Note: I don’t believe our economy is in crisis. To be sure, times are tougher than we’ve grown used to seeing them, but they’re still a long way better than the true crisis points this country has seen in the past. John McCain is right to say that the fundamentals of our economy are still strong; the cracks we’re seeing are real and significant and need to be repaired, but they aren’t going to bring the house down. Certain financial institutions are in crisis due to some very poor decision-making, and this is causing problems for the economy, but I think we need to be careful not to overstate the problem.Rather than panicking, I think we need to ask ourselves where this mess came from and how we’re going to get out of it—and, this being an election year, who’s likeliest to provide the leadership we need. Obviously, I believe that’s Sen. McCain; despite all the disagreements I have with him, he has a record of seeing problems coming and trying to address them, even when such actions aren’t popular. He did it in Iraq, with his advocacy of the surge beginning in 2003, and for all his deprecation of his economic knowledge, he did it in the area of economic policy as well.On my read, the biggest root of the troubles we’re facing has been maladept government involvement in the economy; this has produced a feedback loop in which lobbyists have used money to win passage for federal subsidies of their corporations which have, among other things, given them more money to expand their influence. In 2002, bipartisan legislation in Congress, co-sponsored by Sen. McCain and Rep. Dick Gephardt, would have created a Corporate Subsidy Reform Commission to address this issue. As Peter Wallison tells the story,
The purpose of this group was to eliminate what McCain called “corporate welfare.”In a statement at the time, he noted that “There are more than 100 corporate subsidy programs in the federal budget today, requiring the federal government to spend approximately $65 billion a year . . . These programs provide special benefits or advantages to specific companies or industries at the expense of hard-working taxpayers. In years past, Congress has insisted that it would eliminate the existence of this corporate welfare, but virtually no such program has been eliminated . . . This bill aims to remove the special treatment given to politically powerful industries . . .”
Though not aimed explicitly or solely at Fannie Mae and Freddie Mac, they definitely stood in the crosshairs of this bill; thus Wallison can say that
as far back as 2002, John McCain realized that underlying what would ultimately become the Fannie and Freddie crisis was the willingness of Congress to provide financial support to private corporations. And he was willing to take on powerful interests to stop this process. If his bill had resulted in action at that time, the unprecedented steps that the Secretary of the Treasury and Congress had to take in the last two weeks would not have been necessary.
Though Congress refused to pass the bill, that wasn’t the end of such efforts; indeed, with respect to the government-backed lenders at the center of the crisis in our financial institutions, it was only the beginning. On September 11, 2003, the Bush administration proposed
the most significant regulatory overhaul in the housing finance industry since the savings and loan crisis a decade ago.Under the plan, disclosed at a Congressional hearing today, a new agency would be created within the Treasury Department to assume supervision of Fannie Mae and Freddie Mac, the government-sponsored companies that are the two largest players in the mortgage lending industry.The new agency would have the authority, which now rests with Congress, to set one of the two capital-reserve requirements for the companies. It would exercise authority over any new lines of business. And it would determine whether the two are adequately managing the risks of their ballooning portfolios.The plan is an acknowledgment by the administration that oversight of Fannie Mae and Freddie Mac—which together have issued more than $1.5 trillion in outstanding debt—is broken. A report by outside investigators in July concluded that Freddie Mac manipulated its accounting to mislead investors, and critics have said Fannie Mae does not adequately hedge against rising interest rates.
Unfortunately, Congress rejected this proposal as well; Congressional Democrats led the fight against it as an unwarranted threat to low-income and affordable housing programs.
Among the groups denouncing the proposal today were the National Association of Home Builders and Congressional Democrats who fear that tighter regulation of the companies could sharply reduce their commitment to financing low-income and affordable housing.“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.”Representative Melvin L. Watt, Democrat of North Carolina, agreed. “I don’t see much other than a shell game going on here, moving something from one agency to another and in the process weakening the bargaining power of poorer families and their ability to get affordable housing,” Mr. Watt said.
