StanCollender'sCapitalGainsandGames Washington, Wall Street and Everything in Between

The Sarah Palinization of the financial crisis

04 Jun 2010
Posted by Edmund L. Andrews

Of all the canards that have been offered about the financial crisis, few are more repellant than the claim that the “real cause’’ of the mortgage meltdown was blacks and Hispanics.

Oh, excuse me -- did I just accuse someone of racism?   Sorry.  Proponents of the above actually blame the crisis on “government policy’’ to boost home-ownership among low-income families, who just happened to be disproportionately non-white and immigrant.  Specifically, the Community Reinvestment Act “forced’’ banks to make bad loans to irresponsible borrowers,  while Fannie Mae and Freddie Mac provided the financial torque by purchasing billions worth of subprime paper.   

The argument has been discredited time and again, shriveling up almost as soon as it’s exposed to sunlight.  But it keeps coming back, mainly because the anti-government narrative gives Republicans a way to deflect allegations that de-regulation allowed Wall Street to run wild.   It’s the financial version of Sarah Palin’s new line that “extreme environmentalists”  caused the BP oil spill. 

Paul Krugman caught a whiff of it in a recent commentary by Raghuram Rajan in the FT, and quickly denounced it. 

But far more outrageous is this working paper, which Bruce Bartlett brought to my attention,  published last month by no less an authority than the World Bank.   What galls me isn’t the argument per se; what galls me is that the World Bank would cloak a piece of political drivel with fixings of a serious economic analysis.  

Written by David G. Tarr, who is described as a “consultant’’ and “former lead economist” at the World Bank, the paper says Wall Street and the banks were led by the government like lambs to the slaughter.   The paper reads with a breezy authority, though you get a clue that Tarr is something of a hack when he mistakenly says “HUD Secretary Mario Cuomo” put pressure on the banks.  (It was Andrew Cuomo, Mario’s son, who was HUD secretary.)

 In the mid-1990s, the Clinton Administration changed enforcement of the Community Reinvestment Act and effectively imposed quotas on commercial banks to provide credit to underserved areas….. Failure to meet the quotas would result in denial of merger or consolidation requests…Riskier mortgage standards by banks were not the consequence of deregulation; rather the banks were compelled to change the standards by new regulations at the behest of community groups….Once the banks were pressured by regulation to offer risky mortgages to underserved areas, they (and mortgage brokers) found they could make money on them by selling them to “securitizers,” who in turn packaged the mortgages in pools and sold them. 

Tarr then says Fannie Mae and Freddie Mac made it all possible, because they had an implicit government guarantee and were lusting to expand their market share in subprime mortgages. And as we all know, Fannie and Freddie effectively went bankrupt in 2008 and have been bailed out with more than $200 billion in taxpayer money since then. 

But none of the devil-made-me-do-it arguments is new, and none of them is true.   The Federal Reserve analyzed the Community Reinvestment Act in 2008, and emphatically concluded that it had nothing to do with the explosion of hallucinogenic mortgage lending. For starters, the Fed noted, there was “essentially no change in basic CRA rules or the enforcement process that can reasonably be linked to subprime lending activity.”

More importantly, the Fed said, the vast bulk of subprime mortgages were originated by non-bank lenders that either weren’t subject to the Community Reinvestment Act or were made by banks outside their community assessment areas. Bottom line: in 2006, only 6 percent of all high-priced loans (a proxy for subprime loans) had anything to do with the Community Reinvestment Act. 

What makes this smear so repellant is that it blames poor people – mostly minorities – for bringing on the crisis. But what makes it so maddening is that it’s so demonstrably false.   We have reams of evidence that banks and mortgage lenders actively targeted blacks, Hispanics and other immigrant groups for reckless loans.    The lenders weren’t forced. They were making a fortune. 

An almost equally unforgivable lie is that Fannie and Freddie caused the subprime meltdown. It’s true that Fannie and Freddie were allowed by Congress (especially by Democrats) to run up huge leverage. And it’s true they bought a hefty volume of securities backed by subprime mortgages. 

