Wednesday, December 15, 2010

What's the Fuss?

Some people apparently are bothered by the behavior of the four Republicans on the Financial Crisis Inquiry Commission (FCIC).
This piece
in the Huffington Post makes it appear that the Gang of Four are out to protect Wall Street by, for example, manipulating the language in the ultimate report. Further, the Gang of Four don't like the idea that the FCIC is not meeting its December 15 deadline, and have chosen to issue a kind of pre-report, which is available on the American Enterprise Institute web site, with a statement about the intent of the group here.

In case you don't know what the FCIC is up to, the FCIC web site tells us that its mission is to "examine the causes, domestic and global, of the current financial and economic crisis in the United States." Hearings have been held, various experts and officials consulted, the relevant economics brought to bear, etc., and the FCIC is supposed to tell us what happened and why.

I read the Republican Gang of Four pre-report, and it looks quite innocuous to me. This is a 9-page description of what happened during the financial crisis. The economics seems sound, and the document is written in accessible language. Blame appears to be spread around. For example, the authors state:
Put simply, the risk of a housing collapse was simply not appreciated. Not by homeowners, not by investors, not by banks, not by rating agencies, and not by regulators.
The government gets a good share of the blame, but gets credit for its response to the crisis:
These were the best of a series of bad options, and policymakers had extremely limited information to work with. While we believe that the government deserves quite a lot of the blame for getting our financial system and our nation into trouble in the first place, we applaud the quick and decisive actions taken by our nation’s leaders during the panic.
What seems to have bothered some people about the pre-report is the focus, early in the document, on Fannie Mae and Freddie Mac as key players in the runup to the crisis. Now, why anyone would want to defend the GSEs is beyond me. In the United States, the securitization of mortgages may be a necessary component of the financial system, as it promotes diversification in a banking system which still has many small banks. However, there is no reason why that securitization cannot be accomplished by the private sector (appropriately regulated of course), without government guarantees or subsidies. Fannie and Freddie, are currently under federal government conservatorship, and each continues to operate at a loss, with Fannie losing $1.3 billion and Freddie $2.5 billion in the third quarter of 2010 alone. The Dodd-Frank Act neglected to come up with a Fannie/Freddie solution, but we need one, and badly. My suggestion is that asset purchases and the issue of liabilities by Fannie and Freddie be suspended, with the assets ultimately sold off.


  1. Steve,

    You're missing the point. The objection to the "gang of four" language re Fannie & Freddie is not to "defend the GSE's." For all their problems (and there are many), F&F were not major factors in the housing bubble. See Thoma/Smith ( I know you're not a fan of Thoma's, but there are lots of people who have thoroughly smacked this one down.

    The Republicans are trying to re-write history, and that's the point.


  2. Here's another (non-Thoma/Krugman/DeLong) take on the GOP version:


    PS -- Is there a way I can put these in as hyperlinks? I'm still html-challenged...

  3. Pete,

    "F&F were not major factors in the housing bubble."

    This word bubble is used a lot, and like "liquidity" it can mean many things, apparently. I think the common use of the word "bubble" is for a phenomenon where some asset price increases at a high rate, and then decreases at a high rate. There seems to be some presumption that the asset price has somehow departed from "fundamentals." My interpretation of the runup in house prices in the US, up to 2006, was this had a lot to do with poor incentives in the mortgage market, coupled with the liquidity premium imparted to mortgage backed securities through their role in asset trading, backed up by new financial derivatives. Did Fannie and Freddie contribute to that? Of course they did. They engaged in risky activities, contributed to the incentive problems, and had to be taken over by the government. The CRA connection may be a bogeyman, there may be nothing new in that document, but there's nothing outrageous about it.

  4. Still not getting the point. The headlines are "How did the US Government contribute to declining lending standards", and "How did important financial firms become exposed to the mortgage market?" I suppose important financial firms were just innocent bystanders going along with their usual business and then something bad just happened. People get upset about this kind of wording.

  5. Anonymous:

    Not sure what you mean. Who is not getting what point?

    "I suppose important financial firms were just innocent bystanders going along with their usual business and then something bad just happened."

    I think what you are saying is that you want to think of important financial firms as being bad guys who did bad things to us. Important financial firms are greedy and self-motivated. We take that as given, and I think Adam Smith convinced us that greed and self-motivation, when channeled properly, can generate excellent outcomes. It's our fault if we designed our financial system badly and did not regulate it properly. Recurrent financial crises are not a fact of life. It's feasible to design a financial system and regulate it so that these things don't happen - Canadians know how to do that. Whether we want to do it or not is another question.

  6. Steve,

    I agree that the word "bubble" is problematic. I was trying to think of an alternative this morning but hadn't had enough coffee. But whatever -- call it a banana.

    The point I was trying to make revolves around the phrase "major factors." I didn't say (nor has anyone else AFAIK) that F&F played no role.

    And yes, there is something outrageous about the Republicans' document (disclosure: I haven't actually read it). The outrageous part is that, as I understand it, they're repeating claims that have been shown repeatedly to be untrue. Two more takedowns are from Karl Smith:

    and the late, great Tanta:

    There's a nifty chart I saw a while ago showing F&F's share of the securitization market vis-a-vis private originators that makes this point pretty clearly. Haven't been able to find it back though.

    So again, the point (at least mine) is not about F&F being problematic, or "important financial firms being bad guys." It's about four people perpetuating falsehoods.


    PS -- I used to have a lot of respect for Holtz-Eakin...

  7. D'oh!

    The "nifty chart" (or 2) is at the Big Picture (K Smith) link above. Shoulda scrolled a bit lower...


  8. Pete,

    I don't know. I read the thing. It's not very interesting, as a lot of it is just the standard financial crisis account you have seen many times before. On the "falsehoods," I don't think you can accuse them of outright lies. Some of the things that I've read where people claim to have "debunked" these ideas don't seem any more solid. I'll find out more and write about it.