Paul Krugan writes about the housing crisis in his NY Times Op-Ed titled, “Wall Street Whitewash”:
It’s not as if the story of the crisis is particularly obscure… It’s a straightforward story, but a story that the Republican members of the commission don’t want told. Literally.
Last week, reports Shahien Nasiripour of The Huffington Post, all four Republicans on the commission voted to exclude the following terms from the report: “deregulation,” “shadow banking,” “interconnection,” and, yes, “Wall Street.”
Reading this gets me frustrated on two fronts. First, that we’re in this economic mess in the first place. Second, the misdirection the GOP is trying to create – but this is just as bad as the misdirection that Krugman and the Democrats are trying to create as well. I don’t agree with the Republicans trying to go so far as they are to paint Wall Street in a good light, but Krugman or anybody trying to tell me that the Democrats are truly against the “fat cats” is _____ing down my back and trying to tell me its raining.
I was going to just comment on the “Linking GOP with Wall Street” thing, but Krugman’s points can’t go uncontested. (Brace yourselves, this is a long one.) Krugman’s points:
“First, there was a widely spread housing bubble, not just in the United States, but in Ireland, Spain, and other countries as well. …The housing bubble was international — and Fannie and Freddie weren’t guaranteeing mortgages in Latvia.” True. They were, however, following the U.S.’s lead. Canada didn’t, and look at them.
“Nor were they guaranteeing loans in commercial real estate, which also experienced a huge bubble.” No, but easy money helped cause this bubble as well, and who exactly caused that, the private sector? No, government did. As individual disposable incomes drop, stores close, vacancies go up and rents go down. When that happens, the value of commercial property goes down, too. On the other side, small business credit to secure commercial real estate or refinance becomes harder to get (often times secured with the owners personal assets), and here we go again.
“This bubble was inflated by irresponsible lending, made possible both by bank deregulation and the failure to extend regulation to “shadow banks,” which weren’t covered by traditional regulation but nonetheless engaged in banking activities and created bank-type risks.” Yes, the bubble was INFLATED because of this, and Wall Street definitely deserves their full share of blame. However, Krugman ignores again one of the bubble’s main CAUSES which occurred before the irresponsible lending – the easy access to credit – which was what made the irresponsible lending possible.
“…the timing shows that private players weren’t suckered into a government-created bubble. It was the other way around. During the peak years of housing inflation, Fannie and Freddie were pushed to the sidelines; they only got into dubious lending late in the game, as they tried to regain market share.” Krugman tries to suggest that this is when the government got involved. How convenient for him.
In my opinion, I see the problem in three stages, each with their own assignment of blame:
Government – 100%. Fannie and Freddie stating that “nothing’s wrong”. The Bush Administration tried 17 times to reign in Fannie and Freddie (Note: I tried to quote the original White House posting, but it’s been (conveniently?) taken down. All it takes is someone with two eyes and a brain watching the YouTube clips of the Congressional hearings, or read an excellent collection of the whitewashing here to see that the public was totally being snowed over.
“Community Organizers” – 100%. Using their political pressure and threatening to publicly call banks “racist” if they didn’t give more unqualified lenders homes was sickening (and yes, it did happen).
I would normally assign some blame to the general public here, but then again they could have gotten out of the market while the market was high. I realize this is unlikely and almost irrational – who would sell their house in a rising market only to not be able to afford their new house and have to move to something smaller or less? It wasn’t wrong at the time to think your house would hold greater value than you owed.
50% Government, 50% Wall Street, 50% General Public
50% of the blame here falls on government. They were trying to put people who couldn’t afford homes into homes they couldn’t afford for nothing but political reasons, which was incredibly short-sighted on government’s behalf. The fact remains that had their ultimately not been the protection of government bailout, free market capitalism would have otherwise stopped the bad lending before it got really bad.
