In all the fuss and bother over the 'credit squeeze' and the 'bailout package', the US news media have mostly failed to point out that the same politicians who got us into this mess are the ones currently trying to find a solution.
I'm not confident of their chances of success.
Most US news media have been slow to point out the truth. I found one of the best expositions in an Australian newspaper.
It is very easy for Democrats in the US to blame all the nation's problems on the President, George Bush, and such fellow Republicans as John McCain. This is the tactic of the Democratic presidential candidate, Barack Obama, and Democrats such as the House of Representatives speaker, Nancy Pelosi, and the Senate majority leader, Harry Reid. So far, it seems to be working on the political level. But after the election, a Democrat administration would need to focus on the facts - unpleasant as it may be.
The empirical evidence suggests that in so far as the financial crisis has been caused by what Americans term subprime lending - then the Democrats are as responsible for the mess as Republicans, if not more so. As Ralph R. Reiland pointed out late last month in the Pittsburgh Tribune-Review, "the roots of today's mortgage-based financial crisis can be traced back to the Community Reinvestment Act (CRA) which Jimmy Carter signed in 1977".
Put simply, three decades ago the Democrat administration responded to the demands of anti-poverty activists that banks should not discriminate against low-income earning minorities. Rather, they said banks should take affirmative action to meet the needs of low-income borrowers. And so the subprime loan phenomenon came to pass with the intention that banks should loan housing funds to clients who could not meet existing prudential regulations.
This policy was re-activated during Bill Clinton's presidency. Sure, it had the support of some Republicans in Congress. But the key backers of the plan were Democrats - all the way from the administration to Congress and on to community activists. These days the Democrat congressman Barney Frank, who now heads the House Financial Services Committee, can be seen and heard attempting to sheet all the blame for the US's economic woes on the likes of Bush and McCain. This is the same Frank who, as early as 1992, resisted attempts by Congress to rein in the activities of the (now failed) government-sponsored Fannie Mae and Freddie Mac enterprises which bought many subprime loans. Frank's dreadful record was documented in The Wall Street Journal on September 10. McCain, on the other hand, advocated increased regulation for Fannie Mae and Freddie Mac.
No doubt Frank was acting with the best of intentions. The same can probably be said for the many left-liberal activists who worked in community groups involved in the advocacy of so-called affordable housing.
One such body is the Association of Community Organisations for Reform Now - ACORN. As Mona Charen has pointed out, "ACORN recognised very early the opportunity presented" by the CRA to pressure banks to make affirmative action, or subprime, loans. As she documents, "one ACORN fellow traveller" was none other than Obama.
It is true that Wall Street greed played a part in the financial crisis. But it is also true that quite a few contemporary Gekko types vote Democrat, not Republican - and that Democrats, along with Republicans, should bear some responsibility for the crisis. It serves no useful purpose to posit simplistic explanations for complicated realities.
Of course, in the middle of an election campaign, don't expect either party (or their Presidential candidates) to speak the truth. Each is trying desperately to blame the other: the Democrats pointing to 'the failed policies of the Bush administration', the Republicans trying to retaliate by pointing to the economic policies of the Clinton administration. Both are right - and both are simultaneously covering up their own party's share of the responsibility for this mess.
It's noticeable, too, that partisan news media are ignoring articles they themselves published, years ago, which forecast the current crisis, and are trying to blame their political bêtes noire instead. For example, take this article from the New York Times, dated September 30, 1999:
Fannie Mae, the nation's biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people and felt pressure from stock holders to maintain its phenomenal growth in profits.
In addition, banks, thrift institutions and mortgage companies have been pressing Fannie Mae to help them make more loans to so-called subprime borrowers. These borrowers whose incomes, credit ratings and savings are not good enough to qualify for conventional loans, can only get loans from finance companies that charge much higher interest rates -- anywhere from three to four percentage points higher than conventional loans.
"Fannie Mae has expanded home ownership for millions of families in the 1990's by reducing down payment requirements," said Franklin D. Raines, Fannie Mae's chairman and chief executive officer. "Yet there remain too many borrowers whose credit is just a notch below what our underwriting has required who have been relegated to paying significantly higher mortgage rates in the so-called subprime market."
