Who will write the history of the U.S. Financial Crisis? Contrary to those on the left declaring "the death of market fundamentalism," so far it's the right wing. Here is a roundup of some of the most popular articles on the root of the crisis:
"How the Democrats Created the Financial Crisis," Kevin Hassett, Bloomberg, Sept 22:
The economic history books will describe this episode in simple and understandable terms: Fannie Mae and Freddie Mac exploded, and many bystanders were injured in the blast, some fatally... Take away Fannie and Freddie, or regulate them more wisely, and it's hard to imagine how these highly liquid markets would ever have emerged. This whole mess would never have happened...
Back in 2005, Fannie and Freddie were, after years of dominating Washington, on the ropes. They were enmeshed in accounting scandals that led to turnover at the top. At one telling moment in late 2004, captured in an article by my American Enterprise Institute colleague Peter Wallison, the Securities and Exchange Comiission's chief accountant told disgraced Fannie Mae chief Franklin Raines that Fannie's position on the relevant accounting issue was not even ``on the page'' of allowable interpretations.
Then legislative momentum emerged for an attempt to create a ``world-class regulator'' that would oversee the pair more like banks, imposing strict requirements on their ability to take excessive risks. Politicians who previously had associated themselves proudly with the two accounting miscreants were less eager to be associated with them. The time was ripe...
What happened next was extraordinary. For the first time in history, a serious Fannie and Freddie reform bill was passed by the Senate Banking Committee. The bill gave a regulator power to crack down, and would have required the companies to eliminate their investments in risky assets.
If that bill had become law, then the world today would be different. In 2005, 2006 and 2007, a blizzard of terrible mortgage paper fluttered out of the Fannie and Freddie clouds, burying many of our oldest and most venerable institutions. Without their checkbooks keeping the market liquid and buying up excess supply, the market would likely have not existed.
But the bill didn't become law, for a simple reason: Democrats opposed it on a party-line vote in the committee, signaling that this would be a partisan issue. Republicans, tied in knots by the tight Democratic opposition, couldn't even get the Senate to vote on the matter.
"Lies or Ignorance?" by Richard Rahn, Washington Times, October 1st:
If government agencies pressure banks to give loans to people who are poor credit risks, do you view this as a failure of capitalism or a failure of government? A number of left-wing politicians and commentators have made the assertion that the financial crisis is a result of too much deregulation under the "capitalistic" policies of President Reagan. Those who make the assertion are either ignorant of the facts or being untruthful...
It is universally understood that the present financial meltdown began with the problems of two enormous government-sponsored enterprises (GSEs) - Fannie Mae and Freddie Mac. These two enterprises purchased mortgages from banks to allow banks to issue larger and riskier mortgages with the explicit goal of increasing homeownership...
Financial regulators are supposed to protect the integrity of the system, the investors and consumers. It was the anti-capitalist left that insisted the regulators make banks originate bad loans and made sure that the GSEs would not have to abide by the rules that everyone else did.
"The Cascading Financial Crisis," American Enterprise Institute
For many years, AEI scholars have been observing and warning about the giant government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac. But as the economy boomed, few wanted to deal with the risks the GSEs posed to taxpayers and the financial system. While scholars at AEI were arguing that Fannie and Freddie posed systemic risk to the financial system, Congress routinely ignored calls for GSE reform. Peter J. Wallison said in the New York Times in 1999 that "[i]f they fail, the government will have to step up and bail them out the way it stepped up and bailed out the thrift industry." ... Fannie and Freddie did not pay a price for their risky financial behavior because, as always, those who purchased their debt assumed that the GSEs enjoyed the backing of the federal government.
"In Times of Crisis, Trust Capitalism," Joseph Calhoun, RealClearMarkets, Sept 29:
The "crisis" we face today is not a creation of the market. Government intervention over many years (but especially the last year) is what brought us to the point where we've placed our hopes for economic recovery on the good intentions of a Congress facing re-election in a few weeks. There has been much commentary recently about the role of Fannie Mae and Freddie Mac in the creation and expansion of the sub-prime mortgage market which many believe to be the cause of this mess. That criticism is certainly warranted, but little attention has been paid to the real culprit - the Federal Reserve. Furthermore, what attention there has been is concentrated on the role of Alan Greenspan rather than Ben Bernanke. While Alan Greenspan deserves his share of the blame, Bernanke's contribution to this mess should not be minimized or excused.
"Mislead," Daniel Mitchell, Cato Institute, October 1st:
Government Caused the Turmoil in Financial Markets. One of the ironies of the bailout debate is that supporters think that more government intervention is the solution to problems caused by bad government policy. The main mistake was probably the Federal Reserve's easy-money policy. By creating too much liquidity and by driving interest rates to artificially low levels, the Fed set in motion the conditions for a housing bubble.
But this housing bubble is particularly severe because another government mistake -- the pernicious and corrupt policies of Fannie Mae and Freddie Mac -- lured many people into mortgages that they could not afford. When a housing bubble bursts, that can have a negative effect on economic activity because people lose wealth (or lose the perception of wealth). But when people have been lured into homes they cannot afford and a bubble bursts, the economic consequences are more severe when a bubble bursts because people not only lose wealth, they also lose their homes.
Other mistakes include policies such as the Community Reinvestment Act, which extorted banks into making loans to consumers with poor credit. There are also many other policies that have encouraged economically inefficient levels of housing investment, such as the mortgage interest deduction in the tax code.
"Two Biggest Things Still To Do," Steve Forbes, Forbes Magazine, October 1:
But the two big viruses remain untreated. The most immediate is the mark-to-market, or so-called fair-value accounting, rules that regulators have been enforcing since the early 1990s... The other virus is the weak dollar. The Federal Reserve's reckless, loose-money policy in 2004 and again in the summer of 2007 led to a catastrophic inflation in the commodities and housing markets.
Paul Krugman offers a different perspective, pointing to "shadow banks" as the root:
To understand the problem, you need to know that the old world of banking, in which institutions housed in big marble buildings accepted deposits and lent the money out to long-term clients, has largely vanished, replaced by what is widely called the "shadow banking system." Depository banks, the guys in the marble buildings, now play only a minor role in channeling funds from savers to borrowers; most of the business of finance is carried out through complex deals arranged by "nondepository" institutions, institutions like the late lamented Bear Stearns -- and Lehman.
The new system was supposed to do a better job of spreading and reducing risk. But in the aftermath of the housing bust and the resulting mortgage crisis, it seems apparent that risk wasn't so much reduced as hidden: all too many investors had no idea how exposed they were.
Who will win the debate? The majority of the literature so far supports the market fundamentalists (in part because the majority of economists are market fundamentalists). Where are the progressive economists when you need them?