But Fannie and Freddie weren’t driving the market. They were scrambling to keep up with private mortgage securitizers.

As Krugman shows, Fannie and Freddie were largely sidelined during the heyday of the subprime market, partly because they were doing penance for their prior accounting scandals.   Fannie and Freddie’s market share in securitizations slumped from 2004 until 2007. By contrast, the market share of private issuers soared.   

It’s true that Fannie and Freddie jumped into the muck with born-again enthusiasm. Here is an excellent account of that by David Hilzenrath in the Washington Post in 2008. But as Hilzenrath vividly documented, the quasi-government behemoths weren’t pushing their private sector rivals to roll the dice.  They were late to the craps table and desperately trying to make up for lost time.



I read the Tarr paper quickly

I read the Tarr paper quickly and I think you mischaracterize it. It lists several different causes for the financial crisis. Fannie, Freddie and CRA are among them, yes, but are not exclusively identified. It doesn't quantify their relative contributions to the problem, but neither does anyone else's analysis. Although I tend to agree that the CRA contribution was minimal, it's implausible that the contribution of the GSEs was minimal.

I disagree. Tarr couldn't be

I disagree. Tarr couldn't be much more explicit in echoing the pop-conservative arguments about both the CRA, Fannie Mae and Freddie Mac.  His core thesis, clearly stated in his summary and then detailed at great length, is that the main cause of the crisis was government policy, first in pushing banks to make more loans to low-income borrowers and then in allowing Fannie and Freddie to buy up or guarantee dubious mortgages.

     I'm sure he leaves himself some wiggle-room to allow for other contributing factors -- a "to be sure" paragraph.  But he clearly states that his purpose is to refute the general perception that financial de-regulation was a principle cause of the crisis.

     As a side issue, I think Paul Krugman's recent blast of Raghurman Rajan was over the top and unfair.  Rajan merely alluded  in a rather glancing way to the role of government support for low-income homeownership. He didn't even mention the CRA, Fannie or Freddie.  But Paul, being Paul, assumed that Rajan had joined the rightwing fantasy-history campaign and felt compelled to fire back. 

     But if you look at Raghu's response to Krugman, he disavows the CRA argument entirely.  And on Fannie and Freddie, he argues that  two institutions contributed to the mess by buying subprime paper.  Up to a point, I agree.  But the key question for future policy purposes is this: who was driving whom?  For that, you should look at who was firstest with the mostest in the subprime/no-doc/option-arm arena.   The answer on both counts, by a wide margin: private label securitizers. 

     Did Fannie and Freddie contribute to the crisis?  Obviously, yes.  But again, they did so by trying to keep up with their private-sector rivals.  



Well I went back and read it

Well I went back and read it a 2d time. I see sentences like "The causes of the crisis were subprime lending and securitization" and a description of the SEC's 2004 loosening of net capital requiremens as "a significant mistake". I see two sections criticizing the rating agencies. And so on. These are inconsistent with your characterization of the paper as an anti-CRA rant. I do see he says that CRA and the GSE policy "sowed the seeds" of the problem. But it's hardly as one sided as your initial post portrays it.

In your response, you use the phrase "left himself a little wiggle room". I think that indicates what I am talking about. The paper says what it says. To call the parts that don't fit your thesis a "little wiggle room" is just a characterization that suggests you had a perspective going into reading the article and then read the document to fit your perspective as opposed to being wholly objective. Which is obviosly your right, I just don't think it's fully accurate.


I think you ought to make clear that the paragraph beginning with " In the mid-1990s ..." is a quote from the paper. The way it's set up now, not blocked or with a colon preceding it, makes it look like those are your words. A careful reader will recognize pretty quickly that they aren't, but then we're not all careful readers.

Absolutely correct. Please

Absolutely correct. Please mark cited material as such when you use it.

