The Big Lie: Part III

Ask conservatives what caused the financial crisis and you will hear that it was driven by government affordable housing goals that "forced" the GSEs, Fannie and Freddie, to pressure the private mortgage market into making loans to those who clearly couldn't repay them. These goals were the mechanism that compelled otherwise sound and sober lending institutions to make a mess of the U.S. economy. That's how the story goes.

The SEC has now filed suit against former GSE executives, and the story the SEC tells is very different. As has been reported by many independent analyses, the GSEs were followers, not leaders, in the sub-prime crisis. Furthermore, they got into the business belatedly not because of any government mandate, but because they were chasing market share and big bonuses.

For a good run-down of this, see Karen Petrou at Federal Financial Analytics.

The money quote: "the GSEs didn’t do it because they cared so much about the affordable-housing goals that, pressed by their regulator, they threw caution to the winds. They threw caution to the winds instead because they got paid better each time a breeze blew by."

PoltiFactoid

Jon Chait has an exceptionally smart column on PolitFact's bizarre choice to label the claim that the Paul Ryan budget would effectively kill Medicare as the "Lie of the Year."

The money quote

Is that [the Ryan plan] “ending Medicare?” Well, it’s a matter of opinion. At some point, a change is dramatic enough that it is clearly ending the program. If you proposed to replace Medicare with a plan to give everybody two free aspirin on their 65th birthday, I would hope Politfact would concede that this would be “ending Medicare,” even if you call the free aspirin “Medicare. . . .”

Does the Republican plan indeed end Medicare? I would argue yes. But it’s obviously a question of interpretation, not fact. And the whole problem with Politifact’s “Lie of the Year” is that it doesn’t grasp this distinction. Politifact doesn’t even seem to understand the criteria for judging whether a claim is a question of opinion or a question of fact, let alone whether it is true.

Matt Yglesias makes a similar point.

House Republicans voted to replace Medicare's existing single payer fee for service program with a different program, also called "Medicare," under which (in the words of Politifact) retirees "would receive 'premium support payments' from the government to help pay for the private insurance." Whether or not this change should be described with "harsh" terms is clearly a matter of ethical judgment. But it's obviously a big change. Mitt Romney, for example, lauded the plan as reflecting "the need to fundamentally transform Medicare." If friends of the plan describe it as fundamentally transforming the program, can it really be wildly illegitimate for its foes to describe it as ending Medicare? . . . This is a hair-splitting disagreement, not a gaping void of factual error and deliberate deception.

The Big Lie: A Follow-up

Joe Nocera, a NY Times financial columnist and co-author of All the Devils are Here, my favorite book on the financial crisis, has just published a column that fills out the Wallison/Pinto argument that Fannie and Freddie were behind the entire financial crisis. In his original (and very good) column on the government's official report on the financial crisis, he dismissed Wallison's singular dissent as a as a “lonely, loony cri de coeur”, a description for which (not surprisingly) Wallison took exception.

Now the SEC has filed suit against Fannie and Freddie for making “materially false” statements about the size of the companies’ investments in subprime mortgages. Nocera makes a good case that the charges are extremely weak. Read the column yourself for the particulars.

Nocera concludes the column with this:

After the S.E.C. filed its charges on Friday, I received an e-mail from Wallison, suggesting that the complaint proved that he had been right and that I had wronged him. I now concede that he is half-right. Loony though his theory may be, he’s sure not lonely anymore.

The Big Lie

First, a personal anecdote. One day in September or October of 2008, a time when it looked like the world was about to end, one of my colleagues--a stanch conservative and Rush Limbaugh devotee--came to my office and offered the unsolicited observation that Fannie Mae and Freddie Mac were responsible for the financial meltdown we were witnessing.

I found this observation odd at the time and I said so. As I pointed out, Fannie and Freddie were not mortgage originators. My view at the time, before I entirely understood the role Wall Street played in this mess, was that the primary culprits were private non-bank mortgage originators, such as Countrywide, Ameriquest, New Century, and IndyMac which made a practice of providing sub-prime mortgages (both new homes and refinancing of existing homes) to people who could clearly not afford them. They were able to do this because they did not keep the loans. They sold them off to investors, who would bundle together as mortgage-backed securities. Since they weren't on the hook if the mortgages went bad, they had no personal stake in sound underwriting principles. In short, they blew up the economy because they could make a lot of money doing it.

In any case, my colleague's view was that Fannie and Freddie--quasi government institutions--created the crisis because they "forced" lenders to lend to the undeserving poor.

This view has been widely repeated in conservative media outlets. Even Michael Bloomberg has repeated this story. Gretchen Morgenson, a highly-respected New York Times financial reporter, has also endorsed one version of this story.

Quite simply, this story is wildly at odds with the facts. It was cooked up by conservative ideologues who cannot abide the notion that a catastrophic financial collapse was brought on by people working in the private enterprise system and motivated by a desire for ever larger profits.

The government created a commission whose goal was to document and explain the causes of the 2008 meltdown. The official Financial Crisis Inquiry Report was predictably unable to achieve bipartisan agreement. The main report was endorsed by Democratic members and a minority report was endorsed by Republican members. This is not surprising. What was surprising is that there were TWO minority reports, one representing the views of all of the Republican members, except one. The second reflected the views of Peter Wallison, an American Enterprise Institute scholar, and it was only this dissent-from-the-dissent report that pushed the Fannie/Freddie-did-it line. Even the great majority of the partisan Republicans on the commission could not bring themselves to endorse a position that was so clearly inconsistent with the historical record.

How does Wallison support that which all of his colleagues rejected? Apparently, he relied on research by AEI consultant Ed Pinto that basically redefines "sub-prime" in such a way as to implicate the GSEs. For a detailed analysis of the Pinto research, see the work of Center for American Progress's David Minn. This graphic summaries it fairly well.

As you can see, the default rate of Pinto's "high-risk" loans look much more like the national average than actual sub-prime mortgages.

For a fair and comprehensive treatment of the financial crisis for those who don't want to wade through the government report, I would recommend All the Devils are Here by Bethany McClean and Joe Nocera. The basic story they and others tell is that, yes, Fannie and Freddie did get into the sub-prime mortgage business, but they were followers, not leaders. Fannie and Freddie entered this business fairly late in the crisis as an attempt to recapture some of the market share they had lost to the private market which had been originating sub-prime loans and selling them to Wall Street for years.

In his extremely negative review of Morgenson's book on the crisis, Robert Kuttner, though no apologist for GSEs, outlines who he sees as the worst offenders in the crisis in order of culpability.

1. Alan Greenspan's Federal Reserve, which lowered interest rates without increasing regulation, refused to enforce a 1994 law requiring prudent underwriting standards and turned a blind eye to abuses in the process of loan securitization.
2. The Office of Thrift Supervision, which let savings banks under its supervision engage in outlandishly risky practices.
3. The Wall Street firms that bankrolled subprime lenders and turned their high-risk loans into securities.
4. The credit-rating agencies that blessed toxic subprime securities with Triple-A ratings.
5. The SEC's failure to police those agencies
6. And, of course, the subprime lenders themselves.

This seems about right to me. The financial crisis, the effects of which we are still living through, was caused by a failure of government, but not the type of failure the Right would have you believe.