Articles

Obama and the Economic Blame Game

July 25, 2012

This week brought bad news for President Barack Obama's attempts to blame someone else—anyone else—for America's economic problems.

A poll released Monday by the Hill, a newspaper that covers Congress, found that 66% of voters believe the weak economy is Washington's fault. And who is most to blame? A third—34%—said Mr. Obama. Congress was named the culprit by 23%, while 20% chose Wall Street and 18% fingered former President George W. Bush.

Mr. Obama's obsessive campaign to blame his predecessor is failing. The public, according to this poll, believes the buck stops with the current occupant of the Oval Office: 53% said Mr. "Obama has taken the wrong actions and slowed the recovery down."

It's appropriate that this poll appeared the same week as the seventh anniversary of the Senate Banking Committee's approval of S.B. 190, the Bush administration's reforms of Fannie Mae and Freddie Mac.

Though publicly traded companies, Fannie and Freddie are government-sponsored enterprises—GSEs—chartered by Congress. Because the U.S. government implicitly backed them, they could borrow money more cheaply than competitors such as mortgage companies and banks. And borrow they did. It took from Fannie's founding in 1938 until 1999 for the companies to acquire or guarantee $2 trillion in mortgage-backed securities. By 2005, they had snapped up another $2 trillion in mortgages, many of them subprime.

The Bush administration supported S.B. 190 to provide more oversight to America's two largest financial institutions similar to that of the nation's banks, savings and loans, and credit unions. A new regulator could examine their books, limit their mortgage portfolios, and set capital requirements.

After the Banking Committee passed the bill with 11 Republicans in support and nine Democrats opposed, Senate Democrats warned committee Chairman Richard Shelby (R., Ala.) that all of them—including an Illinois freshman named Barack Obama—would filibuster the bill if it were brought to the floor.

Democrats opposed regulation in large part because the GSEs were an important source of funds for community groups allied with the Democratic Party, and they were run by Democratic power brokers like former Clinton Office of Management and Budget Director Franklin Raines and Walter Mondale's 1984 campaign chairman, James Johnson. And so the Bush reform died.

For the next three years, the GSEs increased their purchases of mortgages and mortgage-backed securities by $1.2 trillion to a total of $5 trillion, of which about $1.8 trillion was in subprime, "liar loans" or other non-prime mortgages, according to Columbia Business School's Charles Calomiris.

At the end, Fannie and Freddie were drastically overextended, with a loan-to-capital, or leverage, ratio of 70 to 1 or higher. In the summer of 2008, when housing prices declined, the value of their mortgage portfolios collapsed and the government put them into conservatorship. When the GSEs collapsed, they took down Lehman Brothers and then nearly America's entire financial sector. Democratic opposition to sensible regulation made this possible.

And what exactly has Mr. Obama done to solve the problem of Fannie and Freddie? After failing to stabilize them early on with $111 billion in bailouts, his Treasury Department, on Christmas Eve 2009, gave them an unlimited line of credit until the end of 2012. They've since received another $70 billion in equity. Various estimates of what they will ultimately lose run to $300 billion. Taxpayers will never recover any of that—it's gone forever.

After Fannie and Freddie went bankrupt, the federal government's Federal Housing Finance Agency took control of them. The Obama administration still has not developed a plan to return these two enterprises to private hands.

In fact, another disaster is brewing at the Federal Housing Administration, which is engaged in some of the same risky practices that undermined Fannie and Freddie. Based on FHA's actuarial studies in November 2011, the agency was then short tens of billions of dollars and leveraged at least 840 to 1. If it is not already insolvent, the agency would be if the value of the mortgages it holds declined as little as 12/100th of a percent. This would trigger another massive taxpayer bailout.

When Mr. Obama warns on the campaign trail against "the same failed ideas that got us into this mess," reporters might gently remind him of his role in helping create the mess by opposing regulation of Fannie and Freddie, then showing little inclination to fix the problem, and now seeming blind to how he's creating another financial debacle.

This article originally appeared on WSJ.com on Wednesday, July 26, 2012.

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