The New Republic

When are you guys at TNR going to connect the dots of your own reportage and reach the obvious conclusion that Barrack Obama will not ever rise to effectively meet the malignant force that is the modern GOP and its corporate sponsors? Obama has been given enough chances, and he has failed every time. Just come out and say it.

- AaronW

June 22, 2011 at 12:09am

I agree with Aaron's main point, but let's not go into hyperbole--Obama hasn't failed every time. We did get a modest financial reform package, and we did get a substantial Healthcare overhaul that does many good things. And we got a very substantial, if still inadequate, stimulus package in 2009. But, sigh, yeah, it does seem clear Obama is stubbornly not up to the task of opposing the modern GOP. Assuming Chait's surmise is correct, it's deeply frustrating that Obama is so sensitive to the critiques of the business elite, and not to the needs of the common man. And, you know, good policy. I don't mean to suggest that being anti-business is good for its own sake. Though I doubt it harmed the business climate, I'm not sure FDR did himself any favors with his oppositional stance toward big business around 38-40. Still, that's not the same as standing up to the modern (insane) GOP.

- Curran1

June 22, 2011 at 1:30am

Jon, NYTimes, June 12, 2011: Obama Seeks to Win Back Wall St. Cash

- tblum123

June 22, 2011 at 6:57am

The premise that Obama had little room for real reformm is not true. There was lots of low-hanging-fruit which Obama could have grabbed. Saying Obama wanted deeper refrom because he brought in a bill after the most devestating financial scandal since the Great Depression is hardly an argument. He had no choice. Low hanging fruit he could have grabbed: The percentage of executive compensation tied to short-term reported income has increased since the crisis. Obama could have repealed the obscure clause in The National Bank Act that would allow local prosecutors effectively take on the banks. There's nothing in it on reversing the pro creditor bankruptcy laws. There were alternatives like FDIC head Sheila Bair proposal to limiting mortgage interest to 32% of the debtor’s family income. Or the existing, colonial era Fraudulent Conveyance Law n NY: "This wise legislation states that if a bank makes a loan to a borrower without knowing how the debtor can reasonably meet the terms of the loans out of normal income, the loan is deemed fraudulent and therefore null and void." Glass-Steagall was ignored. Volcker advised bringing it back; Summers advised against bringing it back. Summers won. The UK has now seperated commercial banking from investment banking. One could go further and point to the overall failure to reform the tax code, which has encouraged the financial sector to promote predatory extractive debt instead of productive industrial credit but that would be asking too much. The incentives are still there to wrap impossibly convoluted derivatives in whatever marketing bullshit you can find and trade until someone's left holding the bomb. The global derivatives market is now over €660 trillion. Obama picked his economic team and Obama didn't push hard at all for any real reform, at all. To say it was the Republicans fault i.e, "political reality" is a complete copout.

- IggyPop

June 22, 2011 at 7:37am

Obama's primary concern is his own re-election, which has been evident since last year. And he does need that Wall Street cash (either in his own campaign coffers or, more likely, not in the Republican campaign coffers). There are two ways to look at this, as an optimist or as a cynic. The optimist would point out that Obama's re-election will release the inner progressive. The cynic would point out that he is getting his advice from Bill Daley.

- rayward

June 22, 2011 at 7:51am

Sorry to harp on it, but the Democrats have the option of nominating a real Democrat in 2012.

- amidut

June 22, 2011 at 8:09am

Come to think of it, Obama had both houses of congress back then. Did the Republicans make Obama pick Summers/Geithner/Rubin? Did the Republicans make Obama ignore Stiglitz and other truly independent thinking experts? One other small but important point is the corruption of the economics profession itself. This was highlighted quite effectively in "Inside Job" (which is now on youtube). Surely Ivy League professors who write marketing bullshit for the industry should disclose the fact that they got paid very handsomely for lending their Yale credibility to products. No? Also, AIG had a triple AAA rating the day it went bust, ditto the rest of them. Why hasn't the for-profit rating agencies being looked into? If ever there was a case for a state role it has to be here. Please see this exchange with Michael Hirsh: http://www.harpers.org/archive/2011/03/hbc-90008013 " Born became a Cassandra about the dangers of unmonitored otc derivatives. Her story is telling because of the utter contempt with which the best and brightest of Washington–Robert Rubin, Larry Summers, Alan Greenspan–treated her. She was railroaded out of the cftc, ignored, mocked, and lampooned." "After the financial disaster of 2008, Stiglitz was full of ideas about reform. While the Obama administration tried to induce the banks to lend more and develop workout programs for underwater borrowers, Stiglitz wanted to give mortgagees the same kinds of rights that distressed corporations get under Chapter 11 of the bankruptcy code, which would allow a judge to reduce the debt subject to a mortgage in the same way he can give creditors a “haircut” in a Chapter 11 proceeding." " Though it is clear by now that Wall Street played a giant confidence game with the world, disguising bad and often fraudulent mortgages as highly rated securities, selling scam derivatives by the trillions of dollars, it is also clear that there will be no spate of prosecutions as there was after the S&L crisis, or during the insider-trading scandals of the ‘80s..." "Led by Summers and Geithner, Obama’s economic team resisted almost every structural change to Wall Street—in particular, Volcker’s plan (initially) and Arkansas Senator Blanche Lincoln’s idea to bar banks from swaps trading."