You're right. Apologies for the quote confusion

  thank you for pointing that out.  I had technical problems with this particular post, all of which had to do with converting from Word to HTML.  I've fixed the quote now, so it's recognizable.  Sorry for the mix-up.  Ed

At Cato's website, Mark

At Cato's website, Mark Calabria, who says he worked on the Senate Banking Committee during the relevant period, has a substantive response to this argument. I particularly recommend the chart he has pulled together on the role of Fannie /Freddie in expanding the subprime market.

Citing CATO? CATO is pretty

Citing CATO? CATO is pretty much worthless, in terms of economics.

Rather than just slam Cato,

Rather than just slam Cato, why don't you address the facts presented? This attacking of organizations/people is simply a way to avoid serious debate, rather than have it. If attack is your standard, then why would anyone take the SF Fed CRA study seriously, since it was written not by the research staff, but by the CRA staff.

More sloppiness.,.

"Republicans a way to deflect allegations that de-regulation allowed Wall Street to run wild."

This is a common populist refrain from folks that want to pin the blame for a very complicated interaction of circumstances on a politically disfavored group. In this case for Ed Andrews, that's Republicans and Wall Street. Absent any facts, it also lacks substance.

What specifically did Republicans do that deregulated Wall Street. Near as I can tell, the only major piece of financial regualtory legislation in the Bush years was Sarbanes-Oxley. I don't hear anybody citing that as a major piece of deregulation.

Ok, so maybe it's everyone's favorite bogeyman, Gramm-Leach-Bliley. You mean the blll championed by Larry Summers and signed into law by Clinton (admitedly with lots of Republican support)? How can you lay this at the feet of just Republicans. How would this have changed poor underwriting standards?

So, when there's nothing real to cite (legislation, changes in the federal register, etc) to cite to support the Republicans de-regulated Wall Street, most people invote a "culture of deregualtion." Please.

Her's another irrigirous, but politically slanted point: "Fannie and Freddie’s market share in securitizations slumped from 2004 until 2007. By contrast, the market share of private issuers soared."

This barely passes the laugh test. The GSE's still retained about 50 percent of the total market share.

What?! Republican politicians

What?! Republican politicians publicly and energetically support deregulation since the 1980s. It's a smear, Sir, a smear I say!

As everyone knows, it was the perfidious socialists in the 'Democrat party' that perniciously undermined the strict oversight and prudent regulation of the financial industry. As part of their devious Marxist plot to bring about state ownership of all assets and industries, they swung the chainsaw of deregulation at huge stacks of paperwork, systematically pushed libertarian solutions to all forms of consumer protection (look at Democrats' current bitter opposition to the Consumer Financial Protection Agency, almost unanimously supported by the Republicans in Congress!)

And if that isn't enough, let's just remember President Reagan's famous statement: "Government is not our problem, goverment is the solution to our problem!"

Fie, Sir, fie I say!

...thanks for making my point

You have absolutely nothing specific to point to but a quote and your own characterizeation of the republican sensibility. Seriously, before allowing journalists (or what passes for them these days as bloggers) get away with unsubstantiated generalizations, folks should challenge the narrative they establish.

"Republicans a way to deflect allegations that de-regulation allowed Wall Street to run wild."

Ok. Fine. How? I've seen nothing that makes this cheap anwesr to a complicated problem true.

Bush Policy circa 2004

Bush was all over allowing the banksters to scam minorities. Bush was all about trying to stiff Fannie with the crap paper in 2008.

In case the posters here suffer from short term memory loss:

"Posted 1/20/2004 1:31 AM

Bush seeks to increase minority homeownership
By Thomas A. Fogarty, USA TODAY

In a bid to boost minority homeownership, President Bush will ask Congress for authority to eliminate the down-payment requirement for Federal Housing Administration loans.
In announcing the plan Monday at a home builders show in Las Vegas, Federal Housing Commissioner John Weicher called the proposal the "most significant FHA initiative in more than a decade." It would lead to 150,000 first-time owners annually, he said.

Nothing-down options are available on the private mortgage market, but, in general, they require the borrower to have pristine credit. Bush's proposed change would extend the nothing-down option to borrowers with blemished credit.

