Barack Obama never misses a chance these days to allege that the financial crisis is due to the right-wing philosophy of deregulation, “a philosophy that views even the most common-sense regulations as unwise and unnecessary.” The charge is echoed by fellow Democrats such as House Speaker Nancy Pelosi.
They’re often unclear on specifics, and for a good reason: Not all deregulation hurts, and not all regulation helps. Republicans and Democrats alike supported a 1999 deregulation that has actually made this crisis easier to handle, for example. Also, Republicans have supported regulations that could have helped avert this problem, while the regulations Democrats enacted worsened it.
The aforementioned 1999 legislation, pushed through Congress by then-Senate Banking Committee Chairman Phil Gramm, repealed the 65-year-old Glass-Steagall Act. In late September, Obama was blasting Gramm as “the architect in the United States Senate of the deregulatory steps that helped cause this mess.” Glass-Steagall had mandated separation of commercial banking, based on deposits, from investment banking, based on issuing and trading securities such as stocks and bonds. The financial community had long ago eaten gaping loopholes in this Swiss-cheese regulation, attempting to compete with the universal banks of Europe, which had never suffered such confused rules.
This long-overdue deregulation played no role in the current crisis. Bill Clinton, who signed the legislation, and his treasury secretary, who told him to do so, Obama adviser Robert Rubin, have both said as much. The bill passed the Senate 90-8, with the votes of Obama supporters Joe Biden, Chuck Schumer, John Kerry, John Edwards, Chris Dodd, and Tom Daschle.
Indeed, exactly contrary to Obama’s claims, the repeal of Glass-Steagall has helped to counter the current crisis. It allowed Bank of America to buy out Merrill Lynch, JP Morgan Chase to buy out Bear Stearns, and Barclays Bank to work on buying up the remains of Lehman Brothers. It allowed investment banks Goldman Sachs and Morgan Stanley to take up refuge as bank holding companies. If investment banks Bear Stearns and Lehman Brothers had diversified more into commercial banking, taking commercial deposits — as the Act’s repeal made possible — that might have provided them with the superior capital cushions needed to survive.
More recently, Obama has attacked McCain on deregulation by saying, “Senator McCain wrote that we need to open up health care to ‘more vigorous nationwide competition as we have done over the last decade in banking.’ That’s right, he wants to deregulate the insurance industry just like he fought to deregulate the banking industry. And we’ve all seen how well that worked out.” Obama is talking here about the deregulation to allow interstate banking, which McCain referenced in proposing interstate sales of health insurance. But the analogy actually supports McCain’s position: Interstate banking has been an unqualified success, strengthening banks and providing more competition and services for consumers. It has not contributed to the financial crisis as Obama implied.
The least regulated of our financial institutions, hedge funds, have fared the best in the current crisis.
REPUBLICAN REGULATION
As far back as April 2001, the Bush administration warned that the size of the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac was “a potential problem” because “financial trouble of a large GSE could cause strong repercussions in financial markets, affecting Federally insured entities and economic activity.” By September 2003, the administration was proposing “legislation to create a new Federal agency to regulate and supervise the financial activities of” Fannie Mae and Freddie Mac.
But Democrats almost uniformly opposed such regulation in the name of “affordable housing.” Barney Frank, ranking Democrat on the House Financial Services Committee, said in October 2003, “these two entities — Fannie Mae and Freddie Mac — are not facing any kind of financial crisis. . . . The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing.”
At a House hearing in 2003, Republicans sought to expand supervision and regulatory controls over Fannie Mae and Freddie Mac. Federal regulators testified that their reckless financial practices threatened the entire system. The Republicans called for a new regulatory authority to impose standard bank regulation on them.
Barney Frank led the counterattack, saying, “I believe there has been more alarm raised about potential unsafety and unsoundness than, in fact, exists,” and “I think we see entities [Fannie Mae and Freddie Mac] that are fundamentally sound financially.” Frank added, “I want to roll the dice a little bit more in this situation towards subsidized housing.” That is what we did.
Democrat Maxine Waters said:
Mr. Chairman, we do not have a crisis at Freddie Mac, and in particular at Fannie Mae, under the outstanding leadership of Mr. Franklin Raines. Everything in the 1992 act has worked just fine. In fact, the GSEs have exceeded their policy goals.
Franklin Raines was the former Clinton budget director who went on to serve as president of Fannie Mae. He expert-testified that the mortgage-related securities of Fannie and Freddie were “riskless.”