- IggyPop

June 22, 2011 at 8:16am

Obama either won't or can't articulate a view that regulation benefits even those who are regulated. Those who are regulated depend on public trust in order to thrive. Regulation creates that trust, e.g. the doctor, the restaurant, the grocer, the stock market all benefit from the belief that they are safe. Ask the maker of tylenol what happens if the public does not believe your product is safe. Without necessary regulation, either tell the public that the market is unsafe, which would be a disaster, or raise the top rates to cover the cost of the next disaster, thereby charging the individuals who benefit from that false sense of security wrapped in deficient government regulation.

- Nusholtz

June 22, 2011 at 8:19am

Hirsh refers to your defence of Obama Mr Chait. "Obama’s aides claimed they were only making necessary compromises, placating the Republicans and centrist Democrats they needed to pass the law..." Didn't know TNR was an Obama aide. "But by midsummer of 2010, the Volcker rule that Obama finally backed was so full of exemptions—allowing banks to invest substantially in hedge and equity funds—that even Volcker expressed dismay. The new law effectively anointed the existing banking elite, possibly making them even more powerful. The major firms got to keep the biggest part of their derivatives business in interest-rate and foreign-exchange swaps. (JPMorgan, Goldman Sachs, Citigroup, Bank of America, and Morgan Stanley control more than 95 percent, or about $200 trillion worth, of that market.)"

- IggyPop

June 22, 2011 at 8:24am

Curran, I'm willing to give O props for ACA, but do I need to point out that Dems controlled the house and had a 59/41 majority in the Senate, and still it all seemed about fifty times harder than it needed to be, AND Obama let the ACA-based death-panel and anti-liberty slanders stand unanswered which arguably contributed significantly to the 2010 electoral debacle.

- AaronW

June 22, 2011 at 8:51am

Throughout this entire article the only horrific yet whimsical thought that kept popping up in my head was the vision of Mitch McConnell twisting his evil mustache a la Snidely Whiplash.

- singlspeed

June 22, 2011 at 11:18am

I'm not sure that the President will have much legislative success adopting the "my way or the highway" approach to governing. The good folks beyond the beltway might be disappointed when that strategy is invoked and inactivity in Washington ensues. One thing to watch for his whether the President devotes any portion of his time to campaign for other candidates.

- Doug12

June 22, 2011 at 12:25pm

There is only one reform that matters, effective limitations on leverage, both the on-balance sheet kind and especially the off-balance sheet kind. Almost everything else is but a minor detail. This is the elephant that escaped regulation, again, in the latest round making it so much lipstick on a pig. Beyond that, Financial institutions should be flatly prohibited from standing as intermediaries for, that is, de facto guarantors of the credit of parties to, derivatives contracts. If people want to buy derivatives, let them accept each others credit or organize a private guarantor agency/market to which regulated financial institutions have zero exposure. Of course Obama could not have mind-melded conservative Dems, but the way you get legislation is to build and cultivate public opinion in favor. Then the legislators lay down and the corporate interests are silenced. FDR was a master at this. Obama has yet to display any interest in engaging.

- roidubouloi

June 22, 2011 at 2:23pm

(Aaron: no disagreement from me, there!)

- Curran1

June 22, 2011 at 4:22pm

Obama is the Great Non-Communicator, the mumblecore president.

- AaronW

June 22, 2011 at 4:29pm

Great vid from Simon Johnson on "what the banks did to us" http://www.businessinsider.com/simon-johnson-seriously-goldman-sachs-cant-fail-its-too-scary-2011-4 Roi - couldn't agree more. Problem now is we have a consolidated elite of banks that we can't allow to fail and they have enormous political connections and power. The revolving door between Wall Street and Washington continues in the Obama admin.

- IggyPop

June 22, 2011 at 4:50pm

I don't know enough to know whether this is exactly the same issue, but the lack of transparency sure sounds familiar: http://www.nytimes.com/2011/06/23/business/global/23swaps.html?pagewanted=1&hp Lately I find myself wondering what would have happened with issues like financial reform, health care and climate change if Clinton had prevailed in 2008 instead of Obama (whom I strongly supported). Based on her experience, would she have handled these issues better? Or would we be bewailing the fact that Hillary the ultimate insider compromised and that the Barack the potential change agent never got a chance?

- Thunderroad

June 22, 2011 at 6:49pm

There is likely to be tens of billions of Greek CDS exposure to US institutions Thunder. At least. We had your Treasury Secretary force feed Ireland 20 Billion in debt on a conf call (like some absentee landlord) with the IMF and the British Chancellor exactly because of CDS exposure to Irish debt. Geithner didn't want any US institutions to payout on any of the contracts, even if it meant the Irish taxpayer was saddled with the debt incurred by private banks trading private contracts. What a prick. This is the fucked up world we now live in; where no debt can be forgiven and all private debt must be paid for by taxpayers around the world in case of "contagion". This is Obama's world. It's Geithner over ruling the IMF on this. Nothing to do with baddie Republicans Chait. I thought the whole point of a CDS contact was to pay if there's default? http://www.independent.ie/opinion/columnists/gene-kerrigan/gene-kerrigan-were-shamed-by-conspiracy-of-silence-2800010.html

