In "My Political Coke vs Pepsi Taste Test", I mentioned that I'd recently stumbled into a conversation (between friends with a more liberal bent) about origins of and solutions for the current problem.

Talking about Blame

I said, during that conversation, that I didn't think "blame" was especially helpful, given that those who caused the problem (in my view) probably had noble motives. But it should be important to figure out what went wrong and learn from that, and avoid such mistakes in the future. I don't blame my grandfather for being an ardent socialist -- such beliefs may have looked sensible back then. But its another matter entirely to pursue the same policies today.

Yet I notice those around me who do approach each new crisis by first reflexively looking to "blame" -- and indeed, even in my own work, I first ask "why did this happen?" (But is the question one of diagnostics, or one of finger-pointing? That's what I try to remember.) Yet when I listen to the mainstream news media, most articles and reports I heard were directly or indirectly faulting "Bush's economic policies" or "capitalism" or "greed" -- with very little or no explanation why this should be so.

Yet it is also not uncommon, in my experience, that those who burst out of the starting gate screaming about blame also tend to shift into "outrage mode" when said blame is actually found to reside rather closer to their own doorstep. "Why are you blaming me?!? It's wrong to be 'pointing fingers' in a time like this!!!" (Is it? I hadn't noticed they really believed that, given their former behavior.)

So my friends seemed incredulous that someone might (ridiculously) be implicating Clinton-era policies, or Congressional Democrats in 2003. ("Think Progress" even wants us to believe that by implicating risky loans, people are being racist -- as such loans were frequently made to minorities.) But my friends and I all agreed that it was important to first find the facts, and only then offer opinions.

So I'd like to briefly air my rather limited understanding, and open it up to any critiques others might have of the factual correctness. Keep in mind there may be multiple causes, not just one.

Glass-Steagall Repeal / Gramm-Leach-Bliley Act?

This Kossite is incensed that the blame isn't resting easily and nicely where her peers first placed it ("my dad and other like-minded Republicans looking for someplace to lay the blame") and so is looking for any handy counter-narrative from her Kos peers. A tiny minority agree her dad is right, but one suggests Clinton's repeal of the Glass-Steagall might be at fault (i.e. this was caused by Clinton's right-leaning tendencies, not his left-leaning ones). In its place, Clinton and Congress passed Gramm-Leach-Billey, which stands today.

Yet I don't understand this narrative, and, other than references to it being thrown around (as if just naming the act itself was self-explanatory) I don't really see any clear explanation. Glass-Steagall was meant to prevent banks from investing in stocks or engaging in other conflicts of interest -- but what happened here was making bad loans -- loans which would still have been perfectly legal under Glass-Steagall. Since this argument is coming from Democrats, I think the burden is still on them to explain precisely what they mean here. Any links would be helpful.

"Greed" / Capitalism

When a Republican is in the White House, an active stock market is portrayed as "a climate of greed". Thus the late 1980s were "a climate of greed" somehow caused by Reagan. (Hollywood followed suit, releasing films like "Wall Street" and "They Live".) Yet those same tendencies and actions, played out even larger in the 1990s, were then portrayed in the press as "a robust economy" -- despite the fact much of it was actually, in retrospect, a cheap-interest-fueled bubble. (I remember NPR telling me, unbelievably, that it was possible that the stock market might only go up from then on.)

Greed is an ancient emotion -- and it certainly was around in the 1960s, 1970s, 1980s, and 1990s. Yet these risky (called "predatory" -- yet aren't all loans made for a profit?) loans didn't appear, in any appreciable numbers (to the best of my knowledge), until the 1990s. If so, then something other than "greed" must have ushered in that turning point.

(And when the people who blame "greed" discover a way of eliminating it from human nature -- including those humans who will lead the more-powerful forms of government they tend to favor -- they should let the rest of us know. My only solution is religious faith, and that's only helpful if one takes it rather seriously.)

Community Redevelopment Act + Clinton Modifications + FM/FM?

There's a video (with supporting documentation & links here) going around which explains this position. To its credit, it has lots of references and makes a fairly strong case. On the other hand, it's unhelpfully partisan and preachy (as if I can talk!), doesn't give enough links (I had to do a bit of scrounging to find the supporting link above), and goes by pretty quickly. But it does make some seemingly powerful points.

For example, it cites this 2000 article by the "Corporate Social Responsibility" crowd, talking about a Fannie Mae which was, by this time, now well-staffed with former Clinton administration officials. This is a powerful point because you have a leftist source happily describing how "socially responsible" it is to be creating a market for these new loan categories. (Underlining added.)

