The Crisis and The Narrative: Who is to Blame for the Financial Collapse?

Recently, on a beautiful Saturday afternoon, I sat outside a tobacconist's in Saint Paul, smoking a really great cigar with my brother-in-law. (Okay, he's not my brother-in-law yet, but we all like him, so we're keeping our fingers crossed.)

We began discussing the state of the world, as one will do over a cigar, and, of course, the current financial crisis quickly became the focus of conversation. As I listened, I realized that my friend was making an argument that sounded familiar.

The current financial crisis, the argument goes, stems from pressure by the Government to extend loans to the disadvantaged through Freddie Mac and Franny Mae- even though these poor people were bad credit risks.

The argument was politely made and plausible. But it sounded familiar, and so I asked my friend to email the the article he was referencing. He sent me a well written piece from a columnist for the Boston Globe.

The more I read, the more I realized that I WAS listening to a line of thought I'd heard before- not so nicely expressed...from some of my right-wingnut email buddies. By the time the right-wing email machine gets done with it, however, it sounds a lot less pretty.

The way THEY put it, the argument goes like this: (My Friends,)Those Damn Democrats FORCED the financial industry to abandon their usual caution, prudence and good sense by TWISTING THEIR ARMS and making them loan money to MINORITIES who didn't have a pot to piss in and couldn't pay back a loan if their lives depended on it. (My Friends)- this started under BILL CLINTON (gasp!) And, (My Friends), although the Bush White House protested that it was time to reign this in, those DAMN DEMOCRATS kept ARM twisting and forcing the money into the hands of these bad risks. And the leader, of course, of all of this was...(gasp) BARNEY FRANK! (My Friends, did you know that Frank is....GAY?!...and that he's from (gasp) MASSACHUSETTS?)

Fortunately, if we just elect John McCain and his "Mavericky" side-kick Sarah Palin (just a couple of Mavericky ole Mavricks Mavrickin' along, doncha know?)- they will get this Government Interference off our backs so we can go back to some semblance of honesty and integrity.

Okay, without even marshaling further evidence- this argument just DOESN'T wash with me. Here's why:

Congress (bad Ole Congress) was controlled by man-eating Republicans from 1995 until 2007. During most of his Presidency, George W. Bush (a Republican) worked alongside a Congress of Republicans with a Federal Reserve Board chaired by Allan Greenspan- a life-long Republican who was first appointed by Ronald Reagan...a, you guessed it, Republican. I'm sorry, but you twist it as hard as you want...you just can't blame the Liberal Democrats and our coddled Minorities for this one...WE WERE NOT THERE- we'd been voted out of office and were sitting on the sidelines- we are cleared by circumstantial evidence.

The other thing that causes me to doubt this line of argument is that we've seen this before. Following 8 years of Reagan, the American people watched in horror as the Savings and Loan industry collapsed...taking the stock market and some $160 billion tax dollars in bailouts with it. It took the economy about five years to recover. The Savings and Loan Collapse happened under a Chief Executive (Ronald Reagan) who believed that "government was the problem"- and that to regulate the market was to strangle the market...left without police, the system collapsed into a free-for-all of greed that wreaked financial harm on many innocent Americans. The difference between then and now, is that this time the price tag is going to be several BILLIONS of Dollars higher.

And so, while Democrats are cleared by circumstantial evidence (we were either outnumbered or we weren't in power at all during the time in question)- we can call the Republicans to account based on past history...the current crisis fits their previously known M.O.

So, in replying to my Right-Wingnut friends, I found a great article written by a columnist in Business Week. It's titled, pretty plainly: Frannie Mae and Freddie Mac were Victims, Not Culprits. And I recommend it to my "brother in law" and anyone else who has questions about the Republican Spin.

Here's a quote:

Start with the most basic fact of all: virtually none of the $1.5 trillion of cratering subprime mortgages were backed by Fannie or Freddie. That’s right — most subprime mortgages did not meet Fannie or Freddie’s strict lending standards. All those no money down, no interest for a year, low teaser rate loans? All the loans made without checking a borrower’s income or employment history? All made in the private sector, without any support from Fannie and Freddie.

