Friday, October 24, 2008

A thoughtful response from my Democratic alter-ego

Hi EnthalpyMama,

EntropyDaddy here, trying to organize the chaos and get my guest blog written (and I only have one kid). You posted a few days ago about the financial crisis and asked me for my thoughts. Here they are with a disclaimer - I certainly can't match your eloquence, so if your revenues tank because I drag down your blog ratings - well, maybe we can just go to the government for a bailout! :-)

The economy is one item that you brought up in your recent "challenge" post. The collapse of the sub-prime market certainly seems to be the driving factor beyond the problems (I'm not an economist, so I'll have to rely on the information I've read). You point out your belief that Fannie Mae and Freddie Mac (FM/FM) are the problem. Certainly they're at the core of the problem. I think there's plenty of blame to go around (from the homeowners who took risks by not understanding the loans they were getting into, to lenders who put these people into loans that they knew would reset into much higher interest rates in a few years, to FM/FM, to banks and Wall Street firms who would buy these mortgages without understanding the risk, to the U.S. government for not fully understanding the markets and the crisis and taking action earlier).

I don't think the Democrats are heroes of the economy. I think it's more likely people think the Democrats will do a better job at fixing the problem than Republicans. I don't blame the problem on one party, but I will blame it on one issue - lack of proper regulation.

But one point very quickly, and then back to regulation. You asked why the Democrats didn't step in and fix the problem once they got control of Congress in 2007? Certainly would have been nice. But, by this metric, why didn't the Republicans step in between 1995 - 2007, when they controlled both houses (except for a brief time in 2001-2003 when the Democrats had a slim one-vote margin in the Senate). Both houses of Congress were Republican-controlled for the majority of a Republican administration (2001-2007), so I can't see blaming the Democrats for not doing something in the last 18 months as the reason for the crisis.

But let's get back to what is the major problem - poor regulation. Fannie Mae and Freddie Mac are regulated by HUD (Housing and Urban Development) - which is in the executive branch of government. Certainly Congress makes laws which can dictate what this organization does, but it's the executive branch that is responsible for running it and making sure there aren't any problems. Now, President Clinton did agree to allow FM/FM to cover more mortgages for more low-income families back in 1995, so maybe he did start this, or maybe not (Why didn't the Republican-controlled Congress from 1995-2001 stop this if it was bad policy?) One might argue that because of Clinton's policies, it was a ticking time bomb waiting to happen. Then why didn't Bush and the Congress come in and fix the problem in 2001? To the contrary, President Bush actually set a goal to increase affordable housing from 50% to 56%. Another metric, in 2000 Freddie bought $19 billion in subprime loans. In 2005, FM/FM bought $170 billion in subprime loans. Are FM/FM to blame, certainly, and so are the people who were supposed to regulate them.

I think the reason people see the Democrats as the potential good guys here is that a main tenet of Republicanism is laissez-faire, hands-off government - while the Democrats are more willing to use the "hand" of government to manage the economy. And I think people are much more willing to believe that the Democrats will yield better regulatory control.

One interesting thing, I don't disagree with the goal of this Republican philosophy - I actually want as little government intervention in my private life as possible. However, I think that over the last century (reference the crash of 1929) we've seen that capitalism is not a system that is fully self-regulating, and we need some government regulation in it. Not over-regulation, but proper regulation.

If you have time, one good article to read about HUD is in the Washington Post (http://www.washingtonpost.com/wp-dyn/content/article/2008/06/09/AR2008060902626.html)

Sorry for the long post, but there's a lot there. I think we'll be sorting this thing out for years to come.

4 comments:

enthalpymama said...

Thank you, EntropyDaddy!

standing still said...

Nicely done.

Rachel said...

No comment LOL

Anonymous said...

Thank you for presenting the many sides of this huge issue. I am against the bail-out, personally, but they didn't let me vote on it. What I really disliked seeing was the multi-million dollar "executive" bonuses for the COEs who got us into the mess to begin with. I'm sure they knew what they were doing.