The Blog @ Spolitics

Wall Street May Have Gotten Drunk, But Uncle Sam Was Serving the Booze

by Heywood U. Reedmore -- July 24, 2008 at 7:14 pm | In No, Seriously | 1 Comment

Many on the left are trying to turn the mortgage meltdown and financial crisis into an indictment on capitalism and free markets. Even President Bush blamed Wall Street:

What Bush fails to mention is that his administration fueled the problem. As WaPo noted back in June, HUD created a market for bad loans and then pushed them onto the GSEs:

In 2004, as regulators warned that subprime lenders were saddling borrowers with mortgages they could not afford, the U.S. Department of Housing and Urban Development helped fuel more of that risky lending.

Eager to put more low-income and minority families into their own homes, the agency required that two government-chartered mortgage finance firms purchase far more “affordable” loans made to these borrowers. HUD stuck with an outdated policy that allowed Freddie Mac and Fannie Mae to count billions of dollars they invested in subprime loans as a public good that would foster affordable housing.

Housing experts and some congressional leaders now view those decisions as mistakes that contributed to an escalation of subprime lending that is roiling the U.S. economy.

Like with Healthcare, this is another example of the government causing problems that then get blamed on the free market. The real problem is our markets are not free from government meddling.

Noting the damage caused by the government-sponsored Fannie and Freddie, John McCain offered his solution for this mess in an op-ed today:

What should be done? We are stuck with the reality that they have grown so large that we must support Fannie Mae and Freddie Mac through the current rough spell. But if a dime of taxpayer money ends up being directly invested, the management and the board should immediately be replaced, multimillion dollar salaries should be cut, and bonuses and other compensation should be eliminated. They should cease all lobbying activities and drop all payments to outside lobbyists. And taxpayers should be first in line for any repayments.

Even with those terms, sticking Main Street Americans with Wall Street’s bill is a shame on Washington. If elected, I’ll continue my crusade for the right reform of the institutions: making them go away. I will get real regulation that limits their ability to borrow, shrinks their size until they are no longer a threat to our economy, and privatizes and eliminates their links to the government.

In the same op-ed McCain points out that he warned about the dangers Fannie and Freddie posed:

Fannie and Freddie are the poster children for a lack of transparency and accountability. Fannie Mae employees deliberately manipulated financial reports to trigger bonuses for senior executives. Freddie Mac manipulated its earnings by $5-billion. They’ve misled us about their accounting, and now they are endangering financial markets. More than two years ago, I said: “If Congress does not act, American taxpayers will continue to be exposed to the enormous risk that Fannie Mae and Freddie Mac pose.”

If McCain has that warning on tape, he’s got the makings of a very powerful campaign commercial.