The Mortgage Crisis and the Democrats (and other winning issues)

It is tempting to look back nostalgically on the post RNC Sarah Palin speech boomlet that lasted about two weeks when all the world was aglow with awe and excitement for the fresh faced Sarah, and the media and Obama campaign dour and pouting as the new starlet strode mightily upon the stage.  They seem now as the halcyon days, heady and encouraging times, with McCain pulling ahead of Obama nationwide and in key battleground states, and even coming within 3 percentage points in such blue states as New Jersey; yes, things were certainly looking up at the time. 

But, alas, the blue skies turned dark when the financial crisis landed on our heads some two weeks ago (and our heroine, Sarah, pre Biden debate, had not quite found her sea legs in the Gibson and Couric interviews), voters suddenly favored the Democrats, a curious phenomenon, given their generally anti-business, job destroying policies.  Perhaps, it is the siren song of the nanny state that drives such movements, the fear factor, the desire for some to seek shelter in the warm bosom of the government, however misguided such compulsions may be.  For, indeed, it is the overweening government that has brought us to the precipice of ruin in the first place, and, now, the costly bailout that will only make matters worse.  

And so, it seems that hope is lost, the country foolishly lining up with the side that actually owns the crisis, created it with its "affordable housing" initiatives, expanding its pet monster federal backed programs Fannie Mae and Freddie Mac to outrageous proportions, together with policies that forced banks to modify their usual lending practices to pursue social engineering fantasies, specifically to move minorities and the "poor" into the ranks of homeowners, not, by my reading, a constitutional right or a government (taxpayer) obligation.  This, by the way, in a nutshell is the legitimate argument McCain should be making with every other word out of his mouth, but I have yet to hear it.  Perhaps, that will change.

But what are the arguments that McCain can make, indeed, winning arguments that can turn the tide in his favor in the remaining time before the election.  Whether he, or Republicans in general, realize that the current climate actually favors them is not known.  Based on McCain's running commentary on the campaign trail and the haplessness of the Republican leadership, it seems they do not. 

So, allow me then to take the opportunity to frame the argument and provide the reasons McCain and Republicans should be climbing all over the feckless and inadequate Obama and his leftist party, a Democrat Party, mind you, that does not own a novel idea to speak of, whose stock in trade consists (however they may want to parse it) of the same nostrums of higher taxes, increased spending, and government expansion.  Government as white knight, as savior, as Lord and Master.  There is not an aspect or niche or recess of civic life that, by their lights, government should not place its warm, prying hands into.  It is a vision of an all encompassing administrative state, European style social democracy, also known as socialism. 

It is this struggle we now find ourselves locked in, a struggle to redefine the character of the nation, a struggle to determine whether the country should move itself in the direction of the welfare nanny state (soft totalitarianism) or retain its unique American identity and character, its free markets, individualism, and liberties, with powers and dynamism residing primarily with the people, its entrepreneurs, innovators, and risk takers. 

So what are the obvious issues: five simple ones, all of which favor McCain, if he will grasp them.

First: The economy.  This is the big one and so I will spend most of my time here, and because it has done the most damage.  Still, it is or at least could be a winner for Republicans.  Yet, none of our elected Republicans seem to realize this.  Rather, they run from it.  Dig little burrows and hide in them, trembling in fear at the mere mention of the word "economy," as if they have nothing to say about it.  Do they not understand the history?  Do they not know the sequence of events that brought us here?  Their collective behavior remains demoralizing and baffling; they appear rudderless, ignorant, and afraid.  And, perhaps, they are.  

Democrats have gotten away with blaming the current fiasco on "deregulation," which they interpret to mean Republicans and then "Bush," or Bush policies, which is completely fatuous.  (That everything is blamed on Bush is another matter.  Because of his overall unpopularity, with approval rating consistently in the high twenties, he simply has no traction, and can be trashed at will by Democrats - even if, as in this case, it is for all the wrong reasons.) 

The housing bubble that recently burst and the mortgage/credit crisis that ensued was caused not by deregulation, not by Bush policies, but by Democrat government programs in place well before Bush ever took office: federal policies that sought to expand home ownership by minorities and the "poor," policies that required banks and mortgage companies to abandon standard lending practices to pursue the cosmic pipe dream of home ownership for everyone, even those who could not afford it, those who could not make a down payment, those who may not have even had a job, in fact even those who may have even already been receiving public checks. 

It was, in other words, housing welfare:

They get a house, taxpayers wind up paying for it. 

Impractical.  Devoid of common sense.  Ignorant of human nature.  Primed for corruption.  Doomed to fail and blow up in our faces.  Government writ large.  In a word: liberalism. 

Fannie Mae and Freddie Mac, Democrat play toys, are at the center of the crisis.  The two mortgage monstrosities control more than half of the mortgage market.  In 1970, Fannie and Freddie accounted for $15 billion in mortgage debt.  Since then, egged and prodded by our government, it has doubled its portfolio every year to the incredible sum of $5 trillion today, or more than a third of our GDP with more than half of the nation's mortgages tied up in this duopoly, an incredibly dangerous concentration of risk, power, and wealth. 

With the implicit backing of the government, these "GSEs" (Government Sponsored Enterprises) were able to borrow at much lower rates than other banks and had lower capital requirements, enabling them to leverage more, outrun other companies and grow rapidly.  This, combined with low interest rates in general after 9/11, fed the housing bubble.  With the push for greater homeownership (in particular, among the poor and minorities), along with access to cheap credit, banks came up with "innovative" mortgages that required little or no down payment, low interest, interest only, or adjustable rate (upside down) mortgages (ARMs).  As long as prices continued to rise, everyone was fine including banks and Freddie and Fannie.  Once housing prices began to decline (as inevitably happens in a bubble), unqualified buyers and speculators who were overleveraged to begin with, saw the value of their property drop below their mortgage and defaulted on their loans, especially those who bought in just prior to the housing market's decline.  With rising defaults, the two mortgage giants became insolvent, as did any number of other large firms who had foolishly invested in the "mortgage backed securities" and other such wierd "derivatives" (Lehman Brothers, AIG, Bear Stearns, Country Wide, Merrill Lynch, etc.).  These "collateralized debt obligations" or CDOs were particularly odious because of their utter lack of transparency.  There was no way to assess risk on bundled mortgages when you had no idea who the borrowers were.  Yet, Fannie, Freddie and others happily and foolishly bought and sold them to the tune of trillions of