Lordie, the Big Lie is with us in force.
The New York Times reports that the Republican members of the Financial Crisis Inquiry Commission are going to pre-empt the report (due in mid-January) and issue their own 13 page screed later today focusing blame for the crisis on…Fannie and Freddie, and no doubt the CRA too.
Let’s look at a few inconvenient facts. We had housing bubbles in the UK, Australia, Ireland, Spain, Iceland, Latvia, Canada, and a lot of Eastern Europe. Can we blame the CRA and Fannie and Freddie for that? How about the M&A boom, which resulted in a ton of leveraged loans being issued at super low spreads? If the Fed and other central banks had not driven rates to the floor, we’d see a good bit more distress and dislocation in this sector of the market. Oh, and how about the fact that banks in Continental Europe, which had no housing bubble in their home markets, and no evil Fannie or Freddie analogues, also nearly keeled over in the crisis?
This whole line of thinking is garbage, the financial policy equivalent of arguing that the sun revolves around the earth. Yes, the US and other countries provide overly generous subsidies to housing, and curtailing them over time would not be a bad idea. But that’s been our policy for decades. Calling that a major, let alone primary, cause of the crisis, is simply a highly coded “blame the poor” strategy, In reality, both the runup to the crisis and its aftermath were on of the greatest wealth transfers from the citizenry at large to a comparatively small group of rentiers in the history of man. (If you want to read the long form debunking of this thesis, go straight to Barry Ritholtz, a Republican who has shredded this brand of class warfare, or as he calls it, “one giant clusterfuck of imbecility,” repeatedly on his blog.)
The intent is pretty transparent: to discredit an effort at fact finding into the roots of the crisis, what was hoped to be a Pecora Commission, by making it appear partisan and launching an alternative narrative to muddy the waters. And the reason is clear. Even though FCIC is certain not to have the same effect that the Pecora Commission did, of discrediting major financial services industry figures and exposing various forms of chicanery, it appears that even lesser forms of criticism of the banksters must be sandbagged (the bizarre part of this drama is that at least some Democrats and very selectively, Republicans in office are willing to call out the predatory, extractive behavior of the large banks. But no one has the guts to buck an industry that is a major paymaster in a very serious way).
If you think I am exaggerating how intellectually dishonest this Republican whitewash effort is, Shahien Nasiripour’s first rate account at Huffington Post has more sordid details:
During a private commission meeting last week, all four Republicans voted in favor of banning the phrases “Wall Street” and “shadow banking” and the words “interconnection” and “deregulation” from the panel’s final report, according to a person familiar with the matter and confirmed by Brooksley E. Born, one of the six commissioners who voted against the proposal….Born said that the Republicans wanted to ban two other phrases “of the same ilk,” but she said she couldn’t remember what they were.
How can you talk coherently about the crisis and NOT talk about the shadow banking system, which grew to be at least as large as the official banking system and was the primary object of the various government rescue operations? It’s like trying to talk about AIDS and pretend there is no such thing as intercourse. Similarly, excessive interconnectedness, or as Richard Bookstaber vividly called it, “tight coupling” was another critical driver. AND HOW CAN YOU NOT TALK ABOUT DEREGULATION?!? What is there left to talk about once that is excised? Sunspots?
So what further censorship efforts will these Republicans dream up? Let’s see, if they burn every book on the crisis that contains “shadow banking”, “interconnection” or “deregulation” there will be no crisis books left! They can then engage the American Enterprise Institute, Cato, and other right wing think tanks to reeducate the public via providing far more accurate books (forget books, book reading should probably be discouraged, TV and webcasts with beautiful actors and actresses are much more effective messaging vehicles) that place all blame for the financial crisis on evil left leaning policy makers who pushed too much housing on unreliable lower income people. This of course makes it easy to excise lots of inconvenient facts, say, that 40% of the houses purchased in the bubble years were second homes, or that a single hedge fund, Magnetar, drove at least 50% of subprime demand via its CDO program during the toxic phase. Of course, Hank Paulson, Ben Bernanke, and Timothy Geither will be depicted as the saviors of humanity from the forces of darkness and declining asset values.
This pathetic development shows how deeply this country is in thrall to lobbyists. But these so-called commissioners, who are really no more than financial services minions out to misbrand themselves as independent, look to have overplayed thier hand. This stunt shows more than a tad of desperation on the part of banks and their operatives in their excessive efforts block any remotely accurate, and therefore critical, report on the industry.
Perversely, this development may be a positive indicator on several fronts. First, the FCIC report may be tougher and more probing than I dared hope. The New York Times indicates, for instance, that it highlights the role of CDOs, an area our research (both here and in ECONNED) indicates was rife with abuses and also central in the crisis.
It may also suggest that the banking industry is feeling more cornered than its continued high-handed posture might suggest. I continue to receive reports from industry insiders confirming that the biggest banks in the US are insolvent. The only sensible resolution of the mortgage mess involves deep principal mods, which will force the top four banks to write down their second mortgage books, blowing big holes in their balance sheets, and raising numerous, embarrassing questions (how could they and the Treasury defend paying back the TARP, much the less the level of 2009 and 2010 bonuses?)
In other words, the banks may be worried about the possibility of a backlash that might actually be effective. But they are already too late to stop the inevitable. They refuse to halt the juggernaut, a doomsday machine that continues to grind up families and communities and saddle innocent bystanders with the costs of higher taxes, unemployment, sagging infrastructure, and poor prospects for their children. This next two years may be the last window to leash and collar a parasitic financial services industry. If the authorities fail yet again, the cost will be both the rule of law and our unwritten social compact. If you tear asunder structures that fundamental, expect to reap a whirlwind.