Fannie Mae Announces Pilot to Purchase $2 Billion of "MyCommunityMortgage" Loans; Pilot Lenders to Customize Affordable Products For Low- and Moderate-Income Borrowers

To expand the secondary market for affordable community-based mortgages nationwide, Fannie Mae (FNM/NYSE), the nation’s largest source of financing for home mortgages, today announced a commitment to purchase $2 billion of "MyCommunityMortgage" loans through a suite of flexible mortgage options for low- and moderate-income borrowers purchasing one-to-four unit homes. Starting December 1, 2000 through a web-based application, participating lenders will get prompt approval recommendations from Fannie Mae on loans that previously would have been negotiated on an individual basis. Fannie Mae then will purchase or securitize the MyCommunityMortgage loans.

MyCommunityMortgage product options give flexibility to lenders by allowing variances that borrowers need to qualify for loans, often unique to particular communities. These variances apply to basic loan features such as loan-to-value ratio, borrower contribution, housing expense-to-income ratio, and others. For example, the need for down payment assistance may be a critical borrower need in one part of the country, while the need for 2-to-4-family housing may be foremost in another part of the country.

In other words, Fannie Mae was making the formerly-impossible possible: formerly an institution would evaluate each loan, as the article says, "on an individual basis" -- looking at the individual's situation. Now, the institution could just log into a website and *presto*, Fannie Mae would guarantee to pick it up.

And notice how the article admits admits Fannie Mae is creating room for "variances" in "expense-to-income ratio" (i.e. loans to people already living on credit!), "loan-to-value ratio" (loans to overvalued real estate!), and "borrower contribution" (including "no money down!" -- a guy can't provide an initial payment, and you expect him to take on regular mortgage payments?). The left is calling them "predatory loans" today, but here, with your very own eyes, you see an entirely different (proud and glowing) take at the time. And the then-lauded-as-"responsible" bank CEO's mentioned in this release are following right along.

"We want to work with lenders who are willing to tackle the toughest housing problems in America, which is the focus of our American Dream Commitment," said Dan Mudd, Vice Chairman and Chief Operating Officer of Fannie Mae. "By teaming with lenders, Fannie Mae can not only help increase lending to minorities and other underserved market segments, but we also can assist depository institutions in meeting their own community investment goals and objectives. We look forward to working with our customers to create increased liquidity for Community Reinvestment Act (CRA) -eligible loans." [...]

"The strength of this joint effort between Fannie Mae and First Nationwide will provide a new focus for our affordable housing initiatives," said Terry Klein, President and Chief Executive Officer of First Nationwide....

"For many years, First Horizon and Fannie Mae have worked well together to make the dream of home ownership a reality for numerous consumers," said Carroll Justice, Executive Vice President of First Horizon. "MyCommunityMortgage should help expand these efforts even further especially for low- and moderate-income borrowers with less funds available for down payment."

Nationwide, Bank One, First Union -- these institutions were being lauded for "expanding options" to poorer communities and otherwise-risky situations (including well-off people getting in over their head), in response to new markets being directly created by government entities (and in response to threats) -- which are now called "predatory", as if the nature of these loans had somehow changed between 1999 and today. And of course since this formerly-untenable situation was now made profitable, many of these banks then gave sweetheart loans and generous contributions to those who in the state who now controlled their profits. (Just as any conservative would predict.)

And indeed, regarding the CRA itself, even Wikipedia notes (as of today -- history often changes at Wikipedia):

The new rules, during a time when many banks were merging and needed to pass the CRA review process to do so, substantially increased the number and aggregate amount of loans to low- and moderate-income borrowers for home loans, some of which were "risky mortgages." The number of CRA mortgage loans increased by 39 percent between 1993 and 1998, while other loans increased by only 17 percent.

Related rule changes gave Fannie and Freddie extraordinary leverage, allowing them to hold just 2.5% of capital to back their investments, vs. 10% for banks. By 2007, Fannie and Freddie owned or guaranteed nearly half of the $12 trillion U.S. mortgage market. Due to massive financial losses, on September 7, 2008 the Federal Housing Finance Agency (FHFA) put Fannie Mae and Freddie Mac under the conservatorship of the FHFA.

After Clinton, a bad CRA rating would open banks up to charges of discrimination (read: "lots of lawsuits") and unrelenting pressure and criticism from "social responsibility" groups like the one I quote above.

