Was It Wall Street or the Government?

A recent Securities Exchange Commission (SEC) investigation into Fannie Mae and Freddie Mac, the two government sponsored enterprises (GSEs) that were integral to the housing boom and bust, now formally argues that these two organizations committed massive fraud, which underrepresented their exposure to subprime mortgages and contributed to the economic meltdown.

The Wall Street Journal expounds how this investigation blows holes in the argument, often proffered by anti-capitalist Democrats, that Wall Street is solely to blame:

Democrats have spent years arguing that private lenders created the housing boom and bust, and that Fannie Mae and Freddie Mac merely came along for the ride. This was always a politically convenient fiction, and now thanks to the unlikely source of the Securities and Exchange Commission we have a trail of evidence showing how the failed mortgage giants turbocharged the crisis. 

That's the story revealed Friday by the SEC's civil lawsuits against six former Fannie and Freddie executives, including a pair of CEOs. The SEC says the companies defrauded investors because they "knew and approved of misleading statements" about Fan and Fred's exposure to subprime loans, and it chronicles their push to expand the business.

And while the GSEs were somewhat independent from the legislature and the bureaucracy, the paper trail seems to go further back. At least some of the incentive for the alleged fraud was directly caused by government's social policy of getting every American his or her own house - regardless of the ability to afford it.

The Beltway story of the crisis claims that Congress's affordable housing mandates had nothing to do with it. But the SEC's lawsuit shows that Fannie degraded its underwriting standards to increase its market share in subprime loans. According to the SEC suit, for instance, in 2006 Fannie Mae adjusted its widely used automated underwriting system, "Desktop Underwriter." Fannie did so as part of its "Say Yes" strategy to "provide more 'approve' messages . . . for larger volumes of loans with lower FICO [credit] scores and higher LTVs [loan-to-value] than previously permitted."

Unfortunately, this is what happens when the government meddles in private-markets for social engineering purposes - prices (and risk) get mispriced, bubbles are grown, and then busts bring the economy down. And while this does not fully absolve Wall Street (fraud did occur and non-criminal stupid decisions were made) or the consumer (the role that greedy homeowners played in buying too much house or refinancing to buy flat-screen TVs and BMWs is unfortunately overlooked), it does shed light on the harm government can do. Sometimes trying to help people ends up with a worse outcome than doing nothing, especially if all potential consequences are not considered from the outset.

Some Sense Regarding the Housing Market

It is about time someone talks honestly about the economy. According to The Wall Street Journal, Mitt Romney commented about the housing market and foreclosure:

One is, don't try and stop the foreclosure process. Let it run its course and hit the bottom. Allow investors to buy homes, put renters in them, fix the homes up. Let it turn around and come back up. The Obama Administration has slow-walked the foreclosure processes that have long existed, and as a result we still have a foreclosure overhang.

Number two, the credit [that] was given to first time homebuyers was insufficient and inadequate to turn around the housing market. I think it was an ineffective idea. It was a little bit like the cash-for-clunkers program, throwing government money at something which was not market-oriented, did not staunch the decline in home values anymore than it encouraged the auto industry to take off.

The Journal went on to say:

How's that for refreshing? After five years of politicians trying without success to postpone disclosures and levitate the housing market, Mr. Romney dared to tell the truth. Parts of the U.S., including Nevada, still have too many homes, and that supply needs to be sold off and fixed up so the market can find a bottom before home prices can start to rise again. The faster that process proceeds, the faster the recovery will take hold.

While the personal plight of many individual Americans is heart-wrenching on the personal level, meddling in the housing markets is the sort of disastrous policy that helped push the economy to its current state. Why can so many correctly criticize the bailout of big banks, insurance companies, and auto manufacturers, but not realize a bailout of Main Street is just as dangerous? The government's expressed desire to "prop-up" or "boost" the ailing housing markets are simply other terms for "create a new bubble."

By distorting incentives the government encourages individuals and institutions to incorrectly calculate risk. Inevitably, this will lead to sub-optimal outcomes. As difficult as it may be to watch the nefarious outcome of poor risk management, it is sometimes better for all to simply do nothing. The government not only does not have the ability or resources to "help" everyone, but it creates awful drags on the economy, as current policies have demonstrated, and breed future problems when it foolishly tries to become a superhero.

A Cracked Nut: ACORN's Implosion

In a recent series of sting-operation videos, ACORN, the community organizer association affiliated with President Obama, was exposed for being corrupt and aiding people in committing illegal acts. The videos, posted on Andrew Breitbart’s BigGovernment.com, show a young couple, posing as a prostitute and pimp, get advice from ACORN workers on how to avoid paying taxes, run a prostitution ring, engage underage girls in prostitution, smuggle illegal immigrants into the country, and other heinous crimes.

ACORN has been forced to respond, naming a self-appointed ‘independent’ auditor to review the organization. It is doubtful that this auditor will uncover anything truly independent. However, the damage has seemingly already been done as Congress voted to cancel the copious funds that were earmarked for the organization.

ACORN’s actions are shameful, yet unsurprising. The left-leaning group, which has strong ties, to the Obama administration, has been continually been connected with controversy and corruption. The scariest part is that the tentacles of ACORN and its sister organizations run deep into the administration. Obama’s choice of allies and advisors is becoming increasingly damnable as more corruption is revealed.

ACORN’s sleaze, the resignation of Obama advisor Van Jones , and other Obama disasters, raise the question of the President’s competency in choosing his associates. He is either grossly inept at vetting his connections or is ideologically committed to their atrocious worldviews. Either way, it is a scary fact that these people are so tied into the leadership of our country.

This has given Republicans much fodder to lash out at Obama and has resonated strongly with many Americans. Obama’s popularity is in a steady decline, falling at an extremely fast rate. In fact, as The Economist points out, if Obama’s popularity continues its descent he will fall below the 50% approval rate faster than any post-War President except Bill Clinton and Gerald Ford.

This trend was somewhat predictable. As more controversies in Obama’s inner circle come to light, it is clear that America did not really understand the relatively unknown candidate when he was running for the presidency. Whether it was implicit bias in the media or simply anti-Bushism, Obama was given a free pass that is coming back to haunt America. As has been argued here before Obama was not elected on his own merits, but on a rejection of the prior eight-years. America, having duped itself, is regretting this mistake as the administration’s ideologies and associations are becoming clearer. Hopefully, we can avoid some of the damage still to come.