The author goes on to summerize the findings of a study (released back in March, before the hoopla started)by the Federal Reserve Bank of New York. He writes:

The study identifies five causes of the subprime meltdown:
-Convoluted loan products that consumers didn’t understand.
-Credit ratings that didn’t do a good job highlighting the risks contained in subprime-backed securities.
-Lack of incentives for institutional investors to do their own research (they just relied on the credit ratings).
-Predatory lending and borrowing (which I think means fraud perpetrated by borrowers).
-Significant errors in the models used by credit rating agencies to assess subprime-backed securities.

You’ll note in the Fed’s five causes that there’s some culpability for lenders, borrowers, investors and credit raters. There’s no blame for Freddie Mac or Fannie Mae which had little or nothing to do with the entire situation.

In the end, my feeling is this: Whenever you hear a Republican start complaining about Barney Frank, Bill Clinon, or Massachusetts- you'd better pull out your boots and put 'em on...because whatever line they start spewing next isn't going to be the truth, is going to be deep, and won't smell very pretty at all.

While Worth Watching, Obama Film missed a chance to Teach and Resorts to Gotcha Tactics.

"Those who do not learn from History are doomed to repeat it."



All week we've been subjected to sound bites of Tina Fey (oops, I mean, Sarah Palin) yammering about how "The Noow Yoork Tiiimes sayz dat Barak Obama Palled around with Terrorists a heck of a lot don't ya know" And the "Liberal Media" continues to play the sound bite despite the fact that the NYTimes article concludes that the connection between the two is not close...and that the terrorist in question has since become an activist for education AND that Barack Obama was all of 8 years old when Bill Ayers was active.

So, I can understand WHY the Obama Campaign felt obliged to make and release it's short documentary: "Keating Economics". Still, after watching it, I found myself wishing that the campaign could have aimed a little higher.

Don't get me wrong. As the financial industry collapses around our ears, and We the People are tapped to pay the bill, the ghosts of the SAVINGS AND LOAN crisis are hovering right above our shoulders. So it's great to have a reminder.

(Wikipedia has a nice refresher course in the S&L Crisis, just in case you forgot the 160 BILLION Dollars you paid back in the late 1980s. It basically boils down to a bunch of Greedy Financial Types, doing fraudulent back flips under a "Free Market" President who sent all the Federal Regulators Home for the Long Weekend. This was back in the 1980s- and here we are again- hence my resort above the overused Santayna quote.)

But "Keating Economics" does a little more than "remind" us. The movie, which feels a lot like a cross between a Frontline piece and something from Fox News, opens with John McCain being hauled before the Senate Ethics committee. In flashbacks, we learn that McCain had close personal ties to Charles Keating, one of the most infamous of the S&L bandits. We learn that McCain and several other Senators used undue influence behind closed doors to offer improper advantage to Keating.

We watch as Keating is trapped and cornered....and the documentary leads you to the emotional conclusion that we will be watching John McCain doing the Perp Walk, too.

But McCain never did the perp walk. The truth is that he was found largely innocent of wrong doing...and he went on to continue a fairly distinguished career in the U.S. Senate.

At this point the movie swerves away from it's "criminal" narrative and makes some really valid points about what happens when Government agrees to protect investors without regulating their activities...in the end, THIS is the most valid part of the film, the part the makes it worth sitting through.

I wish that the Obama campaign had used the same tricks of the trade (tight editing, good story structure, etc.) to make an easy to understand movie about why a Free Market works best with a bit of government oversight to protect the Taxpayers and the Public, rather than indulging the in the temptation to race Sarah Palin and her ilk to the bottom.

My fear is that the American people, realizing that the case against McCain is overstated for dramatic effect, will ignore the parts of the S&L story which are truly important. Our present crisis proves that we've ignored these historical lessons once to our cost (Savings and Loan, 1980s: $160b...government bailout, 2008: $700 -so far!)- let's start electing some public officers who won't continue to compound the mistake.

As it is, this campaign could feature a real debate (Ronald Reagan, George Bush and Milton Friedman vs. FDR and John Maynard Keynes)- instead it's turning into a bickering match:

"You sat too close to Bill Ayers at the board meeting!"
"Oh, yeah? Well, YOU sat too close to Charles Keating!"

Of course, that having been said- it IS true that THEY started it.