The Blame Game, Redux

As the nation’s housing and financial crises continue to wind their way into the nation’s collective consciousness, the nation’s news dailies are taking their own swings at the blame game. And make no mistake about it: there is plenty to go around. The New York Times is the latest to play a game of “pin the tail on the donkey,” with a look this past weekend at how the Bush administration made a historic push towards home ownership that has since backfired in a big way. It suggests that Bush officials did not want to stand in front the tracks of a fast-moving train of the nation’s real estate economy, with former chief economics adviser Lawrence Lindsey telling the Times that “no one wanted to stop that bubble,” because “it would have conflicted with the president’s own policies.” The Times story, however, misses an opportunity to cast a more appropriate and wider net of blame here; Alan Greenspan isn’t mentioned in the story at all, and the man himself has admitted to Congress that he made mistakes in housing policy during his tenure at the Federal Reserve. And the Times also suggests that Fannie Mae (FNM) and Freddie Mac (FRE) were central to the genesis of the current crisis, a troubling example of revisionist history. Bush shares blame The above points shouldn’t detract from the role the Bush administration played in creating this mess. A June 27 editorial here at HousingWire took a look at the role of recent government in pushing housing over the brink. It wasn’t that long ago, after all, that nearly everyone was swept up in “the Ownership Society” — with the White House issuing press release after press release challenging lenders to loosen their credit standards and make riskier loans to minorities in the name of “expanding homeownership.” Consumer groups often even partnered with lenders to make riskier loans to the very minority groups they’re now indignantly suing lenders for lending to. Legislatively, President Bush went so far as to propose eliminating down payment requirements altogether. In a September 2004 press statement, administration officials touted a so-called “Zero-Downpayment Initiative” that would eliminate the statutory requirement of a minimum three percent down payment for FHA-insured single-family mortgages for first-time home buyers. But while it’s true the Bush administration is the latest to toss housing policy around, it’s equally true that this administration is also on the losing end of a long-standing game of musical chairs in this country; that is, it was unlucky enough to be left standing when the music finally stopped for housing. Clinton policies, rethought Before readers begin decrying the Times’ coverage, it’s worth noting a less-highlighted story from the same paper that ran last week, that looked at a Clinton policy that in all likelihood helped to fuel the current mess: a move in 1997 to remove the capital gains tax from a majority of real estate transactions. “[M]any economists say that the law had a noticeable impact, allowing home sales to become tax-free windfalls,” the story reads. “A recent study of the provision by an economist at the Federal Reserve suggests that the number of homes sold was almost 17 percent higher over the last decade than it would have been without the law.” Such a change likely helped many Americans begin to see their homes as investments, not just places to live. The Times isn’t alone in nodding to policies put into place by Democrats. Vernon L. Smith, a Nobel laureate and economics professor at George Mason University, recently published an op-ed with the Wall Street Journal lambasting the tax policy shift as “fueling the mother of all housing bubbles.” Of course, Nobel laureate or not, Smith has his own ideology to push — and, like many, he chooses focus most of it on the efforts of the Democratic Clinton regime’s role in pumping up housing, while ignoring similar efforts made by a Republican Bush administration. That he does so with such fervor underscores the highly political environment that has always enveloped housing policy in this country. A political animal Housing holds a very special place in the American psyche; and because of that, it’s remained front-and-center for any politician that has looked to gain office. The promise of “expanding American homeownership” has been part-and-parcel of nearly every Presidential platform since Jimmy Carter, and likely even well before that (although I personally have not found time to study housing policy in-depth further back than Carter’s administration, as of yet). I suspect that housing’s central role to our culture has its roots back in the founding of our very country, when our system of property rights helped set the Yankees apart from the monarchies we’d left behind; property ownership has helped propel a middle class in America, depending on which historians you choose to read. Our model of private ownership of property has been foundational to our country — and therefore, it should come as little surprise to find that property rights are equally foundational to politics in our country. What this means is that the political history of housing goes back far enough in this country to span both major political parties many times over. And that means that any one political party can amply choose to focus their blame on their rivals, while ignoring their own role in this mess; we’ve seen plenty of evidence of this in recent weeks, especially in the finger-pointing taking place over Fannie and Freddie. It should be gospel, at this point, that the GSEs emphatically did not lead the charge into subprime and Alt-A mortgage credit; both Fannie and Freddie followed the private-party market, after watching their market share erode. But, as my colleague Darrell Delamaide writes in the current cover story for HousingWire Magazine (subscribe here), the two GSEs have been instrumental in pushing government policies designed to foster homeownership and affordable housing — a role that gives politicians on both sides of the aisle a stake in their activities. More from Delamaide: “In the finger-pointing that followed the government takeover, Republicans were quick to charge that Democrats had resisted efforts to rein in Fannie and Freddie. The Wall Street Journal editorially labeled [House Financial Services Committee chairman Barney] Frank as “Fannie Mae’s Patron Saint” for his efforts to block any restrictions on the GSEs, a charge that the Massachusetts Democrat has forcefully rejected. “Frank and the Democrats noted that Republicans controlled both Congress and the White House for six of the past eight years. Former Ohio Congressman Michael Oxley had ample opportunity, as Frank’s predecessor at the head of the House committee, to steer through legislation to reform and regulate the GSEs. Oxley, for his part, says it was the Bush White House that thwarted his 2005 GSE reform bill with a ‘one-finger salute.'” All the above should illustrate how complex the GSEs were — and remain — politically, with a history that spans both parties, no matter how hard one side of the aisle attempts to paint the other with a given brush. But the fact that we’re now debating who pushed for what with Fannie and Freddie misses the larger point that neither GSE was responsible for pushing us into the financial mess we now face. It’s troubling, to say the very least, to see both political parties arguing about the role of the GSEs in the credit crisis, because such a discussion detracts from the more prominent reasons we ended up here. In fact, had the GSEs been reformed, eliminated, or put into conservatorship back in 2005, it would have done little to stunt a push by independent investment banks on Wall Street into subprime and Alt-A mortgages. The GSEs had little to nothing to do with the emergence of the private-party RMBS market; and in fact, proof of that can be seen in the fact that the private-party market is now gone, and the agency MBS market continues ever onward. What sins did the GSEs commit, then? If anything, they used their funding advantages to begin purchasing Alt-A mortgages and securities well after the market had taken off without them, in an effort to regain lost market share; and they did so on a highly-leveraged basis, relying on their favored status. Hardly the foundational sort of blame that some are now trying to pin on both firms. But when you’re half of the mortgage market, I suppose everything ends up being your fault. It’s clear that housing remains highly politicized to this day, with enough blame to go around to everyone involved in both the public and private sectors; after all, we didn’t get into a historic mess overnight, or because of any one bad decision or company. It took a collection of actions, and a multitude of players, to create a mess of this magnitude; the sooner we all recognize this truth, perhaps the sooner we can begin to address real solutions that will make a difference and help prevent us from ending up here again. With the federal government now poised to play its biggest role in mortgage banking since the Depression-era, such level-headed realism seems to be in precious little supply. Write to Paul Jackson at [email protected]. Disclosure: The author held no relevant investment positions when this story was published. Indirect holdings may exist via mutual fund investments. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.