Friday, September 26, 2008

The Bailout & The Blame

In some quarters – including, I think, in several of the posts on this blog – a particular narrative about the current crisis seems to have taken hold. It goes something like this: "The current woes – which most of us really couldn’t describe, let alone explain – are the result of deregulatory policies and free-market ideology. What we are now seeing is the fruits of selfish (i.e., Republican) action and venal inattention. The blame for the bailout, and for the costs it will impose on regular people, is fairly placed on President Bush, free markets, deregulation, the Republican Congress, and (strangest of all) John McCain."

This narrative is politically useful, no doubt. But because this blog is not merely an outlet for partisan point-scoring, but is instead intended to be, in a meaningful sense, educational, it seems necessary to point out the fact that this narrative corresponds imperfectly to reality.
Fannie and Freddie, and their woes, are not the results of free-market ideology or excessive de-regulation; rather, their very existence (as GSE’s) is in tension with that ideology. They and their practices (and failures) are not the product of "conservative" legislators, but of "liberal" ones, who sought to find ways to provide housing to low-income people *precisely* by end-running market incentives and pressures. For more than a decade, it has been conservatives and Republicans – like John McCain – who have been calling for closer supervision of Fannie and Freddie’s practices; and Democrats who have resisted such calls. (The recipients of Fannie’s and Freddie’s campaign contributions are, overwhelmingly, powerful Democrats, including Sen. Obama.)

If anyone has been proved horribly wrong in this crisis, it is Rep. Barney Frank and Sen. Charles Schumer, not John McCain; if anyone has been vindicated, it is certainly not Sen. Obama (or European-style business regulations). Look again: The Democrats have ignored calls for regulation and oversight, while receiving hefty campaign contributions. They have controlled the Congress for the last two years. And yet it’s the Republicans’ fault that Fannie and Freddie are now at the heart of the credit crisis?

I share the view, of course, of Michael Sean Winters that Catholic Social Teaching does and must speak to this and similar crises. Of course there is a moral dimension to all this. The Catholic Social Tradition, however, is not merely a set of populist talking points. To say that the economic order exists in order to contribute to the authentic flourishing of the human person is not (by a long shot) to answer any particular question about how what laws and policies should be regarding sub-prime mortgages and mortgages for low-income would-be borrowers. It is quite mistaken, then, to diagnose the current crisis as involving merely the attempted exploitation by the rich capitalists of the (to quote Michael) "grandmother who had earned her retirement or a married couple trying to put money away for their child’s college education." At least as much a part of the story – if only the pro-Obama press would tell it – is the fact that deciding, in boom times, to get Fannie and Freddie in the business of making risky loans (and, in many cases, strong-arming banks to provide risky loans), is, well, risky.

Rick Garnett


Mike Appleton said...

Your comments would be well taken were it not for the fact that Fannie Mae and Freddie Mac practices had very little to do with the current mess. As a lawyer representing primarily small business owners and individuals, I have watched the crisis develop on the ground here in Florida over the last three years. From clients seeking to withdraw from real estate contracts improvidently entered into, I have heard a veritable litany of misrepresentations and deceptive tactics utilized by sales persons and mortgage loan originators. The people who profited most handsomely from the binge of the last several years have been the brokers rather than the principals. Greed will always trump reason and sophisticated players will always take the money and run, without fear of civil suits (due to the cost) or criminal prosecution (due to the reluctance of prosecutors to pursue financial crimes). More, rather than less, regulation is required given the prevailing morality in the financial marketplace. That deregulation is primarily a Republican value is understandable; Republicans generally believe that markets untrammeled by regulation promote growth and that the wealthy and powerful can be trusted to act honestly, resulting in the trickling down of economic benefit to all segments of society. Unfortunately, this creed ignores the reality of human nature. The man in the street certainly understands that what has been "trickling down" is hardly beneficial.

Rick said...

well said, and don't forget that Clinton had eight years prior to GWB to throw ringers in the system. somehow the democrats only seem to be able to see others faults and not their own. oh yes i see republican mistakes too, but not here. not in this case. and who better to benefit from this 'crisis' just weeks before the election than 'Obaby' and who received hefty contributions from Wall Street anyway? 'Obaby'! God have mercy if he is our next president?!