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