The FHA isn't a direct lender, but guarantees loan payments for mortgages on moderately priced owner-occupied property. The FHA guarantee now permits private lenders to finance as much as 97% of the purchase price of a home for millions of low- and middle-income borrowers.

In the proposal soon to be delivered to Congress, Bush would allow the FHA to guarantee loans for the full purchase price of the home, plus down-payment costs. As a practical matter, the FHA would guarantee mortgages as high as 103% of the value of the underlying property.

Weicher says the change is aimed at potential home buyers whose credit excludes them from the private mortgage market. Borrowers would need sufficient income to meet monthly payments. But, he said, the plan would eliminate the single largest impediment to homeownership for millions of households — lack of money for a down payment.

The most recent government figures show a national home ownership rate of 68.4%, the highest ever. But less than half of black and Latino householders own the home in which they live. Bush has a goal of 5.5 million new minority homeowners this decade.

FHA loans carry higher risks of delinquency and foreclosure than do private mortgages, and the proposed change presumably will lead to greater losses to the government than the current program does.

Weicher said the added risk will be offset by higher fees charged to borrowers who opt to make no down payment.

On a $100,000 mortgage with an interest rate of about 6%, the nothing-down borrower could expect closing costs $750 higher than other FHA customers. Monthly house payments would be slightly higher.

Mortgage analyst Keith Gumbinger of financial publishers HSH Associates says the Bush plan "would fill at least a small niche in the mortgage market" — first-time buyers with somewhat impaired credit.

Affordable-housing advocate Scott Syphax, CEO of Nehemiah Corp., called the proposal "revolutionary." It marks the clearest official acknowledgment that millions of potential homeowners are being blocked by high down-payment costs, he says."

WTF promoted SUBPRIME? GWBush promoted the subprime. Don't deny it.

Yup, your accusation is scurrilous

The blame doesn't lie with Blacks and Hispanics, but with the *government* for encouraging lenders with a stick to lend to people woefully unprepared to handle a mortgage.

You're just pulling out the race card to avoid the actual criticism.

Wall Street funneled foreign

Wall Street funneled foreign capital into the housing market through their clever methods of securitizing loans that were not likely to be paid back. Nobody had their arms twisted. They were lobbying for lax regulation so they could take more risk and make a quick buck. Heavy reliance on foreign capital exported the meltdown and created a global crisis. It also created a demand for AIG's credit default swaps requiring that bailout as well since the foreign banks could use the swaps to meet their capital requirements. Simple story and anyone who thinks the financial meltdown was driven by altruism or policies that were intended to help the poor is financially illiterate and quite naive (or simply dishonest).

A parallel with the need to drill deep offshore

Here's a take from the "innernets":

There is a parallel here with the securitization and derivativization of toxic debt: loan originators had to drill very deep into the pool of potential borrowers to come up with "raw material" to manufacture CDOs, CLOs and other such "products". What they came up with stank to high heaven, of course, and since they couldn't afford to adequately guarantee their products it wasn't long before the whole thing collapsed.

Sarah Palinization? I can

Sarah Palinization? I can stop reading there, right?

Government or Private Sector

At issue is whether the problem is too much/incompetent government or too little government and too much unregulated free-market. If it is the latter it totally undermines all the arguments we have been hearing from the right-wing for the last 30 years. That is why they had to create a narrative that blames the whole problem on government, the fact that it also blames poor minorities for bringing down the global economy is just a bonus from their point of view.

The facts clearly show that CRA had nothing to do with the housing bubble, but because the narrative that the market is always right and government regulation is always wrong is so firmly embedded in the Rush Limbaugh worldview, conservative clasped onto the idea and won't let go.

"Blacks and Hispanics Caused"

CRA is/was and always will be a "toothless tiger" and I laugh when I hear bank apologists claim it drove the banks to do uneconomic mortgage lending.

I agree with Andrews that Fannie's and Freddie's low income lending ("the Blacks and the Browns") had little to do with the greater financial meltdown, but their 2007 gluttonous purchases of private label subprime securities (PLS)--created and sold exclusively by Wall Street firms--did.

