I have said the demise of Lehman Brothers, Fannie Mae, Freddie Mac, and the rest was the result of central planning, apart from the greed involved when all "bubbles" occur--eventually bursting as in the dot.com "bubble" (where the overall stock market lost over half its value when the bubble burst). What do I mean by saying that "central planning resulted in this debacle, and in making it worse than it needed to be?
Well, first the idea that government "regulation" solves everything is a central planning idea that has been proven wrong time after time. The leftist solution is always more regulation, when the previous attempt at central planning by regulation fails. It usually, however, goes beyond just the predictable failure of regulatioin, because the regulations are never perfect and administered by a cumbersome, huge bureaucracy that gets worse every year. In this case, as is typical, the disaster occurred because central planning mistakes went beyond the failure of regulation to work.
This was the central planning idea: "Every American, regardless of income, credit, neighborhood, race, etc., should be able to have the American dream of owning a home." That is basically a leftist Democrat concept, but Republicans (typically, again) bought into it. The unintended consequence has been that "owning a home" has turned into a nightmare for many people, and has become HARDER for most people today. That is what happens when you impose/implement an idea by central planning. Notice that Democrats are not much talking about "predatory lending" anymore, because it is obvious that the problem is hardly "predatory lending" when the lenders themselves are going bankrupt. The dirty little secret is that most of what the Democrats in Congress have done to "save" homeowners has had more the effect of bailing out lenders than really helping homeowners that much (probably hurting the entire class of "homeowners" in the end, as usual). But it has become crystal clear to all that the problem goes way beyond "taking advantage of" borrowers.
It started in the leftist Carter years, and before, with the Community Development Act of 1974 (Carter became President in 1976, but this was one of those good intentioned leftist ideas that quickly expanded into a central planning nightmare). Remember "redlining", and the idea thatlenders were not treating minority credit applicants "fairly" because they were unlikely to have the same credit "scores" as others? Lenders were basically FORCED to make "subprime" loans. They found they LIKED it. As usual, people found that they could MAKE MONEY off of government programs. That is why it is a MYTH that Wall Street likes Republicans. Modern Wall Street likes Democrats better. They are more willing to throw money around that Wall Street expects to get a major piece of. It is no accident that Bloomberg is basically a leftist Democrat, or that the people of Lehman Brothers contributed almost three times as much money to Barack "World" Obama as they did to John McCain.
In the meantime, Fannie Mae and Freddie Mac came into existence, and began to expand beyond all bounds. The concept was strange to begin with: "quasi-governmental" organizations that were off the Federal books, but that the Federal Government basically stood behind (and, and had to bail out in the end. They were created to implement that central planning idea that the central government could help every American own a home. Fannie Mae and Freddie Mac would be off the Federal budget, but were created to proide the equivalent of a Federal financing of mortgages. In other words, a private lender would issue a mortgage. But that mortgage would be SOLD to Fannie Mae or Freddie Mac, which would really be financing the mortgage. This gave the lender the same money back again to make another loan. Remember, lenders could not be too picky on these loans The idea was to let everybody have a chance to tuy a house. Meanwhile, private lenders picked up the idea to create the entire "subprime" market (greed raising its ungly head, as ousing took off in a BOOM with everybody making money).
Segue to the Clinton Administration. Clinton crony Frankliin Raines was appointed to head Fannie Mae. As I said, Wall Street and leftists are closer these days than Wall Street and Republicans. Franklin Rains and his counterpart at Freddie Mac began to expand the entities beyond all bounds. Raines (first black man to be CEO of a Fortune 500 company) got maybe a 100 million dollars in bonuses from Fannie Mae by inflating its earnings. This excerpt from Wikipedia should give you the lflavor:
"The son of a Seattle janitor [1], Raines graduated from Harvard University, Harvard Law School; and Magdalen College, Oxford University as a Rhodes Scholar. He served in the Carter Administration as associate director for economics and government in the Office of Management and Budget and assistant director of the White House Domestic Policy Staff from 1977 to 1979. Then he joined Lazard Freres and Co., where he worked for 11 years and became a general partner. In 1991 he became Fannie's Mae's Vice Chairman, a post he left in 1996 in order to join the Clinton Administration as the Director of the U.S. Office of Management and Budget, where he served until 1998. In 1999, he returned to Fannie Mae as CEO, "the first black man to head a Fortune 500 company."
Do
On December 21, 2004 Raines accepted what he called "early retirement" [2] from his position as CEO while U.S. Securities and Exchange Commission investigators continued to investigate alleged accounting irregularities. He is accused by The Office of Federal Housing Enterprise Oversight (OFHEO), the regulating body of Fannie Mae, of abetting widespread accounting errors, which included the shifting of losses so senior executives, such as himself, could earn large bonuses [3].
Do you understand why Democrats LIKED Fannie Mae and Freddie Mac? They ware acting like the Federal Goverrnment--inefficient and fudging the numbers--but you could make MAJOR MONEY there. Obama has people with Fannie Mae adnd Freddie Mac connections as economic advisors.
Thus, Fannie Mae and Freddie Mac expanded beyond all bounds. Attempts at "reform" ran up against Democrats like Barney Frank, who defended Fannie Mae and Freddie Mac against all remofr attempts. Indeed, the collapse of the housing boom, and the mortgage market, dates from when the Democrats took over Congress--the collapse not occurring until 2007, after Democrats had been "in power" a year. The Democratic Cngress did nothing to reign in the excesses in the mortgage market, since everyone was HAPPPY that housing was doing so well. Now it is true that Democrats could probably have done little by the time the new Congress took over after the 2006 elections. But they had done little, as individuals, before that. No one wanted to stop the housing boom. Greed was rampant--in and out of government. But the housing housing bubble was bound to burst. It did, and the centralized concentration of mortgage financing, along with new financial instruments, made the result worse than the many previous busts in housing (a CYCLICAL industry). How was the government going to reign in private lenders, when Fannie Mae and Freddie Mac were so out of control, with support of politicians like Barney Frank? It wasn't going to happen. Everyone had fancy computer "models" that said this time was DIFFERENT. It wasn't, and the central planning expansion of the housing market made the bursting of the bubble much worse than the normal housing cylcle downturn.
Yes, it was all about greed and power, as it always is. However it was about GOVERNMENT greed and power, as well as about private greed and power. As always with central planning, the government did its best to make sure that the eventual day of reckoning was disastrous.
Obama's solution: more central planning, and more putting all of your eggs int the Federal regulatory basket. McCaiun's solution: Not much different, although probably a little less emphasis on Federal Government expansion. McCain keeps saying he will do something about CEO compensation. Does that mean the Federal Government should step in when Alex Rodriguez has a bad year? The government has no business setting compensation, although it may be able to do some things to make it easier for shareholders to challenge compensation. Did I ever tell you I actually like McCain politically? I know I did not. The best you can say about him is that he is better than Obama, and perhaps not that for conservatives. HOwever, I affirmatively like Sarah Palin. I digress (sort of).
Central planning did fail here, from the beginning to the end. It failed both in the structure it set up and in the regulation. It took a central planning "idea" of home ownership and virtually destroyed home ownership for many. This is always the result you get from central planning.
It will happen again. The Republican Party has pretty much abandoned its principled stand against central planing, and the Democrats are MUCH worse.
No comments:
Post a Comment