Democrats to Blame for Economic Crisis

by Larry Tate on September 24, 2008

A concerned citizen sent us a link to an article published over at Bloomberg by a Kevin Hassett. The article is entitled “How the Democrats Created the Financial Crisis.” We are intrigued.

The title tells you all you need to know. To the manichean brain produced by 8 years of pavlovian response to the Bush administration’s clanging bells of terror and doom, the world is neatly divisible into two categories: good and evil. There is no nuance, no gray area, nothing to doubt — not a moment’s hesitation, unclarity or unease. When something goes wrong, don’t think — just point your finger at the appropriate evildoer, be he terrorist or Democrat (or both).

Hassett’s article has several points: 1) Fannie Mae and Freddie Mac are the cause of the subprime meltdown and our current economic crisis. 2) John McCain — a man who claims to know nothing about the economy or even how to use a computer — somehow figured out in 2005 that this economic shitstorm was coming and crafted a bill specifically designed to prevent it. 3) However, Fannie Mae and Freddie Mac and their lobbyists gave tons of money to Democrats in Congress which prompted key Democratic senators to vote down McCain’s bill. Therefore: John McCain = Good; Democrats = Bad.

Or, in Kevin’s own words:

Now that the collapse has occurred, the roadblock built by Senate Democrats in 2005 is unforgivable. Many who opposed the bill doubtlessly did so for honorable reasons. Fannie and Freddie provided mounds of materials defending their practices. Perhaps some found their propaganda convincing.

But we now know that many of the senators who protected Fannie and Freddie, including Barack Obama, Hillary Clinton and Christopher Dodd, have received mind-boggling levels of financial support from them over the years.

Throughout his political career, Obama has gotten more than $125,000 in campaign contributions from employees and political action committees of Fannie Mae and Freddie Mac, second only to Dodd, the Senate Banking Committee chairman, who received more than $165,000.

Clinton, the 12th-ranked recipient of Fannie and Freddie PAC and employee contributions, has received more than $75,000 from the two enterprises and their employees. The private profit found its way back to the senators who killed the fix.

There has been a lot of talk about who is to blame for this crisis. A look back at the story of 2005 makes the answer pretty clear.

Yes, pretty clear to the manichean brain.

I. Step One: Consider the Source.

Who is the author? Who does he work for? Who are his associates? What are his interests? Is he biased?

Hassett is a research fellow for AEI, a conservative think tank that, among other things, accepts donations from Exxon and tries to deny the validity of global warming science. Other notable fellows from this distinguished operation include Alan Keyes, Michael Ledeen, and Fred Thompson (ahem).

My other suspicions were confirmed when I discovered that Hassett has written a variety of other opinion pieces at Bloomberg. This one, for example, argues that the US should immediately engage in offshore drilling to lower our gas prices — an idea universally panned by economists. Hassett also wrote a book in 1999 entitled Dow 36,000 which predicted absurd increases in the stock market. Since the Dow is opening today at 10,839, I think we can safely assume that anyone who trusted Hassett in 1999 has virtually nothing in their IRA.

Does this make him biased? Perhaps not. But considering his membership in an organization whose explicit purpose is to create conservative policy for Washington, we have to now have our guard up — perhaps he’s too ideological to make an honest inquiry into the root causes of this economic meltdown. And in addition, he’s been catastrophically wrong in his previous writings.

I also discovered that Hassett was the chief economic advisor to John McCain during the 2000 primaries and is currently a senior economic advisor to the McCain presidential campaign. Is he an honest broker or a political operative? Is he trying to help us understand issues or is he trying to help get his candidate elected?

Is it at all significant that Hassett works on the McCain campaign with people like Aquiles Suarez, who was a director, and later, a lobbyist for Fannie Mae? Or Charlie Black, a top McCain aide, who was a lobbyist for Freddy Mac between 1999 and 2004? Or what about McCain’s campaign manager, Rick Davis, a “former” Freddie Mac lobbyist who was yesterday revealed to still be on the payroll for Freddie Mac to the tune of $15,000 a month? In all, there are 19 people who are former lobbyists for Fannie or Freddie now working for the McCain campaign.

Isn’t this a damning revelation? Why didn’t Hassett disclose this information? His article explicitly blames Freddie and Fannie and their influence-peddling dollars as the reason behind the economic meltdown. And yet, he continues to work intimately on the campaign with the very lobbyists who delivered the checks to Congress! Either he’s a scruple-free mercenary or he’s trying to manipulate us. Or maybe both.

I’m not saying that these individuals are ultimately to blame or that it’s somehow all McCain’s fault. Corporations hire lobbyists, they seek influence, they make donations. This is, regrettably, how our government currently works. But the specific point to be acknowledged here is that this particular source of information, Hassett, is deeply compromised and his argument should be viewed with skepticism. From where I sit, this “article” is nothing more than a piece of political casuistry designed to help McCain look good during this troubling economic time. Considering how toxic this economic news could be for a campaign that has such deep ties to Fannie and Freddie, I imagine that it is considered important strategy to try and distance McCain from it by blaming the opposition.

