Bailout blame?

You may have seen that Bob Barr has filed a lawsuit in Texas to keep Obama and McCain off the ballot there, since (he claims) they failed to follow Texas election law.

A blogger commenting on a article snidely remarked “With their [Libertarians] penchant for deregulation, I wonder how the markets would have reacted if they had been in charge for the last 8 years?”

I tried to overlook the partisan sneer on the Bush administration, but couldn't (even though it's not my Party). I point out that Democrats have been in charge of Congress for nearly two years and have done absolutely nothing that they could have done to rectify any problems they may have been concerned about. Similarly, President Clinton was supported by a Democrat-led Congress for six years of his term and did nothing. In fact, the current Administration tried to overhaul Fannie and Freddie in 2003 but was snubbed by powerful Democrats in Congress.

The Bush administration today recommended 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.

''There is a general recognition that the supervisory system for housing-related government-sponsored enterprises neither has the tools, nor the stature, to deal effectively with the current size, complexity and importance of these enterprises,'' Treasury Secretary John W. Snow told the House Financial Services Committee in an appearance with Housing Secretary Mel Martinez, who also backed the plan.

It's very interesting now to notice who immediately opposed the idea and especially to read the comments of Barney Frank against this oversight (emphasis mine):

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.

I have said in an earlier posting that there is plenty of blame to go around., and I'm not trying to excuse any Republican involvement, I just can't stand it when someone knee-jerks a partisan comment.

This crisis was a long time brewing, but it was foreseen by many people, including Alan Greenspan and other Fed leaders, long ago. Congress knew about the problem and did nothing, mostly because Democrats fought regulation of Fannie & Freddie tooth and nail. I found a link to a Wall Street Journal chronology where the WSJ has focused on problems with Fannie Mae for a long time. Several of these articles name Mr. Frank as a ring-leader for changes that more than likely exacerbated the current crisis.

So determined are Barney Frank and Chuck Schumer to "do something" about subprime mortgages that they have come up with a proposal that is unnecessary, will do little to help distressed borrowers, and would increase the risk to taxpayers from Fannie Mae and Freddie Mac. Other than that, it's a fabulous idea.

One more note, in 1995 the Clinton Administration revamped the Community Redevelopment Act. Here's Wikipedia's entry on the law. It is interesting to note the name of the first company to take advantage of the changes the law wrought. It is also interesting to note that the Bush administration, as mentioned above, tried to insert some checks-and-balances into the system but Barney Frank and Democrats kept it from passing Congress.

In 1995, as a result of interest from President Bill Clinton's administration, the implementing regulations for the CRA were strengthened by focusing the financial regulators' attention on institutions' performance in helping to meet community credit needs. These revisions^[1] with an effective starting date of January 31, 1995 were credited with substantially increasing the number and aggregate amount of loans to small businesses and to low- and moderate-income borrowers for home loans. These changes were very controversial and as a result, the regulators agreed to revisit the rule after it had been fully implemented for seven years. Thus in 2002, the regulators opened up the regulation for review and potential revision.^{[citation needed]}

Part of the increase in home loans was due to increased efficiency and the genesis of lenders, like Countrywide, that do not mitigate loan risk with savings deposits as do traditional banks using the new subprime authorization. This is known as the secondary market for mortgage loans. The revisions allowed the securitization of CRA loans containing subprime mortgages. The first public securitization of CRA loans started in 1997 by Bear Stearns. ^[2] The number of CRA mortgage loans increased by 39 percent between 1993 and 1998, while other loans increased by only 17 percent. ^{[3] [4]}

An article in Forbes puts it succinctly: The Government Did It.

The government has promoted bad loans not just through the stick of the CRA but through the carrot of Fannie Mae and Freddie Mac, which purchase, securitize and guarantee loans made by lenders and whose debt is itself implicitly guaranteed by the federal government. This setup created an easy, artificial profit opportunity for lenders to wrap up bundles of subprime loans and sell them to a government-backed buyer whose primary mandate was to "promote homeownership," not to apply sound lending standards.

I never got around to answer the basic question, I got so sidetracked in pointing out the root of the problem can hardly be laid in the category of "failed Bush economic policies."