Who is to blame?
Christie Pesavento | Monday, October 6, 2008
With the financial sector in crisis mode, Americans are once again tuning in to everyone’s favorite reality TV show, The Blame Game. This season’s riveting plot takes place in our nation’s capitol, where Congressmen and Senators on both sides of the political aisle have launched an all-out attack on one another, with plenty of name-calling and finger-pointing to go around. People all across the nation, not to mention the world, sit perched at the edge of their seats, eagerly awaiting the upcoming installment and hoping to find out the answer to a single question: who is to blame?
The whole debacle might be mildly entertaining if it wasn’t for a slight problem: this particular reality show, unlike others of the same genre, portrays reality. And it comes with a hefty $700 billion dollar price tag for American taxpayers. Now that the bailout plan has been passed and signed, the finger-pointing can continue without any pesky legislation to negotiate. The question of who is at fault, however, remains unresolved.
Amidst the political chaos of the past few weeks, it has become difficult for observers to determine which indictments are justified and which are merely attempts to win over public support. What seems to have registered among voters is that corporate greed has led to the current predicament, and it is now up to hardworking, middle-class Americans to bail them out. With both John McCain and Barack Obama launching into similar tirades against Wall Street, backed by a chorus of support in Congress, the reasons behind these widespread beliefs are understandable.
If Congressional leaders really wanted to discover the truth of who is to blame, however, all they would have to do is look into a mirror. Unfortunately, finding a politician who is willing to take responsibility for his or her failures would be asking for nothing short of a miracle, especially during an election season. Instead of admitting guilt, they will often resort to reciting populist mantras against easy targets. In this case, they have attempted to avert conviction by projecting their own greed and incompetence onto those voracious villains on Wall Street.
Greed in Wall Street is nothing new; on the contrary, our capitalist system is driven by it, and thrives because of it. Of course excessive greed can be dangerous if it leads to reckless financial practices and illegal activity, but blaming the pursuit of wealth for the situation at hand is akin to blaming hunger for obesity, when it is really the poor decisions made in between that lead from one to the other. The poor decisions that led to the current mess, as we will soon discover, were encouraged by governmental encroachment on the market.
In order to determine the source of today’s financial crisis, we must go back in time a few decades, beginning with the passage of the Community Reinvestment Act in 1977 under President Jimmy Carter. This law was implemented “to encourage depository institutions to help meet the credit needs of the communities in which they operate, including low- and moderate-income neighborhoods, consistent with safe and sound banking operations.”
In 1992, when Bill Clinton was President, the law was amended to address problems of oversight and to appease community activist organizations that demanded an increase in the number of low income homeowners. Among other mandates, the amendment required that Fannie Mae and Freddie Mac purchase a certain percentage of loans to areas of low income and poor credit ratings.
Normally, lending institutions would refuse to make these sub-prime loans because of the risk of not being repaid, and Fannie and Freddie would not purchase them because of their stringent guidelines. After 1992, however, the guidelines were loosened in order to encourage sub-prime lending, thereby allowing lending institutions to profit while transferring the risk onto Fannie and Freddie. It is a classic example of good intentions leading to disastrous unintended consequences.
Now let us jump ahead to 2003, when the Bush administration was calling for renewed efforts at regulation in light of charges of fraud and mismanagement against Fannie and Freddie. Democratic Representative Barney Frank of the Financial Services Committee was quoted in the New York Times as saying, “These two entities – Fannie Mae and Freddie Mac – are not facing any kind of financial crisis. The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing.”
Two years later, Sen. McCain co-sponsored a second attempt to forestall a financial meltdown, stating “If Congress does not act, American taxpayers will continue to be exposed to the enormous risk that Fannie Mae and Freddie Mac pose to the housing market, the overall financial system, and the economy as a whole.” His bill never made it to the Senate floor. The two biggest financial beneficiaries of Fannie Mae in terms of political money, Democratic Representative Chris Dodd and Senator Obama, were conspicuously silent.
And the rest is history.
The moral of the story? Government regulation, despite good intentions, can easily turn a secure situation into an unmitigated disaster.
Now politicians are demanding more federal regulation to solve the problem. Most Americans would hope that people elected to such high office would have the intelligence and wisdom to learn from past mistakes, but this isn’t the case when politicians are caught up in the latest season of The Blame Game. Realizing that avoiding calls for more regulation would mean an admittance of guilt, they have decided to transfer the blame elsewhere, in effect risking the nation’s economic stability to save their own skins.
Christie Pesavento is a junior political science major. She can be contacted at [email protected]
The views expressed in this column are those of the author and not
necessarily those of The Observer.