HOW HOUSING SOCIALISM CAUSED THE GREAT FINANCIAL COLLAPSE. TERENCE CORCORAN,
Here’s something you probably don’t want: another take on the causes and significance of the Great ’08 Financial Collapse to coincide with the 10th anniversary of the destruction of Lehman Brothers. The Wall Street giant blew up on Sept. 15, 2008, leaving a trillion-dollar global financial mushroom cloud that almost (they say) destroyed the world economy.
Assorted columnists have been reworking the ground over the last few weeks, their wisdom, or lack thereof, piled on top of a bazillion words produced over the past 10 years by journalists, academics and insiders. Searching Lehman Brothers on Amazon produces a list of 224 books, most of them pointing to free-market capitalism and too-big-to-fail Wall Street banking sleazeballs as the primary causes of the greatest financial and economic scare since the Great Depression.
However, there appears to be a growing awareness that the underlying causes of the 2008 global financial disaster had little to do with free markets, executive compensation, corporate giganticism, banker malfeasance or the other mythical beasts of business that have been blamed for the financial collapse.
That the collapse of Lehman Brothers was the final explosive device that rocked the world financial system is beyond dispute. But why and how Lehman Brothers was allowed to fail is another story told with new insight in the latest book, The Fed and Lehman Brothers: Setting the Record Straight on a Financial Disaster, by Johns Hopkins University economist Laurence Ball. In Ball’s view, Lehman did not have to fail and was instead executed by agencies of the U.S. government.
Those agencies were the Federal Reserve under Ben Bernanke, the New York Fed under Timothy Geithner and the U.S. Treasury under Hank Paulson. Ball’s research uncovers scores of contradictions and self-serving, even deceptive actions on the part of three players. In the end, political rather than financial judgments drove them to make bad decisions for the wrong reasons.
They forced Lehman to file for bankruptcy on Sept. 15 after bailing out others, including Bear Stearns, a few days earlier. A day later, they rescued insurance giant AIG. The reasons for letting Lehman fail, says Ball, were concocted and unsupportable:
“The truth is that Lehman’s failure could have been avoided, and that policymakers did not have to be particularly clever to achieve that outcome,” he writes. “Lehman only needed the kind of well-secured liquidity support that the Fed provided liberally to other financial institutions… Indeed, Lehman probably could have survived if the Fed had merely not taken actions to restrict its access to the Primary Dealer Credit Facility on September 14.”
Former Bank of England governor Mervyn King, in his book on the crisis, The End of Alchemy, wrote that allowing Lehman to go into bankruptcy “triggered a run on the U.S. banking system (that) took off with extraordinary speed.” That run spread around the world.
The long-term impact of the Lehman fiasco has yet to play out. In its aftermath, central banks and government agencies have been handed massive new regulatory powers over financial firms and markets. In Ball’s view, these new powers contain the seeds of further crises.
He argues that the postcollapse legislative extravaganza, the 2,300-page DoddFrank Wall Street Reform Act of 2010, entrenches the idea that the Fed should not be allowed to rescue financial institutions. Future crises are inevitable, says Ball, but “under these rules, future Fed leaders may be helpless to counter runs on financial institutions,” even when rescues can be backed by collateral.
The main opposition to bailouts, then and now, is political. The prime motivations for Dodd-Frank were rampant anti-bank sentiment and a populist rage against the rescue of wealthy bankers and their cronies. Bernie Sanders called it “socialism for the rich.” The current standard-bearer of the anti-banker, anti-corporate movement, Elizabeth Warren, recently said: “Ten years ago, a bunch of enormous banks got taxpayer bailouts while American consumers got a punch in the gut.” And a recent Financial Times recap on the Lehman anniversary blamed the financial collapse on “hubris, greed, opacity — and tunnel vision among financiers.”
But the real causes of the 2008 disaster have already been devastatingly exposed by British regulatory expert Oonagh McDonald. In two books (Fannie Mae and Freddie Mac: Turning the American Dream into a Nightmare and Lehman Brothers: A Crisis of Value), McDonald lays out the disastrous confluence of bad policies, manipulative personalities and what can only be described as a run of political gameplaying and borderline corruption within the U.S. political system.
In her book on Fannie Mae and Freddie Mac, government-sponsored mortgage enterprises at the heart of the crisis, McDonald documents the populist political origins of the housing and mortgage policies that fostered the subprime-mortgage meltdown that led to Lehman’s collapse and the subsequent stock-market crash. She pinpoints 1995 as the launch toward the crisis. That’s when then president Bill Clinton outlined his “National Home Ownership Strategy,” or what McDonald refers to as “the affordable housing ideology.”
In Clinton’s words: “This is the big deal. This is about more than money and sticks and boards and windows. This is about the way we live as people and what kind of society we’re going to have.” George W. Bush later expanded that effort with a program called “Blueprint for the American Dream” of home ownership.
Massive national institutional resources — government and private — were ultimately corralled and coerced into government-mandated programs that were ultimately designed to provide mortgages to people who had no money to make down payments and insufficient income to carry a mortgage. Between 1995 and 2007, trillions of dollars flowed into housing people could not afford.
The scale of this national campaign, incorporating both small banks and massive banks through scores of government agencies and financial firms, beggars description. In a juicy appendix, McDonald lists the political contributions of Fannie Mae, Freddie Mac and other mortgage players. In the years prior to the crash, Fannie Mae donated more than $80 million in political contributions. Millions more poured in from local government and private players.
The idiocy of the policies apparently eluded even the Fed, where then chairman Bernanke defended the advantage of subprime lending policies that made “homeownership possible for households that in the past might not have qualified for a mortgage.” That rise in home ownership — from 65 per cent in 1995 to 69.2 in 2005 — later evaporated. By 2014, notes McDonald, the ownership rate had collapsed to 63.9 per cent, a function of the credit crisis and the necessary restructuring that followed the bad policies.
In the end, the bailouts were not examples of “socialism for the rich.” The root cause of the 2008 financial crisis was a massive and misguided decade-long succession of policy manipulations aiming to provide backdoor redistribution to the poor. The objective was to funnel capital to fund mortgages and housing for people who could not afford them.
The crisis of 2008 was not a product of capitalism or markets or the inherent greed of bankers. It grew out of populist political posturing and manipulation of the market economy to attain social objectives. It was a colossal failure of socialism for the poor.
THE OBJECTIVE WAS TO FUNNEL CAPITAL TO FUND MORTGAGES AND HOUSING FOR PEOPLE WHO COULD NOT AFFORD THEM.