No shill for the McCain-Palin campaign, the WaPo’s Sebastian Mallaby shows how the Obama campaign’s deregulation narrative is either stupid or mendacious.
In so doing, he cites two papers written by Columbia University economist Charles Calormis. I’ve read the second one, not (yet) the first (which is 113 pp. long). Suffice it to say that the deregulation of the financial services industry by Republicans in the last eight years is obviously not the problem. On the other hand, a major contributor is Fannie Mae’s and Freddie Mac’s management of "political risk," which involved enormous lobbying expenditures and the adoption of a new mission--the aggressive promotion of affordable housing--that ensured Democratic opposition to Congressional efforts to rein these GSE’s in.
Here are two snippets from the second paper:
In June 2003, in the wake of the failures of Enron and WorldCom, Freddie’s board of directors suddenly dismissed its three top officers and announced that the company’s accountants had found serious problems in Freddie’s financial reports. In 2004, after a forensic audit by OFHEO, even more serious accounting manipulation was found at Fannie, and Raines, its chairman, and Timothy Howard, its chief financial officer, were compelled to resign.
It is eloquent testimony to the power of Fannie and Freddie in Congress that even after these extraordinary events there was no significant effort to improve or enhance the powers of their regulator. The House Financial Services Committee developed a bill that was so badly weakened by GSE lobbying that the Bush administration refused to support it. The Senate Banking Committee, then under Republican control, adopted much stronger legislation in 2005, but unanimous Democratic opposition to the bill in the committee doomed it when it reached the floor. Without any significant Democratic support, debate could not be ended in the Senate, and the bill was never brought up for a vote. This was a crucial missed opportunity. The bill prohibited the GSEs from holding portfolios of mortgages and mortgage-backed securities (MBS); that measure alone would have prevented the disastrous investment activities of the GSEs in the years that followed. GSE immunity to accounting scandal is especially remarkable when it is recalled that after accounting fraud was found at Enron (and later at WorldCom), Congress adopted the punitive Sarbanes-Oxley Act, which imposed substantial costs on every public company in the United States. The GSEs’ investment in controlling their political risk--at least among the Democrats--was apparently money well spent.
The events in 2003 and 2004 had undermined the legitimacy of the GSEs. They could no longer claim to be competently--or even honestly--managed. An important and respected figure, Alan Greenspan, was raising questions about whether they might be creating excessive risk for taxpayers and systemic risk for the economy as a whole. Greenspan had suggested that their most profitable activity--holding portfolios of mortgages and MBS--was the activity that created the greatest risk, and three Federal Reserve economists had concluded that the GSEs’ activities did not actually reduce mortgage interest rates. It was easy to see at this point that their political risk was rising quickly. The case for continuing their privileged status had been severely weakened. The only element of their activities that had not come under criticism was their affordable housing mission, and it appears that the GSEs determined at this point to play that card as a way of shoring up their political support in Congress.
From the perspective of their 2008 collapse, this may seem to have been unwise, but in the context of the time, it was a shrewd decision. It provided the GSEs with the potential for continuing their growth and delivered enormous short-term profits. Those profits were transferred to stockholders in huge dividend payments over the past three years (Fannie and Freddie paid a combined $4.1 billion in dividends last year alone) and to managers in lucrative salaries and bonuses. Indeed, if it had not been for the Democrats’ desire to adopt a housing relief bill before leaving for the 2008 August recess, no new regulatory regime for the GSEs would have been adopted at all. Only the Senate Republicans’ position--that there would be no housing bill without GSE reform--overcame the opposition of Senators Christopher Dodd (D-Conn.), the banking committee chairman, and Schumer.
The GSEs’ confidence in the affordable housing idea was bolstered by what appears to be a tacit understanding. Occasionally, this understanding found direct expression. For example, in his opening statement at a hearing in 2003, Representative Barney Frank (D-Mass.), now the chairman of the House Financial Services Committee, referred to an "arrangement" between Congress and the GSEs that tracks rather explicitly what actually happened: "Fannie and Freddie have played a very useful role in helping to make housing more affordable, both in general through leveraging the mortgage market, and in particular, they have a mission that this Congress has given them in return for some of the arrangements which are of some benefit to them to focus on affordable housing." So here the arrangement is laid out: if the GSEs focus on affordable housing, their position is secure.
I suppose I can hope that a President Obama won’t do the what he’s promising, that he is simply saying what it takes to get elected. But I suspect that much of what he says (both awful and not-so-bad) falls into that category, which is to say, we’re not getting much guidance for what he’s going to do from what he says he’ll do. Reminds me of another eloquent and "empathetic" Democratic politician.