- IggyPop

June 22, 2011 at 7:45pm

"By now, three things are clear. One, the Irish establishment is scared witless about this. Suppose they ask Obama, Clinton or Geithner? And the Yanks say, with typical frankness: "Yeah, that's true. We're sticking you with someone else's bill. You got a problem with that, punk?" What do Kenny, Gilmore and Noonan do, when they've finished peeing in their pants? The second thing: the media isn't pushing it. Third thing -- Kelly got it right. The establishment's silence itself confirms the accuracy of his reporting. The mystery remained. Why did Geithner do it? After all, the debts Irish citizens are being forced to pay are to German, French and British banks -- for reckless loans they made to Irish banks, when they were all gambling on the property bubble. Why should the Americans worry about that? I've been ploughing through reams of statistical stuff from the Bank of International Settlements -- and, frankly, I may as well be looking into a bush. We civilians lack the training to understand the technicalities of this crisis. Yet, it's too important to leave it to the experts, whose record before and during this crisis is not at all impressive. Detailed analysis in a US blog called The Street Light has led to reports in yesterday's Market Watch, part of the Wall Street Journal network, and in the conservative Daily Caller. These claim that American banks (supposedly Bank of America, Morgan Stanley, and Goldman Sachs) are massively exposed to Greek, Irish and Portuguese bank debt. This exposure is not direct. It works like this. The European banks gambled on banks in what they call the PIGs -- Portugal, Ireland, Greece (and, yes, the insult is deliberate). If a PIG defaults, the German, French and UK banks lose the tens of billions they're owed. So, the European banks have been buying default insurance. If a PIG defaults, only about five per cent of the money on which they'll default will be owed to US banks. However, the US banks hold no less than 56 per cent of the default insurance contracts. If Greece alone defaults, said Market Watch yesterday, the US banks are down $41bn (e29bn). So, you can see why Geithner would be worried." http://www.independent.ie/opinion/columnists/gene-kerrigan/gene-kerrigan-were-shamed-by-conspiracy-of-silence-2800010.html

- IggyPop

June 22, 2011 at 7:57pm

But of course the left is supposed to keep their collective yaps shut in criticism of the president. Feh.

- tmmats

June 22, 2011 at 9:28pm

Thunderroad writes: "Lately I find myself wondering what would have happened with issues like financial reform, health care and climate change if Clinton had prevailed in 2008 instead of Obama (whom I strongly supported). Based on her experience, would she have handled these issues better?" Same result. They talk up a storm to appease their base. But in reality they know the ideas they espouse and that the left craves are not workable and not practical and would in fact gravely harm the economy. What other answer could there be? Dems had grabbed congress in 2007. They could have submitted any number of bills for Bush to veto. They did not. Dems grabbed it all in 2009. They could have passed through single payer with the same number of republicans signing on: Zero. They did not even try. Why? It is amazing to me that you guys keep lapping this stuff up. Your thought process makes no sense. You just keep blinking and ignoring reality, and mumbling something like "this is all Bush's fault" Why did Obama, with strong majorities, not do all the crap he said he was going to do? Answer: Because none of it works. And he KNOWS it would have tanked the economy. Maybe he didn't know when he took office. But he knows know. That is why Bush's military playbook became Obama's playbook. Obama sat in the first CIA meeting, mumbled "Oh shit" and did exactly what Bush was doing.

- seattleeng

June 23, 2011 at 2:58am

More bullshit, seattle, in an endless stream. Perhaps it has never come to your attention that industries resist regulation and, by a variety of means, suborn legislators to prevent or mitigate regulation. Even now, the Republicans are doing their best to gut the modest financial reform that was passed, reform that you claim was unnecessary because you believe the libertarian fairy tale that unfettered markets provide superior outcomes, always. The fact that we had a huge crash in the real estate mortgage market, engineered by private finance out of control, also escapes you. In fact, you falsely claim that it was government agencies that caused that crash because, no matter what the facts, you will always claim that the earth is flat. Financial regulation doesn't work? See, e.g. Canada's banks, and the US from the 30s until the repeal of Glass-Steagall.

- roidubouloi

June 23, 2011 at 9:26am

Roid writes: 'More bullshit, seattle, in an endless stream." Funny. Because when I usually hear endless bullshit I don't respond. And yet you do every time. Which means you don't really consider it endless bullshit, you just start every rebuttal by calling the person an idiot. But I've grown used to that from you Roid. Why didn't Dems pass half the crap you wanted passed when they had the numbers? There are a few possible answers here, add your own: 1) They didn't pass it because they don't believe in it, in spite of telling the base they do 2) The wanted to pass it because it would make things better, but figured it'd be political suicide for some reason. 3) They didn't pass it because in spite of believing in it, they loved the payoffs they were getting So which is it? In every case it shows a serious problem in the leadership of the dems. Either they were lying or ethically compromised. Which is it? Ironically, it was financial regulation that made the mess we're in. Absent regulation that encouraged lending to those that couldn't pay back a loan, the lending would not have happened. Period. Fannie and Freddie have been a cash register for dems (and a few republicans). Sad, really, that we all now have to pay for this. But that's what happens when you believe regulation has zero cost. Regulation seldom fixes what it claims to fix. That's what makes applying it liberally is so reckless. But Obama knows that. Otherwise he would have done it. You stand alone here in your beliefs (I guess you have some company with the netroots folks). Obama and the dem leadership SAY they believe in them. But their actions state they agree with me. Not you.

- seattleeng

June 23, 2011 at 10:58am

You will get not quarrel from me, seattle, about the absence and failure of Democratic leadership. That, however, does not go so far as an inch to prove libertarian fantasies about 1) the way the economy works or 2) what Democrats would like to do if they knew how to do it. In particular, your idea that financial regulation is the cause of our financial mess is so preposterous that it beggars the imagination. The sub-prime market was not the creation of regulation or of government agencies. Sub-prime mortgages were those that, by definition, did not meet agency rules for funidng. Regulation did not encourage lending to those who couldn't pay back; the absence of regulation allowed private bankers to use fake mortgages to commit fraud on a massive scale. But facts and reality are completely irrelevant to you. You just make up any old shit you want with absolutely no effort to relate your claims to the reality of the world. You think bullshit is too harsh for that, seattle? I could say much worse but refrain.

