[Posted by Karl]
John Steele Gordon — an author who has chronicled the booms and busts of US economic history — guest-posts at the NYT’s Freaknomics blog that the current mess on Wall Street is due in part to self-delusion by traders and bankers, as well as failures by credit ratings agencies such as Moody’s and Standard and Poor’s (who were part of a government-created oligopoly until 2007) to learn from their mistakes in cases like Enron:
But at the heart of the problem is Congress and its deeply corrupt relationship with Fannie Mae and Freddie Mac. Congress was equally at the heart of the savings and loan disaster 20 years ago and, obviously, learned nothing from it.
RTWT. Gordon also credits The Wall Street Journal editorial page for warning for years that this was a disaster waiting to happen. Now that public attention is riveted on the issue, the WSJ has another op-ed today by Charles W. Calomiris and Peter J. Wallison, explaining how these two government-sponsored enterprises (GSEs) and their political patrons bear a major potion of the blame:
How did we get here? Let’s review: In order to curry congressional support after their accounting scandals in 2003 and 2004, Fannie Mae and Freddie Mac committed to increased financing of “affordable housing.” They became the largest buyers of subprime and Alt-A mortgages [a/k/a "liar loans" -K] between 2004 and 2007, with total GSE exposure eventually exceeding $1 trillion. In doing so, they stimulated the growth of the subpar mortgage market and substantially magnified the costs of its collapse.
It is important to understand that, as GSEs, Fannie and Freddie were viewed in the capital markets as government-backed buyers (a belief that has now been reduced to fact). Thus they were able to borrow as much as they wanted for the purpose of buying mortgages and mortgage-backed securities. Their buying patterns and interests were followed closely in the markets. If Fannie and Freddie wanted subprime or Alt-A loans, the mortgage markets would produce them.
Calomiris and Wallison also notes (as previously noted here) that Senate Republicans, including John McCain, supported a strong reform bill for the GSEs, while Democrats opposed it or — like Barack Obama — remained silent.
Yesterday on the campaign trail, Obama claimed that McCain was a champion of the deregulation that led to the current turmoil in US markets. As McCain was the champion of reform on this issue and the deregulation he supported is one of the few saving graces of the current crisis, Obama’s claim seems remarkably dishonest. Yet Obama’s in-the-tank media pals like the Politico’s Ben Smith and the oh-so-probing New York Times have not bothered to remark upon it.