It’s worth remembering, as these old quotes point out, that it wasn’t all bad motives that created this mess; what people are now calling “irresponsible lending practices” were commended at the time as creative efforts to undo decades of racism in the lending industry and enable poor people to enjoy “the benefits of home ownership.” It worked fine as long as housing values continued to go up; it’s just that most people didn’t think about what would happen when housing prices began to drop.To give Sen. McCain credit, though, he recognized that there was a problem, and in May 2005 he and others took another whack at it:
Mr. President, this week Fannie Mae’s regulator reported that the company’s quarterly reports of profit growth over the past few years were “illusions deliberately and systematically created” by the company’s senior management, which resulted in a $10.6 billion accounting scandal.The Office of Federal Housing Enterprise Oversight’s report goes on to say that Fannie Mae employees deliberately and intentionally manipulated financial reports to hit earnings targets in order to trigger bonuses for senior executives. In the case of Franklin Raines, Fannie Mae’s former chief executive officer, OFHEO’s report shows that over half of Mr. Raines’ compensation for the 6 years through 2003 was directly tied to meeting earnings targets. The report of financial misconduct at Fannie Mae echoes the deeply troubling $5 billion profit restatement at Freddie Mac.The OFHEO report also states that Fannie Mae used its political power to lobby Congress in an effort to interfere with the regulator’s examination of the company’s accounting problems. This report comes some weeks after Freddie Mac paid a record $3.8 million fine in a settlement with the Federal Election Commission and restated lobbying disclosure reports from 2004 to 2005. These are entities that have demonstrated over and over again that they are deeply in need of reform.For years I have been concerned about the regulatory structure that governs Fannie Mae and Freddie Mac–known as Government-sponsored entities or GSEs–and the sheer magnitude of these companies and the role they play in the housing market. OFHEO’s report this week does nothing to ease these concerns. In fact, the report does quite the contrary. OFHEO’s report solidifies my view that the GSEs need to be reformed without delay.I join as a cosponsor of the Federal Housing Enterprise Regulatory Reform Act of 2005, S. 190, to underscore my support for quick passage of GSE regulatory reform legislation. 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.I urge my colleagues to support swift action on this GSE reform legislation.
They didn’t; in fact, thanks in large part to Christopher Dodd and his fellow Democrats, the bill never even came to a vote in the Senate. (NB: this was one of those issues the Obama campaign has been lamenting on which Sen. McCain “voted with Bush.” On this one, it doesn’t mean Sen. McCain wasn’t the maverick reformer fighting Washington business as usual—it means President Bush was.) This was highly unfortunate, because as Ed Morrissey correctly says,
In this speech, McCain managed to predict the entire collapse that has forced the government to eat Fannie Mae and Freddie Mac, along with Bear Stearns and AIG. He hammers the falsification of financial records to benefit executives, including Franklin Raines and Jim Johnson, both of whom have worked as advisers to Barack Obama this year. McCain also noted the power of their lobbying efforts to forestall oversight over their business practices. He finishes with the warning that proved all too prescient over the past few days and weeks.
Still, Sen. McCain is never one to give up; and so the next year, he tried again; as the Washington Post pointed out,
In 2006, he pushed for stronger regulation of Fannie Mae and Freddie Mac—while Mr. Obama was notably silent. cIf 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,” Mr. McCain warned at the time.
Unfortunately, Congress once again did not act, and Sen. McCain was dead right about the consequences.And what’s Barack Obama’s record in this area? Not great, as the McCain campaign has started pointing out:
As noted, Sen. Obama didn’t back Sen. McCain’s efforts to reform the system. Given what the Center for Responsive Politics discovered, this isn’t surprising. When they tallied up the contributions Fannie Mae and Freddie Mac have made to members of Congress over the last 20 years, it was no surprise whose name was #1 on the list: over the last 20 years, Sen. Dodd, the ranking Democrat (and thus current chair) on the Senate Banking Committee, collected $165,400 from the corporations’ PACs and employees. The surprise was who placed second: in less than four years in office, Sen. Obama had already raked in $126, 349 (most of that from corporate employees) to pass John Kerry and hit #2 with a bullet.