- roidbouloi

June 23, 2011 at 11:23am

Would you prefer "tendentious nonsense and fantasy?"

- roidbouloi

June 23, 2011 at 11:24am

Ironically, the crisis created by the actual implementation of libertarian nonsense is now used to claim that we need even more of the same. Pigs don't fly, seattle, even when you strap wings onto them. Every instance of the implementation of libertarian pseudo-theory results on one more disaster. Then the libertarians make up some fictional account to attribute their failure to someone else. What will save the world from these nutcases?

- roidbouloi

June 23, 2011 at 11:27am

seattleeng: "Why did Obama, with strong majorities, not do all the crap he said he was going to do?" Maybe because Republicans in the Senate stood in lock-step to try to ensure failure? This whole "strong majorities" crap fails to recognize the political realities of Senate minority rule--plus there are a whole bunch of Senate Democrats who are practically Republicans as well. The number of seats does not determine the number of votes. "Answer: Because none of it works. And he KNOWS it would have tanked the economy." Yes, the banks said regulation would kill the industry. And they've said that every time regulation has been imposed (I believe they decried the FDIC as "socialism"). And it's never happened. Usually, the banks do better. They have a poor record of determining what's in their long-term self-interest. Yeah, Democratic proposals would tank the economy, just like the Clinton tax rates...oh, wait...

