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Genetically Engineered Chickens Coming Home to Roost

In today’s Wall Street Journal, Columbia University economist Charles Calomiris (one of the most respected money and banking economists of our era) co-authored this essay with Peter Wallison that argues that Congress pushed Fannie and Freddie to make high-risk mortgage loans.  Here are a few passages from the article:

The strategy of presenting themselves to Congress as the champions
of affordable housing appears to have worked. Fannie and Freddie
retained the support of many in Congress, particularly Democrats, and
they were allowed to continue unrestrained. Rep. Barney Frank (D.,
Mass), for example, now the chair of the House Financial Services
Committee, openly described the "arrangement" with the GSEs at a
committee hearing on GSE reform in 2003: "Fannie Mae and Freddie Mac
have played a very useful role in helping to make housing more
affordable . . . a mission that this Congress has given them in return
for some of the arrangements which are of some benefit to them to focus
on affordable housing." The hint to Fannie and Freddie was obvious:
Concentrate on affordable housing and, despite your problems, your
congressional support is secure.


In 2005, the Senate Banking Committee, then under Republican
control, adopted a strong reform bill, introduced by Republican Sens.
Elizabeth Dole, John Sununu and Chuck Hagel, and supported by then
chairman Richard Shelby. The bill prohibited the GSEs from holding
portfolios, and gave their regulator prudential authority (such as
setting capital requirements) roughly equivalent to a bank regulator.
In light of the current financial crisis, this bill was probably the
most important piece of financial regulation before Congress in 2005
and 2006. All the Republicans on the Committee supported the bill, and
all the Democrats voted against it. Mr. McCain endorsed the legislation
in a speech on the Senate floor. Mr. Obama, like all other Democrats,
remained silent.

Now the Democrats are blaming the financial crisis on
"deregulation." This is a canard. There has indeed been deregulation in
our economy — in long-distance telephone rates, airline fares,
securities brokerage and trucking, to name just a few — and this has
produced much innovation and lower consumer prices. But the primary
"deregulation" in the financial world in the last 30 years permitted
banks to diversify their risks geographically and across different
products, which is one of the things that has kept banks relatively
stable in this storm.

As a result, U.S. commercial banks have been able to attract more
than $100 billion of new capital in the past year to replace most of
their subprime-related write-downs. Deregulation of branching
restrictions and limitations on bank product offerings also made
possible bank acquisition of Bear Stearns and Merrill Lynch, saving
billions in likely resolution costs for taxpayers.

If the Democrats had let the 2005 legislation come to a vote, the
huge growth in the subprime and Alt-A loan portfolios of Fannie and
Freddie could not have occurred, and the scale of the financial
meltdown would have been substantially less. The same politicians who
today decry the lack of intervention to stop excess risk taking in
2005-2006 were the ones who blocked the only legislative effort that
could have stopped it.


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