I've seen various attempts to counter this argument, but they frequently don't strike me as even intellectually honest, much less successful. This argument for example: "As Robert Gordon shows, however, this is crap. First, there's the timing. CRA came in 1977. The crisis came in 2007. Indeed, by 2004, the Bush administration had weakened the CRA." The author being is very sensitive to the idea that Bush may have somehow weakened the CRA (which may be true or not -- sorry, haven't yet investigated) but somehow completely overlooks Clinton's major overhaul of the same legislation.

The author also argues: "Another 25%-30% [of subprime loans] came from companies with very little CRA exposure." The context treats this particular argument as devastating, but it's actually a stunning admission: A bit like claiming that you only started 75% of the fires which burned down houses in your town!

When the revised CRA and the FMs' actions started to take effect, a huge influx of new potential buyers entered the market. What does basic economics tell us about such a situation? When supply exceeds demand, prices rise. And so we see, as the video pointed out, that home prices started to rise much faster than inflation.

When that happened, even non-CRA lenders would have had a huge incentive to adopt risky loans: if the borrower defaulted, the projected rise in home values would have covered the losses, or perhaps even yielded a profit. Add that to the fact (omitted by the author above) that Fannie Mae and Freddie Mac were also important factors, "guaranteeing" to buy risky loans (they were, in fact, lying about their own levels of capitalization) -- and thus creating a market for such products -- and there was really no reason NOT to issue lots of risky subprime debt.

Many might say such behavior was characterized by "greed." But as I said, greed is nothing new: before the incentives were changed that same exact "greed" had led banks to be averse to making risky loans. If one engages in social engineering, arguing one was surprised by "greed" is no defense at all: the social engineer must take into account known behaviors of markets and individuals, and the tendency of businesses to maximize profits is hardly an unforeseeable one.

"Product Labeling" Problems

I was recently talking to a Christian mortgage broker. (I seem to know a surprising number of those.) Part of his "ministry" to others was finding financially distressed people who were in bad loans and shifting them over to better loans at no cost. He told me he met a significant number of people who were unaware that they were in a variable-rate program, not having read all the voluminous fine print, and perhaps also having been deceived at closing time.

So I *am* convinced there was some non-negligible number of people deceived (at least in his area -- Los Angeles) about the financial product they were receiving. I have always been a strong supporter of product labeling laws: people should know what they're getting and get what they agree to. (A Christian or Jew only needs to spend a few minutes studying the bible's injunctions against, and punishment for, "deceptive weights and measures" to understand why this is a completely just and useful (and biblical) role for government.)

BUT -- not to excuse or justify this behavior -- BUT that behavior was an obvious result of the incentives outlined above. Had these institutions still been risk-adverse, had the FM's not been encouraging these loans, and had housing prices not been rising, there would have been no significant new incentive to get otherwise-ineligible borrowers into homes "by any means necessary." Though I would like to see this problem fixed (with better labeling laws, just like we do with foods) the argument itself conflates cause and effect.

Attempted Republican Reforms

My friends were rather sceptical of the argument that Republicans (particularly Bush and McCain) had tried to reform Fannie Mae and Freddie Mac back in 2003. How could Democrats thwart such an effort, if they were a minority? But if the difference in numbers is close (it was, I think), and a few Republicans defect, and Democrats stick together and vote a party line, such a thing is indeed possible.

Yet here is a New York Times article (hardly a right-wing source), written at the time (so there's no hedging as we'd have now) which admits that, in their eyes, back then, that was indeed a possibility. In fact, given the tone of the article and how it closes, the Times rather seems to have been trying to encourage that outcome.

Significant details must still be worked out before Congress can approve a bill. 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.

Initially, I had heard of only one attempt to reign in these government-staffed "companies". Instead, I was surprised to find Republicans kept trying over and over -- in 2003, 2005 (here, also) ... in fact, it appears, according to one blogger, Bush and Republicans raised the warning no less than 17 times in 2008 alone. (There's a nice timeline there, starting in 2001.)

I don't claim to understand the exact mechanisms by which these attempted reforms were blocked. (Again, any insight or documentation would be welcomed.) Perhaps its even true that Bush and Republicans didn't do everything in their power. Yet even in that scenario, my friends' narrative makes no sense: If Bush and Republicans were on the "correct side", but didn't do as much as he could have (and thus still deserve blame) then doesn't that also imply that the Democrats would therefore have been far more culpable, being entirely on the "wrong side of history"?

Any Others? / Conclusion

Are there any counter-arguments I might have missed? If you can think of any reasonable holes in the arguments above, or if you have any other reasonable theories, please chime in.

(I saw a video by CNN recently (first online and then on TV) claiming it was a flood of "foreign investments" which caused the subprime collapse. The video didn't seem to make a very strong case for this, other than stating the assumption a few times.)

