Economic Crisis, Plenty Of Blame To Go Around

Rep. Rahm Emanuel, Democratic Congressman from Chicago, and apparently the anointed spokesman for the Democratic Caucus in the House, was just seen on CNN giving the Democrats spin on the newest version of the proposes bailout legislation. It should be noted that Emanuel was a high ranking staffer in the Clinton White House and is arguably the most passionately partisan member of the House.

According to Emanuel, the blame for the current state of affairs can be entirely laid at the feet of the Republicans and their penchant for the free market and limited regulation. Fair enough. There is surely some truth in that. But is that the whole story?

I think not.

In 1999, the NY Times reported the following:

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.''

(emphasis added)

The author of the piece, Steven A. Holmes, goes on to say:

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.

Prescient, no? Perhaps Emanuel should acknowledge that sometimes no good deed goes unpunished and that complex policies often have unintended consequences.

Nah, never mind. It's more fun to play the political game.