The losses on those are what bled and is bleeding F&F, not failure of the loans which each bought to meet their significant affordable housing goals.

Note that former Fannie EVP and current World Bank head Bob Zoellick--who led Fannie's legal operations, communications, and congressional relations offices--probably doesn't view favorably, Andrew Cuomo's time at HUD and the latter's role increasing the GSE housing goals.

Here's the truth from someone who was involved in sub-prime

This was an incredibly complex situation that culminated in the collapse.

1. Derivatives are an illegal form of gambling, first and foremost. Brooxley Born tried to force these monstrosities onto an exchange and was torpedoed by Clinton appointees and Alan Greenspan. (watch this for more info

2. The people with sub-prime credit scores are easily taken advantage of. They are much less cost conscious when offered credit. Most people lack a basic understanding of compound interest, and I would venture to estimate 90% or more of sub-prime borrowers lack this fundamental understanding which is necessary to make an informed decision about a high cost loan. They live paycheck to paycheck, never saving enough for a rainy day. And when the smallest hiccups occur in the economy, they are the first to be negatively affected. Everyone needs at least 6 months of spare income saved up in case of job loss, but the percentage that possess this most basic income insurance are too few. The people must accept some of the blame for the collapse, because we all spent too much and saved too little as a country.

3. Record low interest rates added fuel to a raging fire at exactly the wrong time. Our fiat monetary system is relatively young (since 1970), and one of the side effects of fighting recessions with loose money is the formation of distortions and bubbles (see Nasdaq bubble and "irrational exuberance"). As long as the Federal Reserve believes they know best and price fix the cost of money artificially low, we will continue to have problems in the future. Only the market is capable of determining the optimal price of money. Only higher interest rates encourage Americans to save instead of borrow. Interest rates are like speed limits on our roads. Eliminating speed limits may allow us to move around a lot faster, but the risk of catastrophic wrecks increase dramatically.

4. Deficit spending and borrowing from the social security trust fund made us all feel much richer than we really were. We were not paying adequate taxes for the spending the economy received. This combined with 1% interest rates delivered a punch capable of eliminating the 2001 recession at the cost of generating an unsustainable credit boom as investors sought anyway to keep ahead of inflation.

5. Global imbalances (such as our huge trade deficit), caused by China's fixed exchange rate and surpluses coupled with our propensity to borrow and spend, lead to a situation where too much borrowed money was seeking a home with relative safety and highest possible returns. Much of this money landed in Fannie and Freddie's pocket and the housing market.

6. Excessive leverage was allowed to enter the system and exceed the last record set in the Great Depression. At approximately 360% of GDP, total credit outstanding was pushed well beyond the level that catastrophically lead to the 1930's depression. The 2001 recession was not an ordinary recession, it was a warning signal to stop borrowing and begin paying down debts. Fiscal and monetary expansion was the last thing we needed back then. We must stop trying to eliminate recessions and let them run their course. Unfortunately, a new depression is necessary to bring outstanding credit down to a sustainable level because we refused to take our medicine back in 2001. There is no magic pill that eliminates recessions.

7. The bailout of LTCM in the 90's taught the market that in a crisis the Government will be there with their wallet open to back them up. This is known as moral hazard in economics. Basically, the implied backing of the Government reduced the risk associated with leverage and increased the reward. These institutions all knew they were 'too big too fail' long before we ever heard of the term. If you tell your 18 year old child, no matter what you do I will back you up financially, they are much more likely to get in a serious financial mess.

When people ask did we have too little or too much Government regulation, they are missing the boat entirely.

RR's reply to Krugman

This discussion is endlessly interesting. Readers of this thread may also be interested to read Raghu Rajan's reply to Krugman, evidently written after Andrews's post,

I was particularly struck by this quotation from a speech by George W. Bush (full citation in Rajan's above post):

"The goal is, everybody who wants to own a home has got a shot at doing so. . . The problem is we have what we call a homeownership gap in America . . . And I'm proud to report that Fannie Mae has heard the call and, as I understand, it's about $440 billion over a period of time. They've used their influence to create that much capital available for the type of home buyer we're talking about here. It's in their charter; it now needs to be implemented. Freddie Mac is interested in helping. I appreciate both of those agencies providing the underpinnings of good capital.”