- dsimon

June 23, 2011 at 11:46am

Roid writes: "In particular, your idea that financial regulation is the cause of our financial mess is so preposterous that it beggars the imagination." This is not a far-fetched theory at all. It has gained traction from many mainstream authors, including Pulitzer-prize winning reporters from the NYT, in countless books that have examined the topic. Read "Reckless Endangerment" by Morgenson to understand this. They walk you through the growth of Fan and Fred, describe how those entities came to write their own laws while functioning as a pseudo-government entity. They walk you through the huge piles of money earned by the (mostly) dem execs. They walk you through the pittance that was paid to helping the poor get mortgages, and describe how the company was morphed into a money laundering operation that figured out how to pay lip service to politicians (under the auspices of helping the poor) while at the same time serving as gasoline to super-charge the mortgage market. This constant hammering of "we're helpign the poor" combined with buckets of campaign monies led the problems today. At each turn, Fan offered mortgage products that lowered the bar, again telling folks that these were backed by the full faith of the government. Wall Street loved them. Banks could write as many loans as they wanted, sticking huge fees on them, but because houses were appreciating so quickly nobody cared. As the bar sunk lower, even more speculators without any ability to pay came on board. This is the most clear cut example yet of just how bad it is when greedy governments get in bed with those that are supposed to be regulating. The pain this "good intention" has caused for 10's of millions of middle class families cannot be ignored. No, Roid, this is not a myth. I can promise whatever theories you think caused this will not even be part of the conversation in a decade. The books written about the excesses of Fan and Fred and the government officials involved are serving as the foundation today for future learning on how sleazy this all was. All in the name of "helping poor people". Read up on Clinton's "Partners in Homeownership" to understand just how bad this was. What a crock. And not a single person of import in jail. Again, without Fan and Fred, this would not have happened. From the opening: "Because housing finance was heavily regulated, government participation was vital to the homeownership push. And Washington played not one but three starring roles in creating the financial crisis of 2008. First, it unleashed the mortgage mania by helping to relax basic rules of lending that had been in place for decades. Then its policymakers looked the other way as the mortgage binge enriched a few and imperiled many. Even after the disaster hit and the trillion-dollar bailouts began, Congress and administration officials did little to repair the damaged system and ensure that such a travesty could not happen again. This was a reckless endangerment of the entire nation by people at the highest levels of Washington and corporate America. Barney Frank, the powerful Massachusetts Democrat and ardent supporter of Fannie Mae, summed it up perfectly back in March 2005. He had just delivered a luncheon speech on housing at the Four Seasons Hotel in Georgetown. Walking up from the lower-level conference room where he had addressed the Institute of International Bankers, Frank was asked whether he had considered the possible downsides to the homeownership drive. Was he afraid, for instance, that easy lending programs could wind up luring many of his constituents into homes they could not ultimately afford? Was he concerned that, after the groundbreaking and ribbon-cutting ceremonies were forgotten, the same people he had put into homes would be knocking on his door, complaining of being trapped in properties and facing financial ruin? Frank brushed off the questioner. “We’ll deal with that problem if it happens,” he barked. Morgenson, Gretchen (2011). Reckless Endangerment: How Outsized Ambition, Greed, and Corruption Led to Economic Armageddon (p. 7). Times Books. Kindle Edition. 2000s. The Federal Housing Enterprises Financial Safety and Soundness Act actually encouraged unsafe and unsound activities at both Fannie and Freddie by assigning them a new affordable housing mission. Under the law, the companies had to use their mortgage purchases to help provide housing to those across the nation who had previously been unable to afford a home. While historically Fannie and Freddie supported housing by buying safe mortgages when other sources of capital for borrowers dried up, now the companies’ focus on soundness was diluted by the requirement that they serve the housing needs of “low-income and underserved families.” Morgenson, Gretchen (2011). Reckless Endangerment: How Outsized Ambition, Greed, and Corruption Led to Economic Armageddon (p. 25). Times Books. Kindle Edition. What did this mean in practice? Dispensing with tried-and-true lending rules. As Franklin D. Raines, Johnson’s successor as chairman of Fannie Mae, said later, “We have to keep bending financial markets to serve the families buying the homes you build.” First to go was a reliance on credit history, an age-old method for measuring borrower risk. “Lack of credit history should not be seen as a negative factor,” the recommendations said. “In reviewing past credit problems, lenders should be willing to consider extenuating circumstances.” Neither should relatively high expenses among low-income borrowers disqualify them from receiving loans. “Special consideration could be given to applicants with relatively high obligation ratios who have demonstrated an ability to cover high housing expenses in the past,” the guide said. Morgenson, Gretchen (2011). Reckless Endangerment: How Outsized Ambition, Greed, and Corruption Led to Economic Armageddon (p. 37). Times Books. Kindle Edition. An early change came from the Department of Housing and Urban Development, the regulator that Fannie Mae had worked so hard to weaken. In 1995 it relaxed rules involving appraisals, eliminating the requirement that those assessing the value of a property before a borrower took out a mortgage on it were independent from other companies involved in the process. Under a new rule designed to streamline regulations, HUD said that lenders could hire their own appraisers, setting up the potential for inflated valuations. That is precisely what happened. The inflation game, which would help propel home prices into the stratosphere, began almost immediately. Morgenson, Gretchen (2011). Reckless Endangerment: How Outsized Ambition, Greed, and Corruption Led to Economic Armageddon (p. 57). Times Books. Kindle Edition. Seven billion dollars was a lot of money in 1995. But Phaup’s report contained another bombshell: Contrary to the claims made by Fannie and Freddie, the companies passed on to borrowers only about two thirds of the billions in benefits they received. Fannie and Freddie kept $2.1 billion for themselves and their shareholders. Put another way, for every $3 in savings that Fannie and Freddie received, they delivered $2 to homebuyers, while $1 stayed in the companies’ tills. Morgenson, Gretchen (2011). Reckless Endangerment: How Outsized Ambition, Greed, and Corruption Led to Economic Armageddon (p. 83). Times Books. Kindle Edition. “Imitation follows success and Fannie Mae was hugely successful in carrying that model forward, independent of the underlying merits of what they were doing,” Phaup said after the credit crisis erupted. Speaking of the large financial institutions that were rescued in 2008, he said: “Now we have created a whole new generation of government sponsored enterprises with implied federal guarantees. The cancer isn’t gone—now it has metastasized.” Morgenson, Gretchen (2011). Reckless Endangerment: How Outsized Ambition, Greed, and Corruption Led to Economic Armageddon (p. 93). Times Books. Kindle Edition. Precisely a decade before the horror show of 2008, a dress rehearsal took place when a raft of subprime mortgage lenders failed, causing billions in losses. Subprime 1.0, as it might be called, was not the full-blown disaster of a decade later. But it had all the same elements: anything-goes lending, aggressive accounting practices, somnambulant credit-rating agencies, and a merry band of Wall Streeters willing to package loans, no matter how dubious, for sale to unwitting investors. Unfortunately, Subprime 1.0 was a red flag that regulators, lawmakers, and housing policy wonks determinedly ignored. Morgenson, Gretchen (2011). Reckless Endangerment: How Outsized Ambition, Greed, and Corruption Led to Economic Armageddon (p. 94). Times Books. Kindle Edition. The Federal Housing Enterprises Financial Safety and Soundness Act actually encouraged unsafe and unsound activities at both Fannie and Freddie by assigning them a new affordable housing mission. Under the law, the companies had to use their mortgage purchases to help provide housing to those across the nation who had previously been unable to afford a home. While historically Fannie and Freddie supported housing by buying safe mortgages when other sources of capital for borrowers dried up, now the companies’ focus on soundness was diluted by the requirement that they serve the housing needs of “low-income and underserved families.” [...] Congress did not come up with these requirements on its own. It asked for help from community activist groups like ACORN, which had helped lawmakers draw up the affordable housing goals for Fannie and Freddie. Henry B. Gonzalez, the Texas Democrat who headed the House Banking Committee and its subcommittee on housing and community development, had invited ACORN, Fannie’s new ally, to help legislators define the goals when they were devising the new legislation covering Fannie and Freddie. Morgenson, Gretchen (2011). Reckless Endangerment: How Outsized Ambition, Greed, and Corruption Led to Economic Armageddon (p. 25). Times Books. Kindle Edition.

- seattleeng

June 23, 2011 at 2:56pm

dsimon writes: "Maybe because Republicans in the Senate stood in lock-step to try to ensure failure?" But health care was passed without a single republican vote. Anything could have been passed if it were made the slightest bit appealing to the left most leaning republican. Anything. Why wasn't it?