Demographic information on these borrowers is sketchy. But at least one study indicates that 18 percent of the loans in the subprime market went to black borrowers, compared to 5 per cent of loans in the conventional loan market.
In moving, even tentatively, into this new area of lending, Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980's.
"From the perspective of many people, including me, this is another thrift industry growing up around us," said Peter Wallison a resident fellow at the American Enterprise Institute. "If they fail, the government will have to step up and bail them out the way it stepped up and bailed out the thrift industry."
I've highlighted the key paragraph in bold print. The NYT's 1999 prophecy has come true - but do you think they want you to know about their earlier article? No - because it highlights the fact that Fannie Mae's expansion into loans to those with questionable creditworthiness was at the behest of a Democratic administration. They don't want to bring that up in an election year, as it might hurt the Democrats' chances - and the NYT is in the Democratic Party's pocket, bought and paid for. It long ago ceased to be a reputable source for objective journalism and reporting.
I'm not trying to excuse the Republican party's own role in this mess. They're as guilty as the Democrats. As another Australian commentator points out:
It does not instil faith in the American political process that nothing said in either the recent presidential or vice-presidential debates suggested the Democrats or the Republicans have a plan to slash America's excessive debt or its ruinous military spending and adventurism. Instead, there is a bipartisan rhetorical obsession with cutting taxes and restoring American power and prestige. How about restoring American humility and frugality? Or is that an oxymoron?
I loathe George Soros' politics, which appear to be socialist to the point of quasi-Communism at times: but I have to admit that economically, some of his forecasts have been spot on. From the same article cited above:
Almost five years have passed since George Soros wrote 'The Bubble Of American Supremacy', a book that warned about the dangers presented by excessive debt and enormous market in securitised mortgages. Almost everything Soros predicted has come to pass. So why was nothing done for five years, until the world financial system was on the brink of a collapse?
. . .
Now Soros is back in the fray with another book, and another warning, and this one is closer to home. He thinks the global economy is caught in a commodities bubble, not just a housing bubble. Oh-oh. The commodities boom is supposed to be Australia's get-out-of-jail card.
The title of his new book is dull, 'The New Paradigm For Financial Markets', but the message is not. He says we should not trust financial markets to be self-correcting, or innately stable, or innately wise. "Prices in financial markets do not necessarily tend towards equilibrium. They do not just passively reflect the fundamental conditions of demand and supply." He is rejecting the supposed truism that the market is always right.
We are, Soros warns, not just in a rapidly deflating asset bubble caused by cheap money, lax standards and excessive debt: "We are currently experiencing the bursting of a credit bubble that has involved the entire financial system and, at the same time, a rise and eventual fall in the prices of oil and other commodities that have some characteristics of a bubble, and the two phenomena are connected in what I call a super-bubble. The fundamental trend in the super-bubble has been the ever-increasing use of leverage - borrowing money to finance consumption and investment - and the misconception about that trend was what I call market fundamentalism, the belief that markets assure the best allocation of resources."
The solutions are not simply going to come from more government regulation and intervention. It is deeper than that. After all, despite the current obsession with greed on Wall Street, the exposure of American market deregulation, and the failures of the hapless Bush Administration, it must be noted that in Western Europe - civilised, steady, regulated Europe - there has also been reckless excess. And Europe is in a weaker position to respond to the financial crisis than the Americans.
. . .
What does Soros want us all to do about the mess? Surprise, surprise, he wants a lot of things, but notably a crack-down on financial derivatives speculation, an orderly deflating of the asset bubble and the rapid development of fuel alternatives to oil, which must keep rising in price. It is what many ordinary non-billionaires . . . have been urging for years.
His politics aside, I think Soros has it right. Question is, are our politicians listening? I wish I could be confident that they are . . .
Perhaps the answer is to vote against any and every incumbent in this election. If your Congressperson or Senator has been in office for more than two terms, vote him or her out, and let his or her opponent have a go, irrespective of their party. It's worth the gamble - after all, how can they possibly do worse than our present legislators?