How the Democrats Killed Roosevelt’s Dream of the Affordable Home
Posted on Feb 18, 2011
Editor’s note: The following excerpt from Robert Scheer’s book “The Great American Stickup” details the perversion of Fannie Mae and Freddie Mac. This is especially relevant given news that the Obama administration is abandoning those institutions, as explained in Scheer’s column here.
Chapter 7: Poverty Pimps
That chorus of the nineteenth-century Cockney ditty “She Was Poor But She Was Honest,” detailing the travails of a poor lass whose life is ruined by the deflowering advances of a rich man, best captures the mainstream Republican response to the banking meltdown. Their defense has been to blame “bleeding-heart” liberals concerned for the poor for a debacle that occurred unmistakably on their watch, and in response to their antiregulatory ideology, but for which they shuddered to take responsibility.
The effort to shift blame from Wall Street moguls to the poor who took loans they could not afford, while illogical given the frenzy with which those loans were marketed, is also understandable as an act of political desperation. Blame those being swindled rather than the swindlers has been the mantra of America’s right wing bereft of any other explanation for the debacle that will allow them to continue their ways.
The Wall Street meltdown left conservative politicians and their ancillary pundits in the lurch looking for a culprit, any culprit—except the folks who run Wall Street, that powerful emblem and engine of American capitalism. Instead, they settled on an alternate bogeyman: government efforts to end discrimination in the mortgage markets and broaden home ownership to low-and moderate-income families.
The problem with the economy, they argued, was not greed or incompetence in the executive suites, but a misguided pressure to lend money to irresponsible poor and nonwhite people. Government influence on the mortgage markets, the logic went, had distorted the markets and created an unstable base of bad loans that, like a foundation made of sand, had sent the global economy sliding off a cliff at the first hard rain.
When the Bush administration was forced in the fall of 2008 to bail out the “government sponsored enterprises” or GSEs, as the mortgage buying companies of Fannie Mae and Freddie Mac are referred to, grateful conservatives finally had what appeared to be a convenient government villain. Working backwards from the GSEs’ founding mandate to support the market for middle- and low-income buyers by buying up mortgages from lenders and then repackaging them as securities, longtime critics were only too excited to blame do-gooder liberalism as the fly in the ointment of capitalism. Specifically, House Financial Services Committee chair Barney Frank was singled out as having pressured the GSEs to make loans to unqualified poor people—especially minorities—who then defaulted and caused the economic downturn.
“Taxpayers are now on the hook for as much as $200 billion to rescue Fannie Mae and Freddie Mac, and if you want to know why, look no further than the rapid response to this bailout from House baron Barney Frank,” wrote the Wall Street Journal in a September 9, 2008, editorial. “Mr. Frank wants you to pick up the tab for its failures, while he still vows to block a reform that might prevent the same disaster from happening again.”
The editorial is worth quoting at length because it summarizes a perspective broadly held and argued by conservatives. It correctly criticizes Frank for statements he made in 2004, when Fannie Mae revealed a “multibillion-dollar financial ‘misstatement.’ ” Frank had said that he felt that despite this, the mortgage lender was not a danger to taxpayers. “I think Wall Street will get over it,” Frank had said. The Journal mocked this response—”Yes they’re certainly ‘over it’
now that Uncle Sam is guaranteeing their Fannie paper, and even Fannie’s subordinated debt.” The newspaper then ridiculed Frank for his criticism of conservative economic policies, saying that what really blocked reform was Frank’s insistence that “any reform be watered down and not include any reduction in their MBS [mortgage backed security] holdings.”
Some liberal pundits, most notably the New York Times’ Paul Krugman, attempted to play down the role of Freddie and Fannie, arguing, incorrectly, that they only made proper “conforming” loans. But that was false, for the definition of conforming is whatever Freddie and Fannie approved of, and those turned out to be as disastrously irresponsible as any.
The free-market conservatives are right in criticizing those GSEs, for they were highly culpable, and the grand swindle could not have taken place without them. But they are wrong in describing the GSEs led by Fannie Mae and Freddie Mac as do-gooder public entities; in reality they are privately owned, profit-driven companies that richly reward their executives for stock market success. That is the source of much confusion in this debate; the top executives of the GSEs were compensated as handsomely, and often more so, than any other corporate executives, but because of their original government sponsorship, they made for convenient targets for the wrath of free-market ideologues.
The man who understood that best was a whistleblower in the mold of Brooksley Born. Like her, Armando Falcon Jr. was appointed by the president to regulate entities led by people who had the political clout to prevent any meaningful regulation. Falcon was director of the Office of Federal Housing Enterprise Oversight (OFHEO), the underfunded and government agency assigned to monitor the federal housing behemoths.
Thus there was considerable irony when, a year and half after the crash he had warned against, Falcon found himself on April 9, 2010, before the bipartisan Financial Crisis Inquiry Commission, which included Brooksley Born, unraveling his part of this tale of woe. His testimony was a devastating indictment of the culture of corruption that was as bipartisan in origin as was the makeup of the commission now seeking answers. He had attempted to regulate agencies dominated by leaders drawn from Democratic ranks during a Republican administration, but as with Born earlier, he was done in by both sides.
Yet while Falcon had come to be supported by conservatives who never did have much love for the hybrid GSEs he was attempting to regulate, he was clear that the cause was not the pathetic ambitions of the ordinary folks attempting to buy homes they couldn’t properly afford. Rather, it was the greed of the powerful. Falcon cut through the false dichotomy that cast blame for the banking debacle either on the huge totally private financial moguls or their government-sponsored rivals but not both. He said they were, in terms of motivation and impact, one and the same.
Conservatives make much of the affordable housing goals of the GSEs, endorsed by George W. Bush as well as Bill Clinton, as the cause of the irresponsible lending that occurred these past decades. But Falcon in his testimony shot that one down. Asked by the commission to testify on the impact of those goals on the GSE issue, Falcon responded: “Your letter also asked me about the impact of affordable housing goals on the enterprises’ financial problems. In my opinion, the goals were not the cause of the enterprises’ demise. The firms would not engage in any activity, goal fulfilling or otherwise, unless there was a profit to be made. Fannie and Freddie invested in subprime and Alt A mortgages in order to increase profits and regain market share. Any impact on meeting affordable housing goals was a byproduct of the activity.”
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