II. Step Two: Examine the Evidence.

Is it persuasive? Is it misused? Is it mischaracterized? Does it come from an authoritative source?

Let’s look at an aspect of the argument at closer range:

“But we now know that many of the senators who protected Fannie and Freddie, including Barack Obama, Hillary Clinton and Christopher Dodd, have received mind-boggling levels of financial support from them over the years.Throughout his political career, Obama has gotten more than $125,000 in campaign contributions from employees and political action committees of Fannie Mae and Freddie Mac, second only to Dodd, the Senate Banking Committee chairman, who received more than $165,000.

Clinton, the 12th-ranked recipient of Fannie and Freddie PAC and employee contributions, has received more than $75,000 from the two enterprises and their employees. The private profit found its way back to the senators who killed the fix.”

These are the core claims of Hassett’s argument. He clearly intends to argue that these donations bought influence or were rewards for favorable votes in the Congress. But where did Hassett get his figures from? There is a fantastic resource online that does nothing but track all of the donations that go from corporations or private donors into the coffers of politicians. The website is OpenSecrets.org. There I found the data table that Hassett used for his argument. And, as you might guess, Hassett does not seem to be a fair dealer.

If you’ll notice from the data table below, OpenSecrets divides political donations into two categories: PACs and Individuals. A PAC, or Political Action Committee, is a group specifically organized by a corporation or private group to aid in the election of public officials. The Individual category denotes political donations made by private individuals who just happen to have jobs. In this specific case, they are the employees of Fannie and Freddie.

Name Office State Party Grand Total Total from
PACs
Total from
Individuals
Dodd, Christopher J S CT D $165,400 $48,500 $116,900
Obama, Barack S IL D $126,349 $6,000 $120,349
Kerry, John S MA D $111,000 $2,000 $109,000
Bennett, Robert F S UT R $107,999 $71,499 $36,500
Bachus, Spencer H AL R $103,300 $70,500 $32,800
Blunt, Roy H MO R $96,950 $78,500 $18,450
Kanjorski, Paul E H PA D $96,000 $57,500 $38,500
Bond, Christopher S ‘Kit’ S MO R $95,400 $64,000 $31,400
Shelby, Richard C S AL R $80,000 $23,000 $57,000
Reed, Jack S RI D $78,250 $43,500 $34,750
Reid, Harry S NV D $77,000 $60,500 $16,500
Clinton, Hillary S NY D $76,050 $8,000 $68,050
Davis, Tom H VA R $75,499 $13,999 $61,500
Boehner, John H OH R $67,750 $60,500 $7,250
Conrad, Kent S ND D $64,491 $22,000 $42,491
Reynolds, Tom H NY R $62,200 $53,000 $9,200

Look at the donations from the PAC column. Hassett claims that

“Barack Obama, Hillary Clinton and Christopher Dodd, have received mind-boggling levels of financial support from [Fannie and Freddy] over the years.”

Yet, if you study the numbers, the PAC only gave Obama $6,000, Clinton $8,000, and Dodd $48,500 over a nineteen year period spanning the years 1989-2008. Not very impressive figures. The numbers increase dramatically (though not “mind-bogglingly”) only when you include individual donors who just happen to work for Fannie and Freddie. Citizens who work for these companies gave money to their candidate of choice, be they Democrat or Republican. The PAC similarly gave to members of both parties. Nothing wrong or suspicious about that. (Incidentally, I can’t help but notice that the PAC gave money to Republican candidates at much higher values than the Democrats that Hassett singles out for blame). But just eyeballing the figures in the full table (at the site), I’d say that the money was pretty equally spread around to both parties. While Hassett doesn’t say anything that is an outright lie, he is dishonest and purposefully misleading here in his selective use of the data. If Fannie and Freddie “bought” influence, they were equal opportunity investors. And it seems simply wrong and misleading to associate the donations of average citizens with the lobbying efforts of their employer.

Hassett also claims that in 2005, John McCain co-sponsored a bill that may (or may not) have worked to prevent this crisis. He states that, “if that bill had become law, then the world today would be different.” In any case, he clearly intends us to understand that the political donations from Fannie and Freddie were used to influence these key Democrats to “kill the fix” (i.e. McCain’s bill).

This is wrong on several counts. First, the McCain-sponsored bill mentioned in the article didn’t make it out of the Banking, Housing, and Urban Affairs committee. If you go to the Library of Congress and look up this bill you can see for yourself. According to the official record, the bill was introduced but never scheduled for debate or vote. Hassett’s claim about Democrats “killing” the bill by a vote is false. Second, Obama and Clinton aren’t even on that committee; they didn’t “kill” anything. Third, the claim that the Democrats are responsible for preventing the bill from becoming law is absurd: in 2005, the Republicans controlled both houses of Congress and literally did whatever they wanted within the committees. It wasn’t until 2007 that the Democrats took control of Congress again. Why didn’t the Republicans just force it through? They could have given this issue the Terry Schiavo treatment. If they realized there was a problem, a crisis, they had plenty of time to fix things, but they failed. Hassett’s basis for claiming that the Democrats are at fault because they blocked this bill is utterly false.

