Tuesday, August 13, 2013

Republican Myths

There are a lot of them. Over time, I have developed a small amount of perspective, allowing me a modicum of self-control. And then I read stuff like this from former Senator Phil Gramm in this morning's Wall Street Journal, and I just lose it. I thought the GOP argument that the US Affordable Housing public policy goals, working through Fannie and Freddie, had driven our otherwise perfectly efficient financial system onto the rocks, had been thoroughly debunked by the Financial Crisis Inquiry Commission (whose full report is here). Apparently not.

Instead it has been elevated to the unassailable status of Republican Myth - irrefutable, not subject to analysis or fact-checking, returned into the conversation periodically to assure the faithful that the written-into-stone, surely God-given stories of Creation, Sin, Judgment and Redemption - in other words, the real and Republican truth about how the world works - are still being told, are still true, and will be with the faithful forever. Benghazi has this status. The IRS "scandal" soon will. And so I guess the Fannie/Freddie Caused the Whole Damn Mess has joined the mythic lexicon, and will forever be reintroduced by unimaginative but loyal GOP banner men, when someone around the campfire asks for stories about the Great Financial Crisis of 2008.

Here's the story outline: In 1977, under Carter, Congress passed the Community Reinvestment Act (CRA), written to encourage bank mortgage lending to inner-city, mostly minority neighborhood. Banks would be measured, in part, on how they performed in making mortgage loans to minority communities. The next big step was the 1992 Housing Act, signed by Bush I, that set Affordable Housing Goals for Fannie and Freddie. Initially 30% of the GSEs' portfolios had to be made up of Affordable Housing Mortgages - loans to folks whose income was below the AMI (Area Median Income). In 2000, under Clinton, this target was raised to 50%. Bush took it to 55% shortly before the Crash.

And that's what did it; that's what caused the Crash: Government interfered in the marketplace, directing its Bureaucracy to ensure lots and lots of loans were made to poor people. These perverse, new incentives, encouraging loans to low income (read minority) people inevitably caused, even forced the system to spin out of control and crash. It's not our fault. And it certainly cannot be the market's fault. No - as always, it's the Government's fault.

If you want to get a full-throated expression of this viewpoint, read Peter Wallison's solo dissent to the final, excellent FCIC report here. Wallison argues that, driven by the Affordable Housing Goals, Fannie/Freddie put together huge sub-prime portfolios; they in fact dominated and set the operating and credit patterns for the entire market; and the inevitable crash came in September, 2008, driven by the GSEs' bad policy direction and an out of control Fed.

This GOP myth would have us:
  • believe that banks and other mortgage lenders were forced to make bad loans because Fannie and Freddie had a mandate to buy almost any "affordable housing" loan.
  • ignore the role of the investment bankers, who developed the mortgage securitization system that removed mortgages from the local banker who used to keep a close watch on both the loan and the customer.
  • ignore the role of the bankers who developed complex, tranched pools of mortgages, put together in CDOs - Collateralized Debt Obligations, and then convinced the rating agencies to give them AAA ratings, making these securities as saleable as Government bonds.
  • ignore the role of deregulation, Including Senator Gramm's own Commodities Futures Modernization Act of 2000, which refused to regulate Debt Default Swaps, the exploding of which for AIG was the proximate trigger of the crisis.
  • ignore the role of the banks in almost destroying the US mortgage market by failing badly in completing the complicated and vital paperwork trail in the securitization process, needed to clearly secure title for each individual mortgage in their giant pools.
  • ignore (again) the investment banks who, when they began to see the whole unstable pyramid of housing credit would soon fall, created synthetic CDOs, allowing them to bet against the housing market and their own customers.
The GOP myth is rooted in the absolute certainty that Fannie and Freddie charged into the subprime market (they were, admittedly, a bit late, coming in under full steam only in 2005, a good three years after the subprime run began) in order to fulfill their Affordable Housing mission. Bill Black, one of the key S&L cleanup regulators, does an extraordinary takedown of this part of the myth here. According to Black, the leaders at the two GSEs were engaged, not in trying to accomplish public purpose by finding ways for poor minorities to afford homes, but in just good old fashioned control fraud: buy lots of very high yielding, but still overpriced financial assets very quickly so you can maximize your bonuses before the inevitable crash. Black supports this argument, in part, by showing that Fannie and Freddie bought huge quantities of AltA, or No Income/Liars' Loans. These AltA loans were not normally classified as subprime (meaning that Wallison, and his cohort Ed Pinto at AEI, way overstated the GSEs' role in the true subprime market) and whoever got one, had not been required to declare their income. And if Fannie and Freddie were trying to boost their Affordable Housing numbers, which requires proof of income below the Area Median Income, they would not go for No Income/No Doc loans.

Just old fashioned control fraud, Senator Gramm. Not Government messing in the private marketplace after all. Or more precisely, the motivation powering both Fannie and Freddie to go for yield, had nothing to do with the public purpose of Affordable Housing.

I hope I know enough now to understand that holders of mythic belief are immune to factual rebuttal. And that is the essence of the problem. From the Progressive side, as we survey the field, we are not engaged with folks open to logical analysis. What we see are mythmakers, followers of myth, and other true believers. 

The task is daunting.

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