In the Raines era, government-backed Fannie and Freddie came to be plagued with outright corruption. He criminally led Fannie to falsify its books so that he would qualify for excessive bonuses and compensation eventually totaling $90 million. Fannie and Freddie sought to protect their ongoing racket by hefty political contributions to key political angels. (The top recipient of such contributions has been Senate Banking Committee chairman Chris Dodd. The second highest recipient has been Barack Obama.)
In 2004, the Bush administration renewed its proposal for a strengthened regulator. But Barney Frank accused the president of creating an “artificial issue,” saying “people tend to pay their mortgages. I don’t think we are in any remote danger here.”
By 2005, John McCain, supported by the Bush administration, was one of three co-sponsors of legislation to impose such regulatory supervision and controls over Fannie and Freddie. But the Democrats shouted these proposals down.
So it was the Republicans who tried time and again to extend oversight, supervision, and regulation over the government’s own runaway GSEs. And it was the Democrats who stopped them because such regulation threatened their policy of turning Fannie and Freddie into welfare programs, to serve their goal of “affordable housing.”
DEMOCRAT REGULATION
While the Republicans failed to enact regulation to tame the GSEs’ practices, the Democrats succeeded in using government to actually encourage bad lending. As Stan Liebowitz, Professor of Economics at the University of Texas, wrote recently in the New York Post, “Pushed hard by politicians and community activists, the regulators systematically and deliberately altered financially sound lending practices.”
It started with the Community Reinvestment Act (CRA), adopted during the Carter administration but greatly expanded in the Clinton years. Under the CRA, the government evaluates federally insured banking institutions based mainly on how well they serve low- and moderate-income borrowers. CRA evaluations are taken into account when the government decides whether to allow mergers and acquisitions.
A key turning point came in 1989, when liberal Democrats won amendment of the Home Mortgage Disclosure Act to require banks to compile public records of mortgage lending by race, gender, and income. This data was eventually used to argue that racist banks were hiding behind traditional lending standards to discriminate against minorities and the poor. This assault eventually broke down such traditional requirements as down payments, good credit histories, proven income, mortgage payments limited to 28 percent of income, etc.
Central to this process were Barack Obama’s friends at ACORN, who used provisions of the CRA in the early 1990s to block mergers and expansions based on allegedly racist lending practices. Financial institutions were forced to agree to ACORN demands for relaxed lending standards, as well as cash buyoffs, to get these approvals.
ACORN went national in the early 1990s, lobbying congressional Democrats to force Fannie Mae and Freddie Mac to relax their standards for buying up and securitizing mortgages. The big breakthrough came in the Clinton administration, which adopted quotas for half of Fannie and Freddie financing to go to low- and moderate-income buyers, and even allowed the left-wing extremists at ACORN to rewrite the loan guidelines for these institutions.
Thus, the sub-prime mortgage market was born. Fannie Mae and Freddie Mac spread severe, unrecognized sub-prime mortgage risk throughout the financial world in the form of securities. With an implicit government guarantee, Fannie and Freddie were able to borrow huge amounts to fuel this explosion in lending, and to pump up the housing bubble overall to ever more extremes.
Here’s ACORN’s pitch to prospective low-income mortgage applicants at the time: “You’ve got only a couple of thousand bucks in the bank. Your job pays you dog food wages. Your credit history has been bent, stapled and mutilated. You declared bankruptcy in 1989. Don’t despair: You can still buy a house.”
Of course, for several years from the mid-1990s on, Barack Obama was busily shuffling money to ACORN, working with Bill Ayers as a director of Chicago’s Woods Fund.
By 2005, as Alan Greenspan was warning that if Fannie and Freddie “continue to grow, continue to have the low capital they have, continue to engage in the dynamic hedging of their portfolios, which they need to do for interest risk aversion, they potentially create ever-growing potential systemic risk down the road. . . . We are placing the total financial system of the future at a substantial risk.”
Recently on the campaign trail, Obama said of John McCain, “[H]e’s fought against the very rules of the road that could have stopped this mess.”
This is the Deregulation Big Lie, meant to mislead and misdirect the public in covering up the role of Obama himself, and other liberal Democrats, in creating the current financial crisis.
— Peter Ferrara serves as director of entitlement and budget policy for the Institute for Policy Innovation, and general counsel of the American Civil Rights Union.