For three years liberals have insisted that the financial meltdown of 2008 was the fault of Republican de-regulation of finance and greedy bankers. The New York Times has not been any more shy in the propagation of this narrative than the Democrats' financial point man, Phil Angelides, chairman of the Financial Crisis Inquiry Commission set up by law in October 2009.
But now comes Reckless Endangerment by Gretchen Morgenson and Joshua Rosner. Morgenson is a financial editor for The New York Times. You'd think from the subtitle "How Outsized Ambition, Greed, and Corruption Led to Economic Armageddon" that Morgenson and Rosner continue the official Democratic line, but it is clear from the reviews that they don't. What emerges from the book, surprise, surprise, is the Republican line, that the problem was the convergence of federal housing regulation in the form of the Community Reinvestment Act and the government-sponsored cheap money from the two mortgage giants, Fannie Mae and Freddie Mac. Morgenson and Rosner even go so far as to finger former Fannie Mae CEO James A. Johnson as the #1 culprit. Johnson was the campaign manager for Vice-president Mondale's 2004 presidential campaign, so he knew a lot about finance.
When George Will pointed all this out in the Washington Post the commenters went ballistic.
But The New York Times has now published two reviews of the book by its "assistant business and financial editor" and published by its own imprint. Both reviews, by Robert A. Reich in the Sunday Book Review, and business journalism professor Pam Luecke, acknowledge the central role of Fannie Mae and James A. Johnson in the debacle, and then scurry for the exits.
Even Michael Barone, reviewing the federal role in subsidizing property ownership over two centuries, doesn't make the obvious judgement, that government interference in the financial system has been a disaster for ordinary Americans. Let's follow his argument, anyway.
First, the government subsidized ownership of farms.
Government sold land cheaply and on credit, and under the Homestead Act gave it away free to those who worked it for a few years.
Yes, but President Andrew Jackson's efforts in that department led to the Specie Circular and a ten year deflationary depression in the 1830s and 1840s. After the Civil War, of course the US experienced a financial war between and the Free Silver movement and the deflationary effort to resume gold payments at the pre-war price of $20.75 an ounce. In other words, the efforts of the government to subsidize farm ownership led to eye-watering booms and crashes and untold misery.
When people moved to the cities and bought homes, government stepped in there too.
Government stepped in to subsidize that property, too, in the form of low- or no-interest mortgages and tax deductions for interest payments.
This all worked pretty well for many years, according to Barone.
Then, as with farm programs, government went too far. Fannie Mae and Freddie Mac, with support from administrations of both parties, financed loans to uncreditworthy borrowers on the theory that, hey, you didn't really need a down payment or steady income to be able to afford a house.
In fact, we have had a 50 year inflationary boom in housing which has pushed housing above the level it would have reached absent the subsidies, and that has, all along, put an immense burden on the young and the poor trying to buy a first home. Housing subsidies tend to give windfall profits to people that already own homes.
Now, of course, the whole sordid game has blown up, and who are the people hardest hit? Why women and minorities, of course. They got to buy houses that they couldn't afford and now they are kicked out of their dream homes and back into rentals. Canny speculators (people with money) are already out there picking up bargains. And people that bought homes 20 years ago are doing fine. Sure, their homes aren't worth millions any more, but they still represent a decent return on investment.
The lesson here, and it is a big one, is that government is clueless when it comes to economic management. If it subsidizes farms, then farm prices get caught in a tornado that sends prices soaring one moment and crashing to the ground the next. In housing, the government's meddling has caused untold misery and unemployment for millions.
There are two kinds of government finance in the world. There is Dutch finance, invented by the Dutch in the 17th century, that keeps the financial system pretty well in the hands of the bankers, with the government benefiting by getting low interest rates on its funded debt. Then there is French finance, invented by Scotsman John Law, where the government tries to manipulate the financial system to maximize its seignorage from cheap money and subsidies. Dutch finance (copied by First Treasury Secretary Alexander Hamilton) leads to prosperity and economic growth. French finance leads to inflation, misery, and collapse.
Which would you choose?