The second 50% falls upon Wall Street. Too much deregulation, too much shadow banking. All the things Krugman talks about are valid, yet it’s like giving candy to a kid and then blaming him for eating it because it’s unhealthy, or giving an inexperienced teenager the keys to a Ferrari and then blaming him for crashing it. The deal government handed Wall Street was too tempting, too sweet, and too much of a thrill for them to pass up. Same with the deal this gave otherwise unqualified borrowers.
The third 50% is a variable that falls upon the general public that reduces the %age of ownership that government and Wall Street takes. Many people let their greed overtake their rationality. I’m not saying everyone who got in over their head was greedy, though. You have a family that can only afford a 2 bedroom apartment, and now you can get a house for the same as your rent payment? Of course you’re going to be compelled to own instead of rent. And who actually reads what they sign? The thinking may have been, “This has to be OK, otherwise the government would be shutting it down.” Naive, but understandable. Those who were stupid and greedy take full 50%, those who weren’t take less, but to let the general public completely off the hook here is convenient naivety.
Wall Street 90%, Government 10%.
Christopher Dodd removed the accountability in TARP, and we all stood by and let him do it. Wall Street was able to socialize its losses, and privatize its profits. Wonder how that’s able to happen when you’ve got all ex AIG and “Government Sachs” guys in the White House.
Now this brings me to the point of my post. Krugman and Liberals constantly whine about how tied to Wall Street the GOP is, and with Krugman’s comments re: Republicans trying to remove the “bad language” from the bill, I think he’s right. But why does Krugman, and other Liberal Democrats continue to dodge and hide the fact that this current Democrat Administration is FULL of former Wall Street, now Government, Wall Street cronies and their buddies? OK, we know why – but it’s ridiculous.
Further proof of the extent of Wall Street and Democrat cozying is below:
“During the height of the financial crisis in late September, some of Barack Obama’s campaign advisers pushed him in a conference call to distance himself from Treasury Secretary Henry Paulson. The former Goldman Sachs Group Inc. chief executive officer, they warned, was too close to President George W. Bush and Wall Street. Obama, 47, rejected the idea. At one point, he talked to Paulson every day for two weeks.”
“Overall, Democrats garnered 57 percent of the contributions from the securities and investment industry. If that trend continued through November, it would mark the first time since 1994 that they have drawn more Wall Street cash than Republicans in a presidential election year, according to the data complied by the Center for Responsive Politics.”
“Government Sachs Strikes Gold – Again – Connect the dots: Goldman Sachs made $3.44 billion in profit this past quarter, while the U.S deficit topped $1 trillion for the first time in the nation’s history and appeared to be headed toward doubling that figure before the budget year is out. Since most of the increase in the federal deficit is due to bailing out the banks and salvaging the greater economy they helped destroy, why is the top investment bank doing so well?”
“Democratic senators had wanted to impose even stricter conditions. The Senate bill would have required bonuses already handed out to executives at TARP firms to be paid back, cap all executive compensation at TARP firms at $400,000 and ban any bonus for the top 25 employees at all TARP firms. None of this language appeared in the final legislation.”
“We can’t think of two entities more deserving of overhaul. Yet the Dodd-Frank Act doesn’t even try to reform them. This means nothing will change except the size of government’s hand in the economy. By not addressing Fannie and Freddie, economist Brian Wesbury noted “the government is taking no blame for the subprime crisis and is demanding more power over the U.S. financial system.”
One thing is crystal clear – Politicians on both sides are bedfellows of Wall Street. It’s understandable – they need their money to get elected. Krugman’s Op-Ed also makes another thing clear: that once they do get elected, it seems like Republicans continue to back them while Democrats conveniently turn on them once in power to try and score political points with the public.
Face it people – no matter who Krugman tries to cozy up to, or how polarized the debate becomes between Republicans and Democrats regarding financial reform, the fact is that we got played through this financial crisis by both sides, and we’re still being played.
There’s a lot of talk by Krugman and others about who should be held accountable, but no one actually making anyone accountable, we can only brace ourselves for more financial woes to come.