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Reflections on a House Divided

Who Done It?

I find that the deepest and most disturbing mysteries arising from this election are those related to the current financial crisis. First, how the Democrats have managed to escape blame. Second, how and why the Republicans have let them.

There is little doubt though that this is the pivotal issue of the campaign. Sen McCain had pulled into a comfortable lead over Sen Obama right before the crisis became most acute and public knowledge of it general.

The question now being - is it too late to correct this mistake before the people most responsible for the crisis - largely Democrats - benefit overwhelmingly from its repercussions, and those who fought hardest to head it off - largely Republicans - are punished for it at the ballot box. 

It should have been a slam-dunk.
There was a significant sub-prime industry developing prior to the creation of Freddie Mac and Sallie May, but, by most reliable accounts I am familiar with, it seems difficult to avoid the conclusion that the factors which tipped it towards disaster were largely -

□ Measures - initiated during the Carter and Clinton administrations - in the name of "affordable housing for all" and in response to allegations of discriminatory practices in mortgage lending. Measures which made it more difficult for lending institutions to apply common sense standards in extending credit to would-be homeowners - particularly minorities. Such measures included the threat of aggressive action by the DOJ under Janet Reno to punish lending institutions that looked "too carefully" at the circumstances of minority persons seeking mortgages. As a result of all these factors, institutions of that kind were forced into making more high-risk loans than they might have made otherwise.

□ Creation of an institution - Freddie Mac - which in essence acted as a form of insurance for the sub prime market - similar to FDIC in the banking industry - but without the safeguards and oversight that constrain abuse in the latter program. Doing so - within FDIC - by controlling the level of financial risk that its member institutions are allowed to incur in regards to their investments.
For a correction and expansion of this passage please see
Part II: Who Done It?

□ Stubborn resistance, on the part of many Democrats and some Republicans, to all and  any attempts at imposing effective regulation or oversight on the sub prime mortgage market in general, and the operations of Freddie Mac in particular. This was  a crucial factor in setting the stage for the current crisis. That is due to the fact that the operations of Freddie Mac - having the effect of insuring very risky loans - prevented market forces from operating the way they normally would have otherwise - i.e. to "punish" poor judgment in lending practices before the volume of bad loans could accumulate to a point where their collective weight could bring down the system. In the absence of market forces - having that effect - effective regulation was the only alternative that could have prevented the current crisis (the Democrats were largely acting in the name of "affordable housing for all," the Republicans for free-market principles - heedless of the fact that there was no true free-market at work there in any case)

And the gifts keep on giving - Barak Obama was already the second largest recipient of largess from Freddie Mac and now he may become President on the tide of anger flowing the crisis caused largely by the mismanagement of those companies in concert with a lack of effective oversight and regulation.

"The Democratic Party and Barak Obama want to do for all of America as they have already done for the American homeowner and investor, we can't afford that kind of risk."

Some Readings:
Thomas Sowell :: Townhall.com Columnist Do Facts Matter?
Blame Fannie Mae and Congress For the Credit Mess
 
Would the Last Honest Reporter Please Turn On the Lights?
Is Capitalism Dead?
The mortgage scandal  
Five House Democrats Who Should Be Doing The Perp Walk Tomorrow Morning
Fannie Mae Eases Credit To Aid Mortgage Lending
From NYTs in 1999 and Priceless:

 In moving, even tentatively, into this new area of lending, Fannie Mae is taking on          significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980's.
Thanks to Pink Flamingo Bar Blog


 Welfare State Failures Are At Bottom Of The Crisis
Anatomy of a Finacial Crisis: The CRA and ACORN
The recalcitrance of facts, or Barney Frank as Doctor Who
A Prophet Who'd Rather Not Mention It
Timeline: What Led to the Current Mortgage Crisis and Economic Meltdown
Baloney: Housing Collapse Caused By Privately-Issued Loans, Not Government-Mandated Loans

(C) David Aronin 2008  
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