Staying the course

Shockingly, the NY Times finds that White House Philosophy Stoked Mortgage Bonfire.

There are plenty of culprits, like lenders who peddled easy credit, consumers who took on mortgages they could not afford and Wall Street chieftains who loaded up on mortgage-backed securities without regard to the risk.

But the story of how we got here is partly one of Mr. Bush’s own making, according to a review of his tenure that included interviews with dozens of current and former administration officials.

Its almost boringly predictable that the Times' list of culprits includes everybody except congressional dems. As if the housing policies it ascribes to Bush, were not, by and large, inherited from the Clinton administration and did not enjoy broad, bipartisan support.

From his earliest days in office, Mr. Bush paired his belief that Americans do best when they own their own home with his conviction that markets do best when let alone.

He pushed hard to expand homeownership, especially among minorities, an initiative that dovetailed with his ambition to expand the Republican tent — and with the business interests of some of his biggest donors. But his housing policies and hands-off approach to regulation encouraged lax lending standards.


It should go without saying a President who pushed hard to expand homeownership (one word?) doesn't really believe in leaving markets alone.

Bush was clearly not alone in pushing hard to expand homeownership in particular amoungst minorties (for example...)

The Times' implies that, with proper oversight, the drive to expand homeownership need not have led to lax lending standards. This is hard to understand. Had banks maintained rigorous lending standards, people with weak credit and therefore historically without access to affordable mortgages would have remained so. It was precisely the loosening of lending standards that made mortgages more available, in turn expanding homeownership.

Mr. Bush did foresee the danger posed by Fannie Mae and Freddie Mac, the government-sponsored mortgage finance giants. The president spent years pushing a recalcitrant Congress to toughen regulation of the companies, but was unwilling to compromise when his former Treasury secretary wanted to cut a deal.

Hmm, perhaps this recalitrant Congress should have been included in the list of culprits. I wonder why it was missed.

As to the compromises bush refused, a more thorough description can be found here.

As early as 2006, top advisers to Mr. Bush dismissed warnings from people inside and outside the White House that housing prices were inflated and that a foreclosure crisis was looming. And when the economy deteriorated, Mr. Bush and his team misdiagnosed the reasons and scope of the downturn; as recently as February, for example, Mr. Bush was still calling it a “rough patch.”

In being over-opimistic in 2006, Bush was hardly alone.

For much of the Bush presidency, the White House was preoccupied by terrorism and war; on the economic front, its pressing concerns were cutting taxes and privatizing Social Security.

It takes a certain perspective to view "privatizing Social Security" as a pressing White House concern. By any objective measure it was not. Reforming social security was a bush priority for approximatey one year (3Q 2004 till 3Q 2005) out of his eight years. And he gave clear indication that he could live with social security reform that did not include "privatization". On the other hand, the fear of social security being privatized was a pressing concern of Bush opponents.

Lawrence B. Lindsay, Mr. Bush’s first chief economics adviser, said there was little impetus to raise alarms about the proliferation of easy credit that was helping Mr. Bush meet housing goals.

And yet -- to some degree, he did!

So Mr. Bush had to, in his words, “use the mighty muscle of the federal government” to meet his goal. He proposed affordable housing tax incentives. He insisted that Fannie Mae and Freddie Mac meet ambitious new goals for low-income lending.

Repetitively: People who believe that markets should be left alone, do not feel the need to use the mighty muscle of the federal government to force particular market outcomes.

Concerned that down payments were a barrier, Mr. Bush persuaded Congress to spend up to $200 million a year to help first-time buyers with down payments and closing costs.

And he pushed to allow first-time buyers to qualify for federally insured mortgages with no money down. Republican Congressional leaders and some housing advocates balked, arguing that homeowners with no stake in their investments would be more prone to walk away, as Mr. West did. Many economic experts, including some in the White House, now share that view.


I am quite curious as to how the editorial process worked for this article. The non-editorial content of the article is relatively fair-and-balanced. It paints a portrait of how well intentioned government interference in markets, broadly supported through two administrations and opposed if at all by some congressional republicans helped lead to our current crisis. The headline and more editorial content, almost ill-fittingly overlayed, seeks to pin this tail, above all, on Bush.

“This administration made decisions that allowed the free market to operate as a barroom brawl instead of a prize fight,” said L. William Seidman, who advised Republican presidents and led the savings and loan bailout in the 1990s. “To make the market work well, you have to have a lot of rules.”

But Mr. Bush populated the financial system’s alphabet soup of oversight agencies with people who, like him, wanted fewer rules, not more.


In reality, there were -- and are -- of course, a lot of rules. Few industries are nearly as heavily regulated as financial services.

It is also moderately oxymoronic to claim that free markets require a lot of rules. The reality is slightly more indirect then that. Free market require a lot of things -- information/transparency, competition/customer-choice, etc -- that can be fostered by good rules. The issue is not that there were too few rules, the issue is that there are too many bad rules and too few good ones. Given the process by which the government produces rules, it is at least arguably likely that this is the natural, or most likely, situation.

The president’s first chairman of the Securities and Exchange Commission promised a “kinder, gentler” agency. The second was pushed out amid industry complaints that he was too aggressive. Under its current leader, the agency failed to police the catastrophic decisions that toppled the investment bank Bear Stearns and contributed to the current crisis, according to a recent inspector general’s report.

The second, Donaldson, was on many fronts quite aggressive. He was very much for all sorts of new rules, none of which, however, would have done anything to avert or mitigate the current crisis. Which illustrates the limitation of the simplistic Regulation = Good argument.