From Kevin Hassett, writing in Bloomberg.com
Greenspan's Warning
The clear gravity of the situation pushed the legislation forward. Some might say the current mess couldn't be foreseen, yet in 2005 Alan Greenspan told Congress how urgent it was for it to act in the clearest possible terms: If Fannie and Freddie ``continue to grow, continue to have the low capital that they have, continue to engage in the dynamic hedging of their portfolios, which they need to do for interest rate risk aversion, they potentially create ever-growing potential systemic risk down the road,'' he said. ``We are placing the total financial system of the future at a substantial risk.''
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.
Different World
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.
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1 comment:
Well, I'm not terribly surprised that McCain economic adviser Kevin Hassett's opinion would place the lion's share of blame on Democrats. It's amazing how easy it is to blame almost any specific entity, party, or administration for this financial debacle when you cherry pick the history.
It also might have been a different world if the same Greenspan hadn't lowered interest rates as dramatically as he did, as well as express his approval for ARMs at a time that interest rates were at those crazy lows. And we need not get into Phil Gramm's various deregulation crusades over the years; it's actually rather hard to say exactly what effect they've had, except that they probably didn't help matters.
For a moderate like myself, the only entertaining thing about this particular crisis is watching the politicians desperately trying to spin things to make it look like only the other side of the aisle is at fault.
There's plenty of blame to go around for everyone, and sadly I think the entertainment factor will fade quickly. Soon it'll become apparent that the cross-bickering will again prevent the meaningful reforms from being made. It would be nice if we could actually start fixing the regulatory and deregulatory problems instead of applying band-aid after band-aid.
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