It’s not often that I have a totally different take on an issue from President Obama, but I strongly believe that he has gotten terrible advice on many economic issues, and most have the fingerprints of Larry Summers all over them.
Even more, Obama’s targeting of Fannie and Freddie for closure is part of a larger narrative — on both the left and the right — that banks and government schemed to produce the 2008 financial crisis and the continuing drag on the United States. To be fair, Obama in a recent speech acknowledged that much of the housing crisis was the product of “banks and the government…[making] everyone feel like they had to own a home, even if they weren’t ready and didn’t have the payment.” But that chord is a decidedly minor one in a general atmosphere where there is plenty of blame to go around.
So why in the world is there a new push by President Obama to dismantle Freddie and Fannie; especially in light of the fact that they got into the real estate fiasco late in the scam and, only in a small way, facilitated the Crash of 2008 despite the idiotic rhetoric from the conservatives?
The Financial Crisis Did Not Happen Overnight
Over the past decade, we have collectively spun a story of the financial crisis. If I’m not mistaken, it goes something like this: in the 2000s, government regulation of the financial system began loosening bank regulations, and with consent, if not outright collusion, with so-called free-market ideologues within government, convinced regulators that risk was a thing of the past.
They then took advantage of easy money and lax regulation and began to push mortgages to speculators and non-creditworthy buyers, who purchased homes beyond their incomes’ capacity to pay. Those mortgages were then bundled and used as the fodder for financial derivatives, which turned bad loans into an eventual global crisis. Meanwhile, millions of people lost homes and jobs; the government spent hundreds of billions to bail out the banks, and millions of citizens were left with shattered credit, no employment, and fractured communities such as Cleveland, Las Vegas and Detroit.
Honestly, there is a great deal of truth to that tale of woe, and its basic concepts were repeated recently when the Justice Department presented its case against Bank of America over lax lending practices in 2008. But to claim that Fannie and Freddie, independent agencies backstopped by the government, were the linchpins, buying up those mortgages and providing a seemingly endless firewall, is just simply inaccurate by degree. Neither Fannie nor Freddie became intimately involved until very late in the chronology of that story.
And there is another crucial part of this story missing. President Obama alluded to it in his speech, but he buried many of the pertinent details. Neglected by the President, as well as many other renditions of the tale, is the degree to which so many buyers were convinced, if not conned, into believing that if they were not taking advantage of this once-in-a-lifetime opportunity to buy/sell homes/property, they were being foolish and missing a tremendous opportunity to increase their wealth.
That narrative wasn’t created by banks and government. The “ownership society” has been touted not just by President Bush in the 2000s, but by Presidents Clinton, Reagan, et al, and by Americans of all parties and ideologies since the founding of the republic.
The Draw of the American “Ownership” Society
There is nothing considered more “Jeffersonian” than owning your own land and home (not to mention slaves…but that is another entire subject). The United States has always attracted immigrants in part because of the availability of land and the promise of independence that owning land affords. Freed slaves after the Civil War were promised — though never actually granted — “40 acres and a mule” because having land was widely observed as a necessity to liberty and freedom.
After World War II, the Federal Housing Administration along with other New Deal creations–like Fannie Mae (the Federal National Mortgage Association) promoted widespread home ownership, with returning GIs both swarming into colleges and then into vast new housing developments in the suburbs. Freddie Mac (the Federal Home Loan Mortgage Corporation), founded in 1970, was meant to enhance that progression with even more quasi-government involvement in the mortgage market, with the goal of reducing the risk local banks might incur in making new home loans.
These programs then combined with banks to produce the increase in home ownership, from 62 percent in the 1950s to almost 70 percent in the 2000s. The programs worked not because the compliant masses were persuaded to own homes but because the drive to have a home is deeply entrenched in American culture (and many other cultures as well). Government and banks facilitated the realization of these desires, but it is bit much to claim that they created those desires. They stoked them, and often took advantage of them, but they did not establish and create them.
Blaming unscrupulous banks and inept government will not transform our system, however satisfying it may feel. Shuttering Fannie and Freddie, as the President has suggested, will not force a shift in people’s desires, though it will make it harder for banks to prey on those desires. Ending the government guarantee of mortgages via these agencies will lead to tighter credit standards, and hence less access to credit for those less well-off. That may be for the best, but that’s hardly the role of government and it is doubtful that it wouldn’t generate backlash significant. Rather than unwinding these agencies, we should focus on those lending standards, and when they should be relaxed and when not.
What We Need Are Adequate Regulations, Like Reinstating Glass-Steagall
More importantly, we should have adequate safeguards in place to prevent fraudulent and deceptive practices. Instead, the GOP has successfully, and not without advice from the likes of Larry Summers- who should know better- dismantled every single protection afforded taxpayers enacted after the Great Depression.
Privatization of governmental responsibilities, by itself, can be problematic. If you toss in lax regulations, what you end up with is what we have now:
1. Big Pharma conducting their own tests on new medicines that ends up having disastrous side effects later.
2. A food-plant supply that has been over-treated with chemicals, pesticides, and herbicides.
3. A food-meat supply that has been fed full of antibiotics because of filthy farming conditions, injected with growth hormones so much that turkeys break their legs just from walking so that we can have big-breasted Thanksgiving meals
4. Our rivers, streams and now the life-giving aquifers beneath fracking fields are being turned into poisonous sludge.
5. The repeated failures of financial industries from the Savings & Loan collapse to Enron, WorldCom, and the Financial Collapse of 2008.
No, Mr. President, as much as I admire and respect your intentions, Larry Summers would be Alan Greenspan 2.0 as Fed chairman and shuttering Fannie and Freddie would create many more problems than it would alleviate.