- seattleeng

June 23, 2011 at 2:58pm

seattleeng: "Anything could have been passed if it were made the slightest bit appealing to the left most leaning republican." seattleeng, maybe you didn't read what I wrote above: "The number of seats does not determine the number of votes." Democrats were dealing not just with Republicans. They also had to manage with Nelson, Leiberman, Landrieu, and a few others. Moreover, you also seemed to miss the "lock-step" observation. If even the left most leaning Republican fears the party's wrath, then that Senator won't break ranks even if he or she would rather vote for the bill. Health care was passed without a single Republican vote in the brief window when there were 60 Senate votes. And even that law got through only after compromise after compromise. To say that "anything" the Democrats wanted could have been passed simply ignores the realities of the broken political process exemplified in the Senate. As for your claim to roid that regulation caused the financial meltdown, I think that's a crock. Your arguments regarding Fannie and Freddie would seem to call for more regulation so that the wouldn't "lower the bar" for lending, so blaming them for going wild doesn't seem to make your point. And even if Fannie and Freddie played a but-for role, there are many other but-for causes in the private sector that could have been avoided by even the most modest regulation. No one told Bear Sterns to leverage itself 33 to 1, no one encouraged AIG to dive big time into credit default swaps, and so on. http://www.slate.com/id/2201641/ So to put all the blame on Fannie and Freddie, I think, excuses all the excesses and misdeed perpetrated by the banks which surely caused the crisis every bit as much if not more than those government sponsored entities.

- dsimon

June 23, 2011 at 4:56pm

DSimon writes: "Health care was passed without a single Republican vote in the brief window when there were 60 Senate votes. And even that law got through only after compromise after compromise. To say that "anything" the Democrats wanted could have been passed simply ignores the realities of the broken political process exemplified in the Senate." Agree or not: Obamacare is some of the most controversial legislation to pass EVER, and is currently working its way to the supreme court. It is one of the largest laws ever written, and it significantly expands the role of government in the economy. It passed without a single republican vote. If you agree, then isn't it reasonable to believe that something far less controversial and less complex (such as a special tax on millionaires) could have easily been written and passed without a single republican vote? Why wasn't it?

- seattleeng

June 24, 2011 at 10:49am

DSimon: "As for your claim to roid that regulation caused the financial meltdown, I think that's a crock. " Of course you do. But don't take it up with me. Take it up with the countless journalists that are building this case in numerous books. Not wackjob bloggers either. But substantive, highly regarded journalists from WSJ and NYT. Read "All the Devils are Here" or "Reckless Endagerment." Both are really good reads that do a good job of parceling out the blame. Swaps, leveraging, CDOs, derivatives, etc...none are new. In fact, the government's fingerprints are all over most of these. The second biggest enabler to all this is the ratings agencies. The same clowns that had AAA ratings on AIG et al days before their collapse. What Wall Street did in all this is simply human nature. The rules of a game are established, and then the actors play the game attempting to maximize their profits within the rules of the game. This is what is so dangerous about excessive regulation: A few well-meaning government employees cannot possibly understand the game well enough to set the rules. As a result, their attempts at making things "more fair" almost always end up harming those that were never intended to be harmed. In this case, the middle class. Think about this: The government did all this to help the middle class, but in the end they have damaged the middle class more severely these last few years than anything else in recent memory ever has. This is an example of regulation run amok. Some salient paragraphs... ---- Ironically, it was the government itself that had helped make Wall Street skilled at securitizing riskier mortgages—specifically the Resolution Trust Corporation. In cleaning up failed thrifts, the RTC wound up with hundreds of billions of dollars worth of assets—everything from high-rise office buildings to vacant plots of land—that it took from the S&Ls it was closing down. Eventually, the RTC decided that the best way to get rid of those assets was to securitize them and sell them to investors. Much of the RTC’s raw material, though, qualified as risky and thus couldn’t be backed by Fannie Mae or Freddie Mac. Ah, but if the securities could get a double-A or triple-A credit rating, investors like pension funds would be able to buy them, even without the GSEs’ seal of approval. It was the high rating, after all, that was required for them to hold the securities, not Fannie and Freddie’s guarantee. Even before the RTC, Wall Street had been experimenting with ways to make risky securities less risky by issuing, for instance, a letter of credit promising investors payment in the event the cash flow from the assets wasn’t enough. But the RTC allowed Wall Street to work on such techniques—“credit enhancement,” they were called—on a far broader scale. Over time, people came up with all sorts of ways to do credit enhancements. You could get insurance from a third party—a bond insurer, say. You could “overcollateralize” the structure, meaning you put in more mortgages than were needed to pay the investors, so that there was extra in case something went wrong. Or (and this would come later) you could do a so-called senior/subordinated structure, where the cash flows from the underlying mortgages were redirected so that the “senior” bonds got the money first, thereby minimizing the risk for the investors who owned those bonds. Credit enhancements helped convince the rating agencies to rate some of the tranches triple-A, which in turn helped convince investors to buy them. “The innovative techniques that the RTC developed are now in the process of being used by private sector issuers,” was the way Michael Jungman, the RTC’s director of asset sales, put it in a 1994 lecture. Indeed. Nocera, Joe (2010). All the Devils Are Here: The Hidden History of the Financial Crisis (Kindle Locations 774-789). Portfolio. Kindle Edition. There was a final key to the rise of the subprime business. The federal government was behind it. Not in so many words, of course—and, to be fair, it is highly unlikely that many people in government truly understood what they were unleashing. But by the 1990s, government’s long-running encouragement of homeownership had morphed into a push for increased homeownership. Thanks to the second S&L crisis, the percentage of Americans who owned their own home had actually dropped, from a historic high of 65.6 percent in 1980 to 64.1 percent in 1991. In a country where homeownership was so highly valued, this was untenable. Thus it was that, early in his second term as president, Bill Clinton announced his National Homeownership Strategy. It had an explicit goal of raising the number of homeowners by 8 million families over the next six years. “We have a serious, serious unmet obligation to try to reverse these trends,” said Clinton, referring to the drop in the homeownership rate. To get there, the administration advocated “financing strategies fueled by creativity to help home buyers who lacked the cash to buy a home or the income to make the down payments.” Creatively putting people who lacked cash into homes was precisely what the new subprime companies purported to do. Which also explains why the government had such a hard time cracking down on the subprime companies, even as it became apparent that there was widespread wrongdoing. Roland Arnall’s company, Long Beach Mortgage, offered a case in point. In 1993, the Office of Thrift Supervision, a new agency created by Congress to regulate the S&Ls, alleged that Long Beach was discriminating against minorities by charging them more for their loans than they charged whites. Long Beach ducked this investigation when it gave up its thrift charter, leaving the OTS with no authority over the company. A few years later—around the same time Clinton was announcing his housing initiative—the Justice Department began its own probe. Investigators found that Long Beach’s brokers, most of them independent, were charging up to 12 percent of the loan amount over a base price. The amount they charged was “unrelated to the qualifications of the borrowers or the risk to the lender,” according to the government. Younger white males got the lowest rates, while older, single African-American women fared the worst. In September 1996, then assistant attorney general Deval Patrick, an African-American himself, announced a settlement with Long Beach. Although Long Beach denied the government’s allegations, it agreed to pay $3 million into a fund that would go toward reimbursing borrowers who were allegedly overcharged. The Federal Trade Commission originally demanded half of Long Beach’s net worth to settle the case, but Arnall had what Daurio calls a “brilliant” idea: the company offered to put $1 million toward partnerships with community groups for consumer education. Patrick and the FTC went Nocera, Joe (2010). All the Devils Are Here: The Hidden History of the Financial Crisis (Kindle Locations 794-815). Portfolio. Kindle Edition.

