Great Debate!

Wow, I've never read such well thought out and even tempered political arguments on a blog before. I'm kind of excited to be taking part in it.

The following is an edited response I wrote to a friend who expressed some similar ideas to the comments section from my last post. This is geared toward people who want to lay the majority of the blame for today's financial crisis at the feet of Fannie and Freddie.

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First off, I like fiscal conservatives. I just wanted to start with that. I know it sounds like I don't sometimes, but that's only because there aren't any real fiscal conservatives left in the world. I'd vote for a true fiscal conservative, but I haven't seen one with any clout in my lifetime.

A true fiscal conservative would recognize that the role of government has pushed us well past the free market. That may be sad, but let's face it: Public aid is a reality. So policy must take that into account. There are insured institutions aimed at aiding the public (those institutions make conservatives angry), and there are private institutions aimed at making money for investors.

While public aid for home investments is high risk, the state views it as a more complex investment than a typical home loan. New home owners increase the tax base, stimulate growth, improve local schools, and create more stable communities. That's why the state can argue for a propping up of state insured institutions.

I don't like the way Frank & co. defended Fannie & Freddie, but to call those "companies" instrumental in the meltdown is shifting the blame way too far to the left.

It was the private firms that packaged the toxic debt and sold it as assets. Meanwhile other private institutions modeled F&F's lending practices without obtaining the same kind of backing of the government. During all that, it was a bi-partisan decision to look the other way while these large companies leveraged themselves to the hilt.

It was the fall Bear Stearns, AIG, and Lehman Brothers that signaled how intertwined the system has become.

That intertwined quality is not a result of F&F. It is a result of uninsured companies wanting to take the same risks as insured companies, then swapping risky assests around the world. Without insurance, however, those risks have serious consequences. And not just for the companies, but for the global economy.

If you place the blame on F&F, you are placing Fannie & Freddie on the same playing field as Bear Stearns. Six months ago, anyone at Bear Stearns would have been deeply insulted by that. Six months ago a true fiscal conservative would have been insulted by that.

Private firms over-reached. That same true fiscal conservative would let them fail. But at what expense?

I respect the view that government often impedes business. But the firms that froze the credit markets and inflated oil and housing prices are now impeding governments: Iceland, Hungary, and the US are just a few examples.

While I see where you're coming from, I think you've let partisan thinking cloud your judgment. There is not a party or public institution that can shoulder all the blame for this mess. Fannie and Freddie are not innocent, but if they had fallen alone, this would not be a crisis. The Dems didn't stop this, but the Republicans didn't either.
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As for the CRA argument, I never suggested anyone had the power to overturn CRA. I don't think the act should be overturned. I think a bank chartered within a community should serve that community. It is up to them to find an appropriate business model to do so.

CRA strikes me as the latest in a line of strawmen set up by conservative thinkers who want to pretend the private sector didn't do anything wrong. But if that were the case, then why do the private firms need public assistence? If you want to place blame, you are left with an odd choice: Blame the boy who tripped in the mud, or blame the girl trying to help him back up.

I love this kind of dialogue. I want to say this to those who disagree: Thank you for presenting real arguments. I find that these debates often devolve very quickly on the blogs. I really like real arguments devoid of insults.

In The Know: Should The Government Stop Dumping Money Into A Giant Hole?