By Luke Brinker
The New York Times is out with an analysis of the Republican presidential candidates’ unanimous opposition to the Dodd-Frank Act, the financial regulatory reform President Obama signed into law last year. The Times notes that the candidates malign Dodd-Frank almost as much as the dreaded “Obamacare,” and the comparison is apt. Like the Affordable Care Act, Dodd-Frank is essentially a centrist, milquetoast policy that’s been portrayed as big government run amok. As I noted in an earlier post, Dodd-Frank won the endorsement of J.P. MorganCEO Jamie Dimon, so it’s hardly a threat to the established Wall Street order. The law skirted tougher regulation of derivatives, failed to break up too big to fail institutions, and doesn’t even come close to restoring the separation between investment and commercial banks that existed from 1933 to 1999 under the Glass-Steagall law.
Its timidity aside, Republican candidates are wielding the Dodd-Frank law as a cudgel against the socialist, anti-business Luo tribesman currently occupying 1600 Pennsylvania Avenue. Hard-core Tea Partyers like Michele Bachmann and Rick Perry aren’t the only ones pledging to push for repeal of the law. Even Jon Huntsman, who’s seen as a wild-eyed liberal because he accepts science and thinks gay people are human but has an extremely conservative economic record, has vowed to get rid of the law (in addition to the post-Enron accounting reforms under Sarbanes-Oxley). The GOP candidates’ opposition to even mild financial regulatory reform reflects conservatives’ willful ignorance about how the financial crash of 2008 came to be.
To hear right-wingers tell it, the reason the global financial system came to a halt in 2008 can be explained by policymakers’ foolish decision to increase the availability of housing for blacks and other poor people. This narrative conveniently fits conservative memes about big government (and government-backed mortgage giants Fannie Mae and Freddie Mac) being the root of all our economic problems, while absolving Wall Street and its network of mortgage-backed securities of any responsibility. Economist Mark Thoma put the lie to this meme in a post one year ago, critiquing Raghuram Rajan’s peddling of the anti-Fannie-and-Freddie narrative:
During the peak of the housing bubble, Fannie and Freddie basically stopped providing net lending for home purchases, while private securitizers rushed in. Yes, very late in the game FF increased their share of subprime financing, as they tried to play catchup; but that’s really off point.* The real question is, who was financing the bubble — and it wasn’t GSEs.
Rajan asks why the government was boasting about how it was expanding low-income home ownership, if it really wasn’t. Does that really require an answer? Governments always try to take credit for stuff, and remember than in 2004 subprime was considered a good thing.
Finally, why are we so hard on Rajan? Because the central theme of his book is that the financial crisis was caused by government efforts to help low-income families — which he treats as an established, undeniable fact. But it’s by no means an established fact — on the contrary, most non-AEI analyses find government policy mainly innocent here. So his whole thesis is a structure built on foundations of sand.
As the following chart shows, asset-backed securities – the Wall Street-packaged debt instruments in which various mortgages were bundled together – experienced the steepest drop as the financial crisis hit:
None of this is news, and the complicity of Wall Street – not Fannie and Freddie – has been well-documented, but don’t expect facts to get in the way of the conservative story line on the underlying causes of the financial collapse. Admitting that the government should have had cops on the beat and heeded the warnings of anti-derivative Cassandras like Brooksley Born of the Commodity Futures Trading Commission, would burst the Tea Party’s ideological bubble. Government is the root of all evil, while regulation is “job-killing,” fosters “uncertainty,” and can never avert economic catastrophe.