have… a columnist from the WaPo.
Look, let’s clear something up here: BOTH the GOP and the Democrats are trying to spin history. I’m not trying to convince you to abandon the Democratic version and embrace the GOP’s version. I’m trying to convince you to set aside partisanship and spend more time reading what serious economists of integrity write and less time reading what partisan hacks write. If you do: you’ll see the picture is a lot less stark. The world isn’t as simplistically divisible into good guys and bad guys as you might like. This isn’t any fun but, if we really need an accurate model of the way the world works, we’re going to have to set aside the fun and games of partisanship and do serious work.
One additional quick note for you, Harry, and any interesting readers. The “Big Lie” that Fannie and Freddie and/or some other combination of government intrusion in the market caused the subprime mortgage is just that, a lie. The problem is that the reverse–that Fannie and Freddie and gov’t intrusion had nothing to do with it–is also a lie. In addition to Summers, who I’ve also quoted, Greg Mankiw and Ben Bernanke were both on record in 2007 and before (in other words: prior to the bubble bursting) expressing their concerns about the GSEs.
If you want to look at a more realistic assessment of the role the GSEs played in the bubble, this is a great article: http://american.com/archive/2010/september/many-are-the-errors
Rajan–a finance professor–defends his book “Fault Lines” in which he outlines three factors that led to the crisis: the political push for easy housing credit in the United States, overly lax monetary policy in the years 2002–2005, and global trade imbalances. The GSEs only played a role in one of these three factors. The second was a result of Fed policy (mostly under the Bush administration’s Alan Greenspan) and the third is a result primarily of the Chinese policy of pegging their currency to the US dollar to prop up their export industries.
So a *serious* explanation of the housing crisis isn’t a convenient story for anyone. There’s indictments of the GSEs (and Democrats who protected them), the Fed (specifically under Bush’s term and the GOP-nominated Alan Greenspan) and the Chinese (who had their own reasons).
Not much fun at all,but much more useful.
Nathaniel, I’m all for setting aside “the fun and games of partisanship and do serious work”. For instance, any “serious” look at the post I wrote and the article I linked to would show that it’s about the Community Reinvestment Act, not Fannie and Freddie. Mayor Bloomberg just blamed the CRA for the crisis, and the article is a response to that increasingly widespread lie.
So, when you talk about an accurate model of how the world works, you should try to stick to the topic at hand rather than condescend to me about some straw man arguments you feel comfortable about propping up.
For the record, I blame our current financial situation on deregulating conservatives in both parties, not on Republicans. It’s not a Dem/Rep issue. It’s an issue between people who want smart regulation and people who want none.
The problem is that the reverse–that Fannie and Freddie and gov’t intrusion had nothing to do with it–is also a lie.
Please look through my post above or the article I linked to and show me where that claim is made. I can’t find it.
Harry,
“So, when you talk about an accurate model of how the world works, you should try to stick to the topic at hand…”
I understand that you want to focus specifically on the CRA, but that is precisely what Larry Summers was talking about in his quote. Here it is again (in part): “The illusion that the companies were doing virtuous work made it impossible to build a political case for serious regulation.” He was talking about the CRA.
“The problem is that the reverse–that Fannie and Freddie and gov’t intrusion had nothing to do with it–is also a lie.” (me)
“Please look through my post above or the article I linked to and show me where that claim is made. I can’t find it.” (Harry)
From the article:
>>Wall Street has its own version: Its Big Lie is that banks and investment houses are merely victims of the crash. You see, the entire boom and bust was caused by misguided government policies. It was not irresponsible lending or derivative or excess leverage or misguided compensation packages, but rather long-standing housing policies that were at fault.<<
Barry Ritholtz wants readers to think they have to choose between these two simplistic options:
A – gov't regulation cause the crash (ergo banks are just victims)
B – the crash was caused purely by autonomous bank actions (e.g. irresponsible lending and so on)
This is a clear example of the false-choice fallacy, and it is why I responded by saying that *both* options are lies.