- seattleeng

June 24, 2011 at 11:14am

"There was a final key to the rise of the subprime business. The federal government was behind it. Not in so many words, of course—and, to be fair, it is highly unlikely that many people in government truly understood what they were unleashing." This is the essence of the bullshit you espouse, seattle, no matter whom you quote. The sub-prime crisis was not in the slightest degree, not the slightest, the result of the push by the government for home ownership. It was the result of bankers creating faux assets because they could sell them. Period. They did that due to unregulated leverage and unregulated securities markets and unregulated derivatives markets. The false thesis you peddle is that the government, by emphasizing home ownership, somehow inspired bankers to commit massive fraud. Not at all. They committed massive fraud for the normal reasons, to make money, the private fortunes that you extol whether they are stolen or earned legitimately. It is all the same to you. If the regulators had been doing their jobs, instead of being enthralled by libertarian garbage, none of this need have occurred. How one could conclude that this then requires less regulation is beyond rational analysis.

- roidubouloi

June 24, 2011 at 1:51pm

As usual, seattle, you obviously don't understand what you quote. Despite his sensationalism, Nocera's details actually offer no causal connection between government regulation or emphasis on home ownership and the sub-prime crisis: "Much of the RTC’s raw material, though, qualified as risky and thus couldn’t be backed by Fannie Mae or Freddie Mac. Ah, but if the securities could get a double-A or triple-A credit rating, investors like pension funds would be able to buy them, even without the GSEs’ seal of approval. It was the high rating, after all, that was required for them to hold the securities, not Fannie and Freddie’s guarantee." In other words, it was opening up of a private mortgage channel that avoided GSE rules that caused the crisis. Get that? It is the private market that created the sub-prime crisis, not the government unless you are a conspiracist who thinks that the government is the cause of internet crime for having invented the internet. No matter, you will continue to insist on the same nonsense. You might as well insist that the earth is carried through the heavens on the back of a giant turtle. The claim that the RTC essentially invented securitization, and thus unleashed the genie that became the sub-prime crisis, is also untrue, invented history. This I know directly from my own experience as a banking lawyer and merchant banker from the late seventies into the early nineties.

- roidubouloi

June 24, 2011 at 2:02pm

Particularly pernicious is your claim that the removal of much of the financial regulatory regime in the 80s and 90s had the goal of making things "more fair" for the middle class. Not a bit. They had the goal of making more money for Wall Street, and the controls were progressively loosened until disaster struck. I worked for those people, I was one of those people. None of the banks and investment banks that engineered the abandonment of the government's regulatory role was trying to help the middle class. You deny history because the crisis was the product of two decades of loosening financial regulation, not tightening it. I was a corporate lawyer for big banks. I know. Yet you claim that over-regulation was the cause. Garbage, seattle, just garbage, as usual.

- roidubouloi

June 24, 2011 at 2:06pm

Roid writes: "It is the private market that created the sub-prime crisis" The private market could NOT have done this without the GSEs. Banks no longer loan money. The collect fees on transactions. Those are the rules. The more transactions (mortgage applications) they create, the more money they get. Again, stupid regulation set the game such that the job for banks became one of turning a crank. The faster they turned the crank, the faster the food pellets dropped out. Fan and Fred set up automated lending, such that loans could be approved in hours with no documentation. The crank could be turned even faster. And faster. The insanity in all this was that those preparing the mortgage loan on NO incentive to make sure it was correct. If they could get it through Fan's automated approval process, it passed. This is why you have to be SOOOOO careful with regulation. What seems like a good thing often can severely damage that which you sought to protect. Clinton and congress' good intentions have severely hurt the middle class. Answer this: Would this have happened if the banks were loaning their own money? Yes or no. Very simple.

