Bethany McLean on This Year's Winners of the Stupidest Economists Alive Contest
Bethany McLean:
Why won't the GOP's financial-crisis report follow the money?: [O]n Dec. 15, defecting Republicans—former Calif. Rep. Bill Thomas; Keith Hennessey, who served on President Bush's National Economic Council; Douglas Holtz-Eakin, the former head of the Congressional Budget Office; and Peter Wallison, a fellow at the conservative American Enterprise Institute... released what they describe as their "preliminary findings and conclusions." This "primer" (in a blog, Wallison denied that it was either a "report" or a "response") put blame just where many Republicans would like to see it: on the government's push for homeownership. "There were three important ways that the government pushed investors toward investing in mortgage debt," the authors write.
First, the regulatory capital requirements associated with mortgage debt were lower than for other investments. Second, the government encouraged the private market to extend credit to previously underserved borrowers through a combination of legislation, regulation and moral suasion. Third, and most important, during the bubble's expansion, the largest investors in the mortgage market … Fannie Mae and Freddie Mac, were instruments of U.S. government housing policy.
As a result of government-established affordable-housing goals starting in 1993, the authors argue, Fannie and Freddie had to "invest in mortgages of increasingly lower quality and higher risk to the taxpayer." This narrative... is shockingly incomplete... a ludicrous distortion.... [T]he government did lower the regulatory capital requirements... in the face of fierce lobbying from the private sector.... Countrywide and Ameriquest didn't make mortgages—and Wall Street firms didn't package those mortgages and sell them off to investors—because the government was holding a gun to their heads.... As for the implication that subprime lending began with Fannie and Freddie and resulted from the government's affordable housing goals, that's simply false....
For most of the 1990s, Fannie's and Freddie's affordable-housing goals required them to buy a certain percentage of mortgages made to families with a median income level. That was hardly onerous or risky, and anyway Fannie executives, who were far more preoccupied with return to shareholders, used to joke about the ways they neutered the affordable-housing rules....
The GOP report—oops, primer—provides a calculatedly incomplete account of how bad mortgages found their way onto the balance sheets of financial firms. There's an interesting dissection of the kinds of risk that banks took—but no mention of the reason they took those risks.... As for the ways the risky mortgages were packaged into supposedly safe securities, all readers get is a whitewash.... [No] mention of the Street's failure to investigate the underlying mortgages, despite its promises to investors that it was doing so. Oh, and here's the line about the credit-rating agencies like Moody's and Standard and Poor's, which made fortunes by stamping triple-A ratings on bundles of bad mortgages:
The credit rating agencies made many of the same mistakes as mortgage investors, and ratings on MBS proved to be severely inflated.
Er, the mortgage investors were relying on the credit-rating agencies to do their job by assessing risk accurately. Anyone with even a rudimentary understanding of the 2008 crisis knows that. But apparently it never came up in those "hundreds of interviews" financed by taxpayer dollars....
[T]he explanation—that in essence, what happened to Wall Street was simply a "run on a bank"—ignores the active role Wall Street itself played in causing the run. If you sell hundreds of billions of dollars in bad securities to investors, and then those investors start to realize that you also own some of those same securities, well, there might just be a run. And a justified one at that...