As well, Sen. Obama has made a place for ex-Fannie Mae CEOs Franklin Raines and James Johnson; according to the Washington Post, he’s been “seeking [Raines’] advice on mortgage and housing policy matters” (never mind that Raines “stepped down as Fannie Mae‘s chief executive under the shadow of a $6.3 billion accounting scandal”), while Johnson was the head of his VP search committee. The Obama campaign didn’t like it when the McCain campaign pointed out this connection with Raines:
and I’m sure they won’t like this ad focusing on James Johnson, either:
but though they’re getting increasingly fond of calling any sort of criticism “lies,” even their allies recognize that that won’t wash. The Obama campaign has also tried to respond by distorting Sen. McCain’s record in this area, but even the Washington Post caught them on it:
TO LISTEN to Sen. Barack Obama, Sen. John McCain is a Johnny-come-lately to the cause of regulating financial markets. “He has consistently opposed the sorts of common-sense regulations that might have lessened the current crisis,” Mr. Obama said in New Mexico yesterday. “When I was warning about the danger ahead on Wall Street months ago because of the lack of oversight, Senator McCain was telling the Wall Street Journal—and I quote—‘I’m always for less regulation.’”But the full quotation from Mr. McCain’s March interview with the Journal’s editorial board belies Mr. Obama‘s one-sided rendition. The Republican candidate went on to say, “But I am aware of the view that there is a need for government oversight. I think we found this in the subprime lending crisis—that there are people that game the system and if not outright broke the law, they certainly engaged in unethical conduct which made this problem worse. So I do believe that there is role for oversight.”
The fact of the matter is, Sen. Obama likes to talk about himself as an agent of change, but when it came to efforts to bring change to Fannie Mae and Freddie Mac before it was too late, he was firmly ranged on the side of the status quo. When it comes to the AIG bailout, he seems to be trying to take both sides at once; one might be forgiven the sense that he doesn’t understand the situation well enough to take a position on it, given that his initial statement got the company’s name wrong. Unfortunately, the decision of the Democratic leadership of Congress to declare themselves incompetent to deal with the crisis and refuse to address it isn’t going to help that perception any; it will be hard for them to live down this opening from the Bloomberg News report:
The Democratic-controlled Congress, acknowledging that it isn’t equipped to lead the way to a solution for the financial crisis and can’t agree on a path to follow, is likely to just get out of the way.
Ouch. Under ordinary circumstances, now that Sen. McCain has started talking in more detail about his economic plan, you’d expect the Democrats to start going after him about it; but that abdication of their responsibilities is going to make it hard for them to do so. After all, at least he has a plan—and if the media can’t drown him out, the contrast alone is going to make him look like the real leader in this race.Update: I appreciate what the Anchoress has to say about the Congressional “leadership”:
If the Democrats have forgotten how to lead, then they need to look to NYC Mayor Rudy Giuliani on 9/11, and pattern some leadership based upon how he responded to the challenges of that day. It’s the most basic lesson of leadership, but the one that matters the most: When there is a serious problem, you acknowledge the gravity of the situation, and then—even if you are discreetly looking for outside expertise to address the crisis—you STAY WHERE YOU ARE and you deal straight with the nation, and keep them apprised of the rescue and recovery operation. It’s okay to admit you don’t know anything . . . but you tell the nation, “we’re going to come through this, and we’ll be the stronger for it; we’re going to work together to make sure everything that needs seeing to is seen to. We are here; we know this is bad. Trust us to understand what you need. Yes, this is frightening for us, too, but we are here to lead; we will not abandon you.”The Democrats are saying they can’t do that. They’re saying they have not the tools to lead. To obstruct, yes, to vilify, yes, to blame, yes…but not to actually lead us out of an economic ground zero. They’re admitting they can’t lead us out of the hole; they’re just running to make sure they can stay safe.I am very glad to read Reid’s admission that “No one knows what to do” . . . except it’s not really true. . . . [John McCain] is showing leadership. He is not telling you “we don’t know what to do.” He is not telling you “there are no answers.” He’s telling you this is going to be hard, but we’re going to get through it. He is being Rudy Giuliani on 9/11.
And here’s a helpful analysis of where we need to go from here.