Last Refuge of a Scoundrel

'Oh, excuse me -- did I just accuse someone of racism?'

Which is all that's left to those who need to ignore history. Here are Stan Liebowitz and Ted Day writing in 'Economic Inquiry' in January 1998 (i.e., not in hindsight):

Unfortunately, the Boston [Fed] study [by Alicia Munnell, et al] has had a tremendous influence on public policy, perhaps because it comes from a major government agency with a major publicity apparatus. Its recent publication in a leading economics journal can only increase its standing. ....
Spokesmen for the banking industry have been relatively silent during this debate. Their public actions have been largely limited to statements of repentance, payments of money to minority organizations, and promises to develop new techniques for marketing loans to the minority community, such as the euphemistically named 'flexible underwriting standards'.47
Although their silence might be taken as an admission of guilt, other forces in the regulatory climate have operated to constrain bankers from acting any differently. ....
If we are correct, the media frenzy associated with the release of the HMDA data every year has been largely counterproductive for achieving an even playing field in the mortgage market. The "progress" that has been made in "helping" minorities may not be progress at all. After the warm and fuzzy glow of "flexible underwriting standards" has worn off, we may discover that they are nothing more than standards that led to bad loans.
Certainly, a careful investigation of these underwriting
standards is in order. If the "traditional" bank lending processes were rational, we are likely to find, with the adoption of flexible underwriting standards, that we are merely encouraging banks to make unsound loans. If this is the case, current policy will not have helped its intended beneficiaries if in future years they are dispossessed from their homes due to an inability to make their mortgage payments. It will be ironic and unfortunate if minority applicants wind up paying a very heavy price for a misguided policy based on badly mangled data.

Again, that's not hindsight, but eyewitness testimony as to what was going on in the 1990s; government pressure to relax lending standards. And, an accurate prediction of what would happen.

From a bank owner's point of view

I am a principal stockholder and director of a community bank and can address this topic from personal experience.

The CRA and HMDA are burdensome and needless regulations that work at cross purposes to the proper aim of bank regulation, which should be to protect small depositors by assuring the safety and soundness of bank lending practices. They do not, however, seem to me to be high on the list of causes of the crash.

Fannie Mae and Freddie Mac are another story. The meltdown began in the secondary mortgage market, and the GSEs dominate the secondary mortgage market - indeed they could be called a duopsony. What I identify as the principal malign influence they exercised was the excessively high loan-to-value ratio they set for "conforming loans," i.e., those loans they agreed to buy on the secondary market. Until very recently conforming loans could be made for as much as 97% of appraised value. Thus, for example, a home buyer could put down as little as $7,500 on a $250,000 house, and finance the rest. This gave the mortgage borrower relatively little 'skin in the game,' and the lender a woefully inadequate cushion against decline in value of the collateral.

As the Fed raised the discount rate from a low of 0.75% in 2002 to a high of 6.25% in 2006, 5-year ARMS repricing at much higher rates drove many mortgage borrowers to put their houses on the market. Soon the glut of houses for sale depressed house prices, and the mortgage borrowers' slender equity was wiped out - they were 'under water'. The situation was analogous to the crash of 1929, when people who had bought stock on margin lost their investments as prices fell and they could not meet margin calls.

Fannie and Freddie, because of their inadequate collateral requirements, certainly encouraged mortgage borrowers to over-leverage themselves, and this was the primary cause of the real-estate bubble. The bubble would have burst whether or not there had been a CRA or HMDA.

Commercial banks did and do not make the greater part of mortgage loans, and do not hold the bulk of mortgages directly. Where commercial banks come into play is as investors in Fannie Mae and Freddie Mac mortgage backed securities. I think it is fair to say that if Fannie and Freddie did not have the implicit backing of the Federal government, every bank in the country would have such losses in its investment portfolio as to be in serious trouble.