I'm not cherry-picking a single quote, either. The entire second page of the article is dedicated to a long explanation of the housing crisis that manages to omit entirely from mention GSEs like Fanny or Freddie, despite the fact that serious economists on both sides of the aisle (again: Summers, Bernanke, and Mankiw top the list) say otherwise. Barry's account of the crisis a white-wash. It's a Big Lie. Just like the other Big Lie that he's responding too.
The whole article is nothing but one lie competing with another, and not for a moment does a glimmer of serious, unbiased intellectual inquiry appear. Barry is angry that Bloomberg wants to whitewash out the role the industry played, and so he replies by whitewashing out the role that government played.
It's childish and corrosive. It feeds partisan passions but sheds light on nothing.
Two other things to note:
1. It’s ironic that Barry will cite the fact that mortgage-backed securities were considered triple-A without discussing *why*. The market though they were safe because they believed the gov’t would bail out Fannie and Freddie. And they did. Today, in the WaPo, you could read about Fannie asking for another $8bn to cover loses in addition to the $169b the gov’t has already paid out. TARP may have been bigger ($700b), but so far American tax payers are actually making money on TARP.
2. Anyone that considers Barney Frank any kind of a conservative has a very peculiar nomenclature.
Of course Barney Frank is not a conservative. Of course Barney Frank is not to blame for the financial crisis.
Fannie and Freddie have been securitizing loans for a long time. Not all the mortgage-backed securities were purchased by or insured by F&F, but yes, the government did step in to prevent another Great Depression.
None of this is new. The real problem here isn’t that the government will step in to prevent the economy from blowing up when bad actors enrich themselves at the expense of their employers and their country. The real problem is that we deregulated the financial industry in the misguided belief that they would police themselves. They couldn’t and didn’t. Fannie and Freddie (as problematic as they are) were the true source of this disaster. The repeal of Glass-Steagall was. Deregulation was.
He was talking about the CRA.
Unfortunately for your argument, a great many of the companies who made and packaged the toxic mortgage securities weren’t even affected by the CRA. The CRA didn’t apply to them. And I’m not even sure why we have to pretend that businessmen who were making money hand over fist were forced to do so by the government. I guess the profit motive explains everything except failure.
The entire second page of the article is dedicated to a long explanation of the housing crisis that manages to omit entirely from mention GSEs like Fanny or Freddie, despite the fact that serious economists on both sides of the aisle (again: Summers, Bernanke, and Mankiw top the list) say otherwise.
I count five places in those bulleted points where Ritholtz points the finger at the government for ways it contributed to the mess we’re in. But I guess if he doesn’t agree to blame Fannie and Freddie specifically–even though they were under pressure from Congress to loan less money while the bubble was first inflating and didn’t even jump into the bubble until very late–then it’s some sort of white wash to you.
Fine. I put much less faith in Summers than you do; he’s the guy who pushed for a smaller stimulus and left us stuck in this mess. But go ahead and take him seriously if you want.
Harry-
You say you want a realistic model of how the world works, but it doesn’t fit your behavior.
1. You refuse to let go of the false-choice fallacy.
For example: “Fannie and Freddie (as problematic as they are) were the true source of this disaster. The repeal of Glass-Steagall was. Deregulation was.”
As early as the first post I did my best to try and avoid a repetition of super-simplistic bumper-sticker economics, but you seem unwilling to even consider such a departure.
In the last round of posts you contested my assertion that either you or the article were doing such a thing. I cited explicit evidence from the article, and though you made some attempt at rebutting my points, you end up more than making my case for me with this quote.
You can’t hope to build a realistic model of the world painting only in black and white.
2. You refuse to consider expert evidence that doesn’t fit your pre-determined narrative.
For example: the most prominent detractor of the argument that Fannie and Freddie played a role in the crisis is Paul Krugman. Knowing this, I linked to an article yesterday that dismantled his main arguments. To recap:
In July 2008 he claimed that GSEs were legally barred from lending to subprime mortgages, that they could not control their risk-taking, and that they had zero subprime exposure. Each assertion was factually false.
