Anna Blackshaw’s interview with economist Dean Baker [“Busted,” February 2010] offered a typically leftist perspective that greedy lenders, market deregulation, and hapless consumers were to blame for the housing bubble and subsequent economic crisis.
I’d like to know which former regulations Baker thinks should still be in play. Is it the prohibition that prevented banks from operating across state lines, which was repealed in 1994? Nationwide banks have been a huge boon to consumers and are far better able to balance risks, which has helped keep the situation from spinning even more out of control. Maybe Baker is referring to the 1999 Gramm-Leach-Bliley Act, which repealed part of the Glass-Steagall Act that prevented banks from engaging in securities business? President Bill Clinton, who signed the repeal into law, recently said, “I don’t see that signing that bill had anything to do with the current crisis.” Or was it credit-default swaps, deregulated in 2000? Many policymakers, former Clinton Treasury Secretary Robert Rubin among them, argued that regulating them would have done more harm than good.
What’s most astounding is Baker’s failure to mention Fannie Mae and Freddie Mac, arguably the biggest contributing factors to the meltdown. These two government-sponsored entities were riddled with accounting and corruption scandals and were gobbling up subprime mortgages at an alarming rate, bringing bonuses to their executives and huge risks to the taxpayers, who were backing those loans. Adding to this was the Community Reinvestment Act, which strong-armed banks into making loans to anyone regardless of credit history, all in the name of social justice. Attempts to address this were rebuffed by Democrats in Congress, our current president included, with Representative Barney Frank saying, “I want to roll the dice a little bit more in this situation towards subsidized housing.”
This blatant social engineering completely distorted the housing market. Yet our lawmakers have decided to extend even further the amount of debt Fannie and Freddie are allowed to incur, while calling for still more low-income housing loans. We are doomed to repeat the past.
Tricia Butler
La Jolla, California
Dean Baker responds:
I didn’t actually blame the housing bubble on deregulation, although I believe that what allowed the bubble to grow to such dangerous levels was the unbelievably inept economic management of the Fed and the Bush administration.
I don’t object to interstate banking, although I do have problems with the “too-big-to-fail” banks that were created. Repealing Glass-Steagall was not responsible for the crisis, but taxpayers are now guaranteeing hundreds of billions of dollars in risky trades by Goldman Sachs and Morgan Stanley as a result of this repeal. And the proliferation of unregulated credit-default swaps worth hundreds of trillions of dollars in face value absolutely was a problem and cost taxpayers dearly with the collapse of AIG. I am not sure why anyone is supposed to be impressed that Clinton and Rubin, the engineers of these acts of deregulation, still support them.
Fannie Mae and Freddie Mac did behave badly in the bubble years (they bought mortgages of homes purchased at inflated prices), but the private banks were the real culprits. Fannie and Freddie did not securitize the subprime junk that later collapsed in value. This was done by Goldman Sachs, Merrill Lynch, and the highly paid Wall Street crew. Fannie and Freddie subsequently bought into this sector, not because of the Democrats in Congress (who were in the minority at the time) but because they were losing market share at a frightening pace.
The real story here is pretty clear. The Wall Street brokers were stuffing their pockets until the music stopped and everything collapsed. Trying to blame poor people and those who wanted to help them doesn’t pass the laugh test.