2009-01-12

Is Karl Rove Lying?

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Based on a quick read through his op-ed in the WSJ it would seem that way, as he is still peddling the complete nonsense that blame for the current financial crisis rests primarily with Fannie & Freddie. Call me crazy but I find it useful to listen to experts in economics and finance to get a more complete understanding of the crisis rather than listening to all of the talking heads on cable news or former white house appointees. Here's some of "Rove's revisionism:

"Fannie Mae and Freddie Mac were among the principal culprits of the housing crisis, and Mr. Bush wanted to rein them in before things got out of hand."

"The housing meltdown is largely a story of greed and irresponsibility made possible by government privilege. If Democrats had granted the Bush administration the regulatory powers it sought, the housing crisis wouldn't be nearly as severe and the economy as a whole would be better off."
The first quote is partially wrong in that it focuses on the GSE's as a "principal culprit" while the second quote is entirely wrong in that it puts the blame on "government privilege" rather than Wall-Street recklessness (as well as the Fed, the SEC, and yes even the GSE's role). Thankfully there are economists who have been predicting a crisis for some time now who have weighted in on this debate. Barry Ritholtz offers the following myth busting:

1. “Fannie Mae and Freddie Mac were among the principal culprits of the housing crisis” Wrong. Fannie and Freddie were cogs in the giant mortgage machine, but they had nothing to do with the abdication of lending standards from 2002-07. That was a function of the Lend-to-Securitize business model of the sub-prime mortgage originators. THAT was the primary cause of the housing boom and bust, along with Ultra-low rates and a lack of Fed regulation of these sub-prime lenders.

2. “Fannie and Freddie were too large and overleveraged” True. This had been pointed out by many people, before Bush and afterwards, that Fannie was a problem. Chief amongst the Fannie critics was Fed Governor William Poole. He deserves credit for his many early warnings about Fannie Mae and the GSEs. He was ignored by Alan Greenspan. Also ignored was Fed Governor Edward Gramlich, whose early warnings about subprime and predatory lending and were both timely and prescient.

3. Democrats controlled the Congressional Debate on GSEs: Rove somehow fails to note the GOP controlled Congress from 1994-2006, including the first 6 years of the Bush Presidency. If the President wanted to rein in the GSEs, he needed only make it a major priority, and not a footnote in the 2001 budget.

4. “largely unreported story is that to fend off regulation, the GSEs engaged in a lobbying frenzy.” WTF? This has been widely reported in the media for sometime now.

5. GSEs bought $ trillion of subprime debt and “liar loans,” almost all bought between 2005 and 2007. This bulk-up in risky paper made it possible for banks to lend imprudently on a massive scale. Facts are correct, conclusion is wrong. By 2005, the die was set. The GSEs were very late to the party, buying sub-prime at the top of the market. The peak of homes sales (units) were August 2005, and the peak in prices were in 2006, just a few months later. From there, it was all downhill. By the time the GSE’s were buying sub-prime debt, it was all over but the crying.

6. OMISSION: Bush thwarted attempts to make lenders behave responsibly: Gee, somehow Mr. Rove forgot this one. Bank regulators had proposed new guidelines for writing risky loans. These were internal administrative rules; had they been enacted, the worst of the housing and credit crisis might have been avoided. The Bush administration backed away from proposed crackdowns on the subprime, no-money down, interest-only mortgages that were critical contributors to the credit and housing crisis. According to the Associated Press, pressure from banks (many of whom have since failed) was the reason.


It is easy to put the GSE's at the forefront of this mess because they were the first to get bailed out and they seem to be nothing more than an enabler of the whole sub-prime debacle. They therefore, as this line of reasoning concludes, were destined to fail. I don't want to get into the good and the bad of the GSEs, but my one hope is that we all walk away from this with the knowledge that the simple or easy answer is almost never entirely accurate. To sum that up I've attached a picture of how the mortgage market was/is structured to help explain things:




(Did that help?)

In Conslusion
The 2005 legislation that Republicans love to discuss had very little to do with a possible housing bubble, and had everything to do with the accounting scandals that were making all the headlines (I know this because I've been working on this issue for the past few years to some degree). Though to be sure the Democrats are just as wrong in their arguments that Bush is primarily to blame because of his desire to increase homeownership.

Additionally to blame the GSE's requires conveniently forgetting that fact that originators would lock candidates into variable mortgages that would reset after 2 years. This is important to note, because the GSE's would buy the paper at that point as long as the mortgage holder had not defaulted during that time. Once they window had passed, the originator would take the mortgage off their books and pass the risk along to the GSE's just at the moment when the rate would reset (i.e. increase substantially).

You can debate the importance of each player until your blue in the face, but to rest the blame for the current financial crisis at the feet of the GSE's is to place ideology above reality.

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