The left is slowly beginning to wrap their heads around the fact that it was too mush government intervention in the market, not too little, that caused the current financial crisis. In an article at Slate defending government subsidization of subprime loans, Daniel Gross writes:
Let’s be honest. Fannie and Freddie, which didn’t make subprime loans but did buy subprime loans made by others, were part of the problem. … There was a culture of stupid, reckless lending, of which Fannie Mae and Freddie Mac and the subprime lenders were an integral part. But the dumb-lending virus originated in Greenwich, Conn., midtown Manhattan, and Southern California, not Eastchester, Brownsville, and Washington, D.C. Investment banks created a demand for subprime loans because they saw it as a new asset class that they could dominate. They made subprime loans for the same reason they made other loans: They could get paid for making the loans, for turning them into securities, and for trading them—frequently using borrowed capital.
So Gross is finally willing to admit that Fannie and Freddie were part of the problem, but still wants to lay the lion’s share of the blame on Wall Street greed. As if greed was invented yesterday. As John Steele Gordon documents in today’s Wall Street Journal, our country has a long history of financial break downs, do mostly to bad government regulations enacted to combat greedy bankers. Turning to today’s crisis he writes:
In the 1990s interstate banking was finally allowed, creating nationwide banks of unprecedented size. But Congress’s attempt to force banks to make home loans to people who had limited creditworthiness, while encouraging Fannie Mae and Freddie Mac to take these dubious loans off their hands so that the banks could make still more of them, created another crisis in the banking system that is now playing out.
Even George Soros, prolific funder of left-wing causes, writes: “There are four fundamental problems with our current system of mortgage financing. First, the business model of Government Sponsored Entities (GSEs) in which profits accrue to the private sector but risks are underwritten by the public has proven unworkable. … It would be a grave mistake to preserve the GSEs in anything resembling their current form.”
So who on earth could possibly still want to preserve massive government intervention in the U.S. mortgage market by preserving Fannie and Freddie? The left’s leadership in Congress that’s who. Just last month Senate Banking Committee chair Chris Dodd (D-CT) told The Hill: “I think the burden falls on them to describe what they’re going to put in [Fannie and Freddie's] place. And if their argument is we don’t need anything in its place, then you just dealt a very severe blow to the residential mortgage market and homeownership in this country.”
That is why the debate over whether or not Fannie or Freddie caused this crisis is so important. The left’s leaders on Capitol Hill still see nothing wrong with maintaining a constant political influence over the residential real estate market through the continued existence of Fannie Mae and Freddie Mac. Defenses of the status quo like Gross’ only make real reform harder.