Other than that, I'll sign out with three parting thoughts, based on my current understanding:

1. Initially, my aforementioned liberal friends dismissed the idea that the CRA had anything do with the rise in subprime loans -- despite the fact that was its obvious intent. When they read the Wikipedia page, they seemed rather taken aback to find out it did seem to play a major role. (And, I've since learned, there seems to be plenty of other documentation to support that contention.)

But my point is this: These are two fairly intelligent Democrats who consider themselves reasonably well informed. They stay up on the news. The follow politics avidly. They even check out right wing blogs now and then. And yet they were utterly unaware of the arguably most important factors in this debacle, which is causing huge devastation in our financial sector. You'd think that might be kinda important, but, using them as an example, it seems the media was utterly effective at keeping them (and millions of other Americans, no doubt) completely in the dark about it.

And not just now, but all along, as Republicans apparently repeatedly and insistently tried to get the word out to anyone who was listening.

So it is stunning to see our US media behave like Pravda -- and far more effectively so, because most Soviets were at least aware of Pravda's bias and tricks. There was no expectation of integrity, or even a semblance of balance, as there is here, even from the most left-leaning news sources.

2. It increasingly appears that the "Clinton prosperity" was largely borrowed from the future. After Gore lost the election, he and Greenspan stood on stage together to announce that Greenspan had deflated the bubble (by finally raising his ridiculously low rates), and Gore gleefully announced (I saw this live) that the ensuing recession would be "a W-shaped one" -- and raised Greenspan's arm in a triumphant gesture. (I realized that day that Greenspan had indeed sold us, the US citizens, out to support the current administration.)

And indeed it was as Gore predicted (he's right once, anyway): Bush took office amidst a collapsing economy, yet managed, admirably, to quickly turn it around and move us back to employment levels which were similar to those in the 1990s. (But which the press continually and dishonestly portrayed as dismal.)

During that time, we were hit by 9/11, several months of which could have been arguably pinned on the Bush administration. Yet eight years had elapsed previous to those few months, and a tremendous amount of evidence (that which wasn't destroyed, anyway) showed that Clinton had known about these threats and done nothing. Similarly, the Democrats had argued that Saddam was a huge threat to the mideast, supported terrorism, undoubtedly was trying to acquire WMD, and needed to be deposed. The Bush administration, and the American public during these last eight years, rightly or wrongly paid the price to finally carry out the policies and goals that were stated to be correct, but not paid for nor carried out in earnest, during the 1990s.

So here we are, looking another meltdown. And when we dig, what do we find? More policies which originated, and were deliberately created, in the 1990s.

Yet again, my point here isn't so much to blame as diagnose. My point is only the old conservative stance: government should be small (as it hurts far more than it helps) and growth should be sound, not a result of state manipulation. We shouldn't unduly excoriate Clinton -- who no doubt had good intentions -- but we should neither elect a guy who seems to have the exact same approach, and indeed, seems to have, in record time, received the second-largest political donations from these corrupt organizations. Conversely, McCain should get some credit where due for correctly predicting this problem and having made the right recommendations, as should Bush. At the very least, the media should cover that story and let the voters decide.

3. Though I see no demands that Fannie Mae executives forgo their (utterly obscene, given the fraud) compensation, there are many calls demanding that the executives of these "failed companies" not be given "golden parachutes". Even the House Republicans are on board with this idea, as I myself was on Friday. But if the above is true, then that's perhaps a wrong-headed and immoral approach.

If these organizations, particularly the old stalwart Bear Stearns, failed in small or large part (the latter seems more likely) because they were simply complying with the government's directions and policies, when they wouldn't have otherwise, then it is YOU AND I who owe THEM an apology -- and possibly compensation. We all elected a leader. That leader, as our representative and reflecting the values that put him into office, instituted carrots and sticks to cause this set of incentives, which eventually destroyed companies who were otherwise responsible enough to even have survived the Great Depression. Moreover, we recently further empowered the very Congressmen who had been protecting Fannie Mae and Freddy Mac all along.

So I now take issue even with the conservative House Republicans: If all that's true -- if -- then justice seemingly demands we should be paying back, out of our own pockets, the money lost due to the policies enacted by we, the people. And perhaps, if that were done, and the taxes were spread out fairly evenly among those who voted (rather than concentrated in a few wealthy scapegoats), that would teach us a lesson.

Of course, in real life, no such thing will occur. I'll be happy if the media finally admits even the most basic arguments involved here. But that is, it seems to me, the most just argument about what should be done.

I'd welcome your thoughts, friends.

Best to you!
- Tim