Wednesday, September 17, 2008
McCain and the Crisis
Here's a point that does need to be hammered home:
No national politician has been more out front than John McCain in warning of the enormous danger posed by government backing of home mortgages.
But don't take my word for it: Take the word of Peter Wallison, my AEI colleague who was hailed in July by the Wall Street Journal for his courage and prescience about Fannie and Freddie:
Critic of the Firms Sadly Says 'Told You'
By JOHN D. MCKINNON The Wall Street Journal; July 12, 2008; Page A8
WASHINGTON — Peter Wallison saw Fannie Mae's troubles coming 25 years ago.
In the early 1980s, he was a top official in the Reagan Treasury Department. And Fannie Mae, at least by some measures, was insolvent, thanks to the economic storms that were then roaring through the savings-and-loan industry.
But getting anyone to do anything about the congressionally chartered mortgage company and its unusual vulnerabilities proved futile, even after Mr. Wallison began writing books warning that it and sister company Freddie Mac could take advantage of their government ties and relative lack of regulation to grow too large.
Fannie and Freddie applied pressure to try to silence Peter.
Almost immediately, he said, he experienced political pressure of the sort that—until now—has made Fannie Mae largely invulnerable to new legislative oversight and left it under the supervision of a weak financial regulator.
At the time, he sat on the board of a mortgage-insurance company that did extensive business with Fannie Mae. When the company's officials noticed that they weren't being chosen to insure some mortgage pools, Fannie officials told them it was because of Mr. Wallison's new project at AEI, he said.
So Peter has some credibility on the question of which politicians have been wise and strong and which have been foolish and weak on the mortgage issue. And here is what he has had to say, in for example this speech just this past summer:
For a decade reformers have tried to persuade Congress that they were allowing a serious risk to the government’s credit to develop in Fannie Mae and Freddie Mac, but few lawmakers would take action.
One of the reasons for this was the extraordinary power of Fannie and Freddie. They not only spent close to $150 million in lobbying over the last decade, but they also got their constituents—the securities industry, the homebuilders and the realtors—all powerful industries that depend on Fannie and Freddie’s largesse—to support their sole legislative objective: the defeat of any attempt to control their growth. Congress, as usual knuckled under to the special interest.
However, a very small number of lawmakers saw this problem for what it was, and were willing to stand up to the power of Fannie and Freddie—and I am proud to say that John McCain was one of them. In 2005, he joined a small group of Republican Senators to cosponsor the Federal Housing Enterprise Regulatory Reform Act, the strongest legislation introduced up to that time to control Fannie and Freddie. In a statement, he noted that “For years I have been concerned about the regulatory structure that governs Fannie Mae and Freddie Mac…and the sheer magnitude of these companies and the role they play in the housing market…If Congress does not act, American taxpayers will continue to be exposed to the enormous risk that Fannie and Freddie pose
to the housing market, the overall financial system, and the economy as a whole.”
These were prophetic words, given what we know now, but they did not spring from a sudden conversion in that year. Three years earlier, McCain had introduced legislation—co-sponsored with the House Democratic leader Dick Gephardt—to create a Corporate Subsidy Reform Commission. The purpose of this group was to eliminate what McCain called “corporate welfare.” In a statement at the time, he noted that “There are more than 100 corporate subsidy programs in the federal budget today, requiring the federal government to spend approximately $65 billion a year...These programs provide special benefits or advantages to specific companies or industries at the expense of hard-working taxpayers. In years past, Congress has insisted that it would eliminate the existence of this corporate welfare, but virtually no such program has been eliminated…This bill aims to remove the special treatment given to politically powerful industries…”
In other words, as far back as 2002, John McCain realized that underlying what would ultimately become the Fannie and Freddie crisis was the willingness of Congress to provide financial support to private corporations. And he was willing to take on powerful interests to stop this process. If his bill had resulted in action at that time, the unprecedented steps that the Secretary of the Treasury and Congress had to take in the last two weeks would not have been necessary.
By contrast, Barack Obama was accepting Fannie's political contributions - and inviting its former CEO to head his vice presidential selection contrast.
On the surge and the mortgage crisis, John McCain was both prescient and brave, while Barack Obama was opportunistic and wrong.
09/17 11:36 AM