- seattleeng

June 25, 2011 at 11:58am

Roid writes: "The claim that the RTC essentially invented securitization, and thus unleashed the genie that became the sub-prime crisis, is also untrue, invented history." There is a quote from the RTC director of asset sales claiming just that in what I posted. And Roid rejects it flat out with his usually harrumphing blah-de-blah-blah. Classic. Just classic. Just for fun, I'm going to respond to you using the same formula you always use, which is: First paragraph, call the guy and idiot. SEcond paragraph, make your point. Last paragraph, call teh guy an idiot again. --- Roid, were you born stupid or is that just something recent? I mean, here you see the words from the director of the RTC himself, and you still seem incapable of processing what he says and instead you apply your own stupid, moronic assessment to the situation. AS if you were there. As if you even have a clue what this guy was talking about. You are, at best, an old man who has gone back to audit a few classes in economics. Somehow, this has inflated your sense of purpose and in spite of the most meager training on the topic, you have the nuts to try and refute the words of a man who was actually there in the thick of it all? I'll say it again: There is a quote from the RTC director of asset sales claiming just that. And Roid rejects it flat out with his usually harrumphing blah-de-blah-blah. But of course, that quote won't prevent you from actually embracing the reality. Instead, you'll return to your basement dwelling, crouched under a single hanging lightbulb, fire up the hot plate to make some soup, and return to your dog eared spreadsheets that purport to show why Bush is at fault for everything, even the Vietnam war. Seriously, spare us the stale, tired logic and just admit the man that was there was indeed right. And you are not. ---- End of my Roidism. Now, that response took a while to write. The same meat of the argument was in the second paragraph. But the hateful first and third paragraphs actually took some time. Hint: Save yourself some time and hate and drop the personal attacks. A little prodding, sure. But you'll save yourself a lot of time.

- seattleeng

June 25, 2011 at 12:14pm

Roid writes: "Particularly pernicious is your claim that the removal of much of the financial regulatory regime in the 80s and 90s had the goal of making things "more fair" for the middle class. Not a bit. They had the goal of making more money for Wall Street, and the controls were progressively loosened until disaster struck." Wrong. Here's the 2006 10K from Fannie telling the world: "We have made, and continue to make, significant adjustments to our mortgage loan sourcing and purchase strategies in an effort to meet HUD's increased housing goals and new subgoals. These strategies include entering into some purchase and securitization transactions with lower expected economic returns than our typical transactions. We have also relaxed some of our underwriting criteria to obtain goals-qualifying mortgage loans and increased our investments in higher-risk mortgage loan products that are more likely to serve the borrowers targeted by HUDs goals and subgoals, which could increase our credit losses." See that? They are telling you that HUD mandated them to buy crap they did not want to buy, and that they have relaxed standards to do so. They are also telling you they expected it might lead to losses. Regulation has a price. It always has. I'm not saying this is all Fannie and Freddie. There are no doubt other players in this. But what I am saying is that without GSEs this would not have happened. I dont' think that is at all debatable. Do you?

- seattleeng

June 25, 2011 at 12:21pm

Of course it is not debatable. The GSE contribution to the SUBPRIME MORTGAGE CRISIS was minimal because sub-prime mortgages are the ones that don't qualify for GSE support. Yes, they took in some stuff that did not meet their normal standards due to public goals, but that was still a small fraction of the total of crap generated BY THE PRIVATE SECTOR. Got it, seattle? The securitization of subprime mortgages and the related derivatives were the work of the private sector. The role of the public sector was only that they public sector couldn't and didn't do this. You are simply repeating, as you are wont to do, one of the right-wing myths that circulates on the web when, again, the right-wing's free-market extremism and supply-side nonsense is the cause of a disaster. Because you have the true faith -- that an unfettered private market produces only good and that all of its negative outcomes are therefore the fault of the government -- you accept this completely counter-factual nonsense uncritically. It is still nonsense.

- roidubouloi

June 27, 2011 at 9:32pm

Seattle, while you are waxing hot and heavy about how stupid I am, you demonstrate, yet again, that you do not understand what you are reading. The RTC long ante-dates the sub-prime mortgage crisis. The guy's only point is that the RTC created the precedent for securitization of mortgages that did not meet Fannie or Freddie criteria. But he is wrong. It was the invention of Wall Street in the early 80s when I was still working there and was knocked off by the RTC to unload its assets. But, even if the guy hadn't gotten his history mangled and the RTC was the inventor of mortgage securitization, so what? What does that have to do with the fact that in the 21st century Wall Street was securitizing bogus mortgages and cutting them up into tranches and mixing them into portfolios to conceal the dubious nature of the underlying assets? Nothing. The second thing you really seem not to understand is that sub-prime mortgages, the overwhelming share of what went bust, were not eligible for GSE financing and were not originated by the GSEs. This simple point seems to elude you and is the reason why your attribution of the sub-prime mortgage meltdown to the GSEs is objectively ridiculous. SUB-PRIME MEANS, BY DEFINITION, INELIGIBLE FOR GSE ORIGINATION. Sheesh, seattle, you are some taxing guy. Your ability endlessly to repeat absurdities is amazing.

- roidubouloi

June 27, 2011 at 9:45pm

The GSE practice of securitizing complying mortgages goes back a couple of decades before the RTC. Even this has zero to do with the false claim that too stringent regulation was the cause of the sub-prime mortgage crisis. Yes, if no one had ever invented mortgage-backed securities there could have been no crisis in mortgage-backed securities. So?

- roidubouloi

June 27, 2011 at 9:50pm