In June 2010 he trotted out a new argument (blithely ignoring his past failures) that Fannie and Freddie had falling share of MBS’s in 2004 – 2006 to absolve them of blame. This is once again factually erroneous. He omits from consideration the subprime loans that *weren’t* securitized which they purchase and the MBSs from 3rd parties which they purchased to generate his data. When you put those numbers back in, F&F’s share of subprime mortgages was *increasing* during 2004-2006. Again: he is factually wrong.
Then in September 2010 he came up with a third attempt to defend F&F. He argues that private entities–like Countrywide–underwrote the MBSs and so F&F couldn’t have had anything to do with it. This is at least not factually false, but it omits the fact that while F&F couldn’t create the MBSs themselves, they *did* originate the loans that were then securitized AND they purchased the resulting securities AND they did so with an implicit gov’t backing.
The dates should look familiar to you, because after I posted a rebuttal to all 3 versions of Krugman’s argument, you went ahead and posted links to the most recent 2.
This is clear evidence of selection bias. You either didn’t even click the link in my own piece (Krugman’s name shows up in the first paragraph, after all) or you consider citations from prominent economists to be windowdressing for rhetoric, because nothing in your post interacts with the substance of the rebuttal I pre-emptively posted yesterday.
You do the same thing with Larry Summers. He didn’t ask for a big enough stimulus (never mind this was a political calculation and not an economic one), and therefore we’ll just ignore him.
The apparent simplicity that arises when you heavily filter what information you’re willing to consider is misleading, Harry. When you put Summers, Bernanke, Mankiw, and Rajan back in the mix instead of just looking at Krugman and only Krugman the picture gets murkier, but also more realistic.
In case this isn’t abundantly clear: I’m a moderate. I’m not defending the GOP’s Big Lie. The repeal of Glass-Steagel was certainly a big part of the crisis. You won’t get any blind denialism out of me. I just want a little intellectual integrity from *both* sides of the discussion because–like you–I think a realistic model is important. And a realistic model includes many factors, such as deregulation, GSEs, and international investment.
Oh, this last thing:
“Of course Barney Frank is not a conservative. Of course Barney Frank is not to blame for the financial crisis.”
That’s really sad to hear. I quoted Barney Frank’s dogged refusal to regulate the GSEs in my very first post. This isn’t exactly DEregulation, but it is ANTIregulation. You responded with:
“For the record, I blame our current financial situation on deregulating conservatives in both parties, not on Republicans.”
So I assumed you were referring to Barney Frank’s obstructionism when it came to applying new regulations to F&F (regulations backed by economists on both sides of the aisle). That gave me hope that you really were willing to look at this in a non-partisan way.
Apparently it was false-hope, however. Despite the fact that you consider lack of regulation to be a major cause and despite the fact that Barney Frank opposed regulation that every prominent economist (that I know of) supported, you say that “Of course Barney Frank is not to blame for the financial crisis.” Really, Harry? “Of course”?
It looks like partisan politics are back in play.
There is not false-choice fallacy in Ritholtz’s article; I’m not sure you understand what a false-choice fallacy really is. I’ve been avoiding the topic because I don’t have time time or inclination to educate you on the subject. Let me try this briefly:
False choice fallacy: “The truth must be either X or Y.” Alternately: “X can’t be true, so the truth must be Y.”
Ritholtz (paraphrased): Bloomberg said X, but he’s wrong. The truth is Y, Z, A, B, and C.
The difference is not subtle, and it makes me disinclined to put a lot of time into this conversation. You’re welcome to accuse me of selection bias all you like, but I’m not interested in partisanship. I’m also not interested in “Both sides are partly right” anti-partisanship. Moderation isn’t a virtue in a time of widespread false equivalencies.
Now I’m going to ask you to take your condescending tone to your own space if you want to continue talking about this. This thread is done.