III. Step Three: Examine other Ideas.

If you’re really interested in understanding the root cause of this problem, I heartily recommend this article from the American Prospect. The depiction there is too complicated for the lizard-brained among us, but it seems convincing to me that the cause of this subprime meltdown that is cascading through the global economy was the repeal of key New Deal-era regulations of the financial markets, most notably the Glass-Steagall Act. Its explicit intent was to prevent a “repeat of the 1920′s era scams in which banks made speculative investments, turned the debts into securities, and sold them off to unsuspecting investors with the blessing of the bank.” Sound familiar?

And guess what law repealed that Glass-Steagall Act? It was the Gramm-Leach-Bliley Act of 1999. Yes, that is the same Phil Gramm that said that we’ve become “a nation of whiners” ; the same Phil Gramm that is the head economic advisor to John McCain; the same Phil Gramm whose legislation led to the Enron scandal; the same Phil Gramm who is likely the new head of the Treasury if McCain is elected.

But hey, I’m not pointing fingers.

{ 3 comments… read them below or add one }

Kenneth Almquist September 25, 2008 at 12:41 AM

Nice analysis. I’d just add two points.

First, Hassett’s assertion that the subprime mortgage market wouldn’t exist without Fannie and Freddie is just that: an assertion. He doesn’t make a serious effort to show that this assertion is true.

Hassett does attempt to support his assertion that things would have turned out differently if S.190 had become law, but a little checking reveals that his argument is totally dishonest. He claims that S.190 “would have required [Fannie and Freddie] to eliminate their investments in risky assets,” but this doesn’t support his thesis that the bill would have stopped Fannie and Freddie from investing in “AAA-rated subprime-mortgage pools.” Since AAA rated bonds are considered to be the safest bonds in existence (there is no higher rating), any restrictions on risky investments surely wouldn’t affect the purchase of AAA rated securities.

Just to be sure, I checked the bill to see exactly what constituted a “risky asset,” and I didn’t find any requirement that Fannie and Freddie get rid of assets of any sort. The law gives regulators the power to set capital requirements for the firms and to restrict the ability of the firms to hold assets which aren’t “mission-related,” and the intention is presumably that regulators would use these powers to limit risk. But Hassett’s claim that the bill requires the firms to get rid of risky assets appears to have been made up out of whole cloth.

Hassett then quotes his AEI colleague Wallison who wrote in 2005: “The Democrats and the few Republicans who oppose portfolio limitations could not possibly do so if their constituents understood what they were doing.” Checking this quote reveals that Wallison was defending the Bush Administration’s position that limits should be placed on the amount of mortgage-backed securities that Fannie and Freddie could hold. If there was a case to be made for that position, Wallison fails to state it. He says that holding mortgage-backed securities exposes Fannie and Freddie to interest rate risk, which would be true if Fannie and Freddie didn’t hedge that risk, but according to Wallison, Fannie and Freddie did hedge that risk so his argument makes no sense.

Wallison’s position on bills like S.190, which did not limit the amount of mortgage-backed securities that Fannie and Freddie could hold, was: “If Congress cannot take this essential step, however, no amount of additional authority–given to a purported “world class regulator”–will significantly change the course of events.” For Hassett to cite Wallison in support of the proposition that passing S.190 would have made a difference is simply dishonest, because Wallison said precisely the opposite.

Reply

gilead September 25, 2008 at 4:52 PM

And McCain became a “cosponsor” after the fact 5/25/2006:

http://thomas.loc.gov/cgi-bin/bdquery/z?d109:SN00190:@@@N

And according to Oxley (Oxley is the Republican that sponsored the House version of the Bill):
http://www.ft.com/cms/s/0/8780c35e-7e91-11dd-b1af-000077b07658.html?nclick_check=1

Bush killed the Bill

Reply

Bobo October 5, 2008 at 1:05 AM

S190 was just one of many attempts to rein in the GSEs. Clinton tried in 2000, and Bush in 2003. Each time the measures were opposed by Dodd, Frank and other Dem leaders. Bill Clinton admitted that the Dems were culpable for the failure to constrain the GSEs: http://www.youtube.com/watch?v=XsynspIqAoE

Regarding Senator Dodd, you might be interested in a recent story in the Hartford Courant. Executive summary: “During the past 20 years, PACs and employees of finance-related firms have contributed more than $13 million to Dodd’s election efforts, including nearly $6 million in the past two years.” http://www.courant.com/news/nationworld/hc-dodd0929.artsep29,0,1341992.story

As for the vote on Gramm-Leach-Bliley, your link is misleading. Yes, the initial vote in the Senate was along party lines. But the initial vote in the House (on Leach’s HR 10, which was eventually superceded by S900) was 343-86; S900 passed the House “without objection”. The final (post-conference) vote was 90-8 in the Senate, and 362-57 in the House. http://www.govtrack.us/congress/bill.xpd?bill=s106-900#votes Also, the repeal of Glass-Steagall is largely irrelevant to the lax lending standards, cheap money, and inflated house prices that are the root cause of today’s problems.

Reply

Leave a Comment

Previous post:

Next post: