The Consequences of Conservative Policies in Our Housing and Financial Markets
These crises were caused by calculated deregulation and the gross negligence of the Bush administration and congressional conservatives.
- We are in this mess today because of the deregulatory policies and negligent leadership of President George W. Bush, his financial regulatory officials, and congressional conservatives such as Phil Gramm.
- First, Bush and conservatives in Congress encouraged the explosion of risky new financial products, and blocked them from common-sense oversight and regulation.
- Second, they turned a blind eye to dire warnings that risky lending practices were spiraling out of control.
- Their failure to act allowed Wall Street CEOs to recklessly gamble with other people’s money.
- Now, the bubble has popped and the markets have crashed, and conservatives are desperately casting about for someone else to blame for the consequences of their failed policies.
- Their efforts to pass the buck are an insult to our intelligence. Conservatives controlled the White House and Congress while this crisis grew out of control. This is their legacy of failed policies—it is time for them to own it and learn from it by looking at progressive solutions.
Here Is the Truth About How We Got Here
Beginning in 2000, free-market ideologues led by President Bush, Phil Gramm, and Alan Greenspan encouraged the explosion of risky new financial products and blocked the products from regulation.
- Under their watch, there was an explosion in subprime mortgage lending accompanied by exponential growth in new financial derivatives such as credit-default swaps that encouraged banks and lenders to take huge risks and gamble on products that no one really understood.
- People knew these products were extremely risky. Five years ago, Warren Buffett called derivatives “financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.”1
- But Alan Greenspan and conservatives in Congress, led by Phil Gramm, encouraged the development of these risky new products, and blocked them from regulation. Greenspan said, “it seems superfluous” to regulate derivatives, and Gramm quietly slipped his Commodities Futures Modernization Act into a must-pass budget bill in 2000 to ensure the highly risky derivatives market would not be regulated.
As the housing bubble grew out of this risky marketplace, progressives tried to institute common-sense regulation, but were blocked by conservatives in Congress.
- Predatory lending exploded as commercial and investment banks competed fiercely to originate more and more home mortgages by dropping their lending standards lower and lower. The more mortgages originated, the more could be bundled together as mortgage-backed securities—bonds consisting of mortgages or pools of mortgages that are sliced and diced in different ways and then sold as bonds to institutional investors around the world.
- The development and sale of these mortgage-backed securities was turbocharged by the completely unregulated credit-default swaps market, which was expressly enabled by Gramm’s Commodity Futures Modernization Act. The credit-default swaps market acted as a kind of insurance on mortgage-backed securities and collaterized debt obligations, another type of bond that included slices of mortgages and other types of debt comingled with credit-default swaps. These swaps gave these risky new bonds a blue-chip patina even though they actually were very risky securities.
- Progressives in Congress consistently tried to institute common-sense regulation to discourage banks from engaging in some of the risky lending practices that led to the current crisis. One such amendment was offered in 1999, 2001, and 2005, and defeated by conservatives each time.
As risky lending exploded, the Bush administration and conservatives in Congress ignored and enabled Wall Street’s reckless behavior.
- All this time, the Bush administration and conservatives in Congress turned a blind eye to warnings that predatory lending was getting out of control, and that the markets of new financial products such as credit-default swaps and collaterized debt obligations were getting too hot, too risky, and too big.
- Under conservative leadership, the Securities and Exchange Commission turned a blind eye as the credit-default swaps market ballooned under its nose, going from essentially zero in 2000 to $17 trillion in 2005 to over $60 trillion in 2007.2
- In fact, in 2004, the SEC actively abetted greater risk-taking on the part of the big Wall Street investment banks by allowing them to more than triple their so-called “leverage ratio” to 40-to-1 debt-to-equity levels, up from 12-to-1 levels. This change enabled these firms to indulge in the highly irresponsible borrowing practices that led all five of them this year to either go bankrupt, sell themselves to a bigger bank holding company, or convert themselves into a bank holding company to avoid collapse.3
- There were plenty of warnings about the housing bubble as well.
- The current chair of the Federal Deposit Insurance Corporation, Sheila C. Bair—who today is at the forefront of cleaning up the subprime mess—realized back in 2001, when she was a senior official at the U.S. Treasury Department, that lending practices were amiss in the mortgage markets. She tried to persuade mortgage lenders to adopt a best-practice code of conduct to no avail.4
- Community activists in neighborhoods where predatory lending was most evident warned the Federal Reserve repeatedly about the rising threat of abusive subprime loans, but Greenspan declined to act.5 At the beginning of the decade, subprime mortgages accounted for only 6 percent of total residential mortgage originations. By 2006, subprime mortgages accounted for 25 percent of mortgage originations.6
- Greenspan and other Bush administration regulators even refused to listen to repeated prescient warnings between 2000 and 2005 from Federal Reserve Board governor Edward Gramlich, who warned his colleagues about mounting problems in the mortgage markets.
- Worse still, other federal regulatory agencies supported abusive subprime lending by pre-empting state laws protecting borrowers from lending abuses, as the Office of the Comptroller of the Currency did in 2003.7
While the Bush administration and congressional conservatives ignored the warnings, Wall Street CEOs gambled with other people’s money.
- In a few short years, this toxic combination of risky new products and no regulation transformed the financial market from a place that traded in known quantities like stocks and bonds into a market where exotic new products that no one really understood were being traded at breakneck speed.
Now the bubble has burst, the stock market is crashing, credit markets are frozen, and conservatives are looking for someone to blame.
- For the past decade, the Bush administration and conservatives in Congress aided and abetted wild risk-taking on Wall Street while CEOs raked in huge profits. Now that the bubble has burst and the market has come crashing down, they are desperately trying to divert attention away from the fact that this crises is the result of the failures of their policies.
- Charles Krauthammer and other conservative commentators are desperately trying to pin the blame on a 30-year-old law, the Community Reinvestment Act, which was weakened significantly by the Bush administration before the housing bubble started inflating.
Conservatives’ desperate attempts to pass the buck are an insult to our intelligence. This is their legacy of failed policies and leadership. It’s time for them to own it.
3. Stephen Labaton, “U.S. regulators 2004 rule let banks pile up new debt,” International Herald Tribune, October 3, 2008, available at http://www.iht.com/articles/2008/10/03/business/sec.php.
4. Edmund L. Andrews, “Feds Shrugged as Subprime Crisis Spread,” The New York Times, December 18, 1007, available at http://www.nytimes.com/2007/12/18/business/18subprime.html.
6. The Federal Reserve Bank of San Francisco, “The Subprime Mortgage Market: National and Twelfth District Developments” (2007), available at http://www.frbsf.org/publications/federalreserve/annual/2007/subprime.pdf.
7. Jonathan Fuerbringer, “Some Exemptions Are Proposed on Predatory Lending Laws,” The New York Times, August 1, 2003, available at http://query.nytimes.com/gst/fullpage.html?res=9904E2DA153EF932A3575BC0A9659C8B63.