As for deregulation of banks - the two main regulatory acts that account for the banking industry's current structure are the Riegle-Neal Act of 1994 (passed by a Congress controlled by Democrats and signed by Clinton) and the Gramm-Leach-Bliley Act of 1998 (passed by a Congress controlled by Republicans and signed by Clinton). Both parties share responsibility. Gramm-Leach-Bliley, which undid the division between commercial and investment banking that had been enshrined in the Glass-Steagall Act of 1933, has been blamed for the banking crisis, but in my opinion the principal reason for the development of banks deemed 'too big to fail' was Riegle-Neal.

What Riegle-Neal did was to permit banks to branch across state lines. Hitherto, if bankers wanted to establish a presence in several states, they had to form multi-bank holding companies, which would then separately charter and separately capitalize banks in each state where they wished to operate. The requirement of separate capitalization had the effect of compartmentalizing risk. It was akin to the design of a munitions factory, where instead of having all operations under one roof, they are spread through many small buildings separated by sufficient distance that if one should blow up, it cannot spread fire to its neighbors. The FDIC was designed for a banking system that had such compartmentalization of risk, and when Riegle-Neal was passed, FDIC did not assess properly the added risk that consolidation of banking in the hands of a very few large banks posed. Had, for example, Citibank failed, that by itself would have consumed the entire resources of the FDIC. Hence the 'bailout' was instituted under Paulson in the last months of the Bush administration, and continued under the Obama administration.

In my opinion the proper approach to banks that are 'too big to fail' is to break them up, as proposed by Sens. Ted Kaufman and Sherrod Brown. The so-called financial reform bill advocated by Sen. Chris Dodd is what I would expect from Dodd, who is a crook of the first water. It would not alleviate the problems of the banking system but would entrench them. It is not surprising - contrary to Democratic propaganda, Wall Street is not rock-ribbed Republican, but gives disproportionately to Democrats. Thus most of them are bought and paid for.

Fannie and Freddie’s market

Fannie and Freddie’s market share in securitizations slumped from 2004 until 2007. By contrast, the market share of private issuers soared.

It’s true that Fannie and Freddie jumped into the muck with born-again enthusiasm. Here is an excellent account of that by David Hilzenrath in the Washington Post in 2008. But as Hilzenrath vividly documented, the quasi-government behemoths weren’t pushing their private sector rivals to roll the dice. They were late to the craps table and desperately trying to make up for lost time.

But it was well-known that Fannie and Freddie would try to "desperately make up for lost time" and attempt to defend their market share, and (especially after LTCM) it was widely believed that the federal government would bailout counterparties anyway.

If you look at that chart, it's certainly not that Fannie and Freddie stopped buying these mortgages. Their market share went down, but they were still securitizing plenty. What happened was as it became clear that the bubble was about to burst or was bursting, all the private issuers got out of town but Fannie and Freddie kept buying.

It's clear that Fannie and Freddie made the problem worse, not better. Not only by "making up for lost time," but by earlier being available to be the "greater fool" when all the private issuers started to get out of the business.

"It’s the financial version

"It’s the financial version of Sarah Palin’s new line that “extreme environmentalists” caused the BP oil spill. "

So you mean that it may have some explanatory truth in a counter-intuitive way but is not the whole explanation? After all:

1) Accidents are more likely and more difficult to deal with in deepwater drilling than in shallow waters or on land;
2) The odd political result in this country is that we allow deepwater drilling in the Gulf of Mexico while forbidding shallower drilling nearly everywhere, and forbidding drilling over land in plenty of places with oil as well, meaning that
3) We probably should expect more oil spills than if we had the tradeoff of banning deepwater drilling while allowing ANWR drilling.

Of course, the environmentalists do oppose deepwater drilling as well, but political bargains and compromises are hard to change. It's like how people opposing holding terrorist suspects in Gitmo has led to simply assassinating them from drones instead.

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