End This Depression Now! by Paul Krugman

EXCERPT from End This Depression Now! by Paul Krugman, pages 64-66; W.W. Norton & Company 2012:

 

“The Big Lie

 

I hear your complaints. Some of them are totally unfounded. It was not the banks that created the mortgage crisis. It was, plain and simple, Congress who forced everybody to go and give mortgages to people who were on the cusp. Now, I’m not saying I’m sure that was terrible policy, because a lot of those people who got homes still have them and they wouldn’t have gotten them without that.

But they were the ones who pushed Fannie and Freddie to make a bunch of loans that were imprudent, if you will. They were the ones that pushed the banks because it’s one target, it’s easy to blame them and Congress certainly isn’t going to blame themselves. At the same time, Congress is trying to pressure banks to loosen their lending standards to make more loans. This is exactly the same speech they criticized them for.

–Michael Bloomberg, mayor of New York, on the Occupy Wall Street protests

The story I have just told about complacency and deregulation is, in fact, what happened in the run-up to the crisis. But you may have heard a different story—the one told by Michael Bloomberg in the quotation above. According to this story, debt growth was caused by liberal do-gooders and government agencies, which forced banks to lend to minority homebuyers and subsidized dubious mortgages. This alternative story, which says that it’s all the government’s fault, is dogma on the right. From the point of view of most, indeed virtually all, Republicans, it’s an unquestioned truth.

It isn’t true, of course. The fund manager and blogger Barry Ritholtz, who isn’t especially political but has a keen eye for flimflam, calls it the Big Lie of the financial crisis.

How do we know that the Big Lie is, in fact, not true? There are two main kinds of evidence.

First, any explanation that blames the U.S. Congress, with its supposed desire to see low-income families own homes, for the explosion of credit must confront the awkward fact that the credit boom and the housing bubble were very widespread, including many markets and assets that had nothing to do with low-income borrowers. There were housing bubbles and credit booms in Europe; there was a price surge, followed by defaults and losses after the bubble popped, in commercial real estate; within the United States, the biggest booms and busts weren’t in inner-city areas but rather in suburbs and exurbs.

Second, the great bulk of risky lending was undertaken by private lenders—and loosely regulated private lenders, at that. In particular, subprime loans—mortgage loans to borrowers who didn’t qualify according to normal prudential standards—were overwhelmingly made by private firms that were neither covered by the Community Reinvestment Act, which was supposed to encourage loans to members of minority groups, nor supervised by Fannie Mae and Freddie Mac, the government-sponsored agencies charged with encouraging home lending. In fact, during most of the housing bubble Fannie and Freddie were rapidly losing market share, because private lenders would take on borrowers the government-sponsored agencies wouldn’t. Freddie Mac did start buying subprime mortgages from loan originators late in the game, but it was clearly a follower, not a leader.

In an attempt to refute this latter point, analysts at right-wing think tanks—notably Edward Pinto at the American Enterprise Institute—have produced data showing Fannie and Freddie underwriting a lot of ‘subprime and other high risk’ mortgages, lumping loans to borrowers without stellar credit scores in with loans to borrowers who failed strict lending criteria in other ways. This leads readers who don’t know better to think that Fannie and Freddie were actually deeply involved in promoting subprime lending. But they weren’t, and the ‘other high risk’ stuff turns out, on examination, to have been not especially high-risk, with default rates far below those on subprime loans.

I could go on, but you get the point. The attempt to blame government for the financial crisis falls apart in the face of even a cursory look at the facts, and the attempts to get around those facts smack of deliberate deception. This raises a question: why do conservatives want so badly to believe, and to get other people to believe, that the government did it?

The immediate answer is obvious: to believe anything else would be to admit that your political movement has been on the wrong track for decades. Modern conservatism is dedicated to the proposition that unfettered markets and the unrestricted pursuit of profit and personal gain are the keys to prosperity—and that the much-expanded role of government that emerged from the Great Depression did nothing but harm. Yet what we actually see is a story in which conservatives gained power, set about dismantling many of those Depression-era protections—and the economy plunged into a second depression, not as bad as the first, but bad enough. Conservatives badly need to explain this awkward history away, to tell a story that makes government, not lack of government, the villain.

But this in a way only pushes the question back a step. How did conservative ideology, the belief that government is always the problem, never the solution, come to have such a firm grip on our political discourse? That’s a slightly harder question to answer than you might think.”

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* I highly recommend the book by Paul Krugman, “Winner of the Nobel Prize in Economics.”

picture source: http://www.amazon.com/End-This-Depression-Paul-Krugman/dp/0393088774

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For lagniappe:

Minute 9:23…

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“Hell is empty, and all the devils are here.”–Shakespeare, The Tempest