Identifying the culprits for global financial industry collapses can be challenging. When it comes to explaining who caused the Great Depression, for example, there are still some spirited debates among legitimate experts.
That said, it’s generally easier to understand what didn’t cause a crash. And when it comes to the 2008 crisis and the ensuing Great Recession, it’s imperative to understand just how wrong Republicans are.
The GOP line, especially among the party’s presidential hopefuls, is pretty straightforward: blame government. Candidates like Mitt Romney and Newt Gingrich are convinced — or at least pretend to be convinced for the sake of political appearances — federal housing policy and regulations produced the crash. If Americans want someone to blame, they say, start with Washington in general, and Fannie Mae and Freddie Mac in specific.
Bloomberg reported last week that the Republican line has been rejected “by the chairman of the Federal Reserve, many economists and even three of the four Republicans on the government commission that investigated the meltdown,” but Romney & Co. don’t care about facts; they care about convincing voters to believe ideologically-satisfying nonsense. Sure, the evidence points to a lack of regulations, but since when does evidence matter?
For his part, the New York Times’ Joe Nocera appears to be sick of it. Over the weekend, he labeled the Republican line “the Big Lie,” and explained how thoroughly it’s been embraced by Republican policymakers, conservative think tanks, and GOP-friendly media outlets.
Central to [the argument espoused by Peter Wallison, a resident scholar at the American Enterprise Institute, and a former member of the Financial Crisis Inquiry Commission] is that the government’s effort to encourage homeownership among low- and moderate-income Americans is what led to the crisis. Fannie and Freddie, which were required by law to meet certain “affordable housing mandates,” were the primary instruments of that government policy; their need to meet those mandates, says Wallison, is what caused them to dive so heavily into those “risky” mortgages. And because they were powerful forces in the housing market, their entry into subprime dragged along the rest of the mortgage industry.
But the S.E.C. complaint makes almost no mention of affordable housing mandates. Instead, it charges that the executives were motivated to begin buying subprime mortgages — belatedly, contrary to the Big Lie — because they were trying to reclaim lost market share, and thus maximize their bonuses.
As Karen Petrou, a well-regarded bank analyst, puts it: “The S.E.C.’s facts paint a picture in which it wasn’t high-minded government mandates that did [Fannie and Freddie] wrong, but rather the monomaniacal focus of top management on market share.” As I wrote on Tuesday, Fannie and Freddie, rather than leading the housing industry astray, got into riskier mortgages only after the horse was out of the barn. They were becoming irrelevant in the most profitable segment of the market — subprime. And that they couldn’t abide.
Paul Krugman, referencing Nocera’s column, added, “[W]hat’s going on in the discussion of economic affairs (and other matters, like justifications for war) isn’t just a case where different people look at the same facts but reach different conclusions. Instead, we’re looking at a situation in which one side of the debate just isn’t interested in the truth, in which alleged scholarship is actually just propaganda.”
It’s worth emphasizing a couple of other relevant angles. First, responsibility matters. When this subject comes up, some on the right prefer to say the “blame game” isn’t worth playing (except when they’re blaming federal regulations), but it’s worth knowing exactly what happened if we’re going to be able to prevent it from happening again. Accountability and responsibility matter, too, especially when the leading Republican presidential candidates are promising to remove safeguards and regulations starting in 2013.
Second, it’s also worth realizing that for much of the right, they don’t have much of a choice — they have to blame government, even if Fannie and Freddie weren’t to blame, because the alternative would be to accept the intellectual bankruptcy of their worldview. Wall Street and the major financial industry institutions were responsible for the 2008 crash, but for Republicans to accept that fact would lead them to conclusions they’re just not comfortable with: the need for federal regulations that limit recklessness and prevent catastrophes.
In other words, Republicans have to blame government whether the argument is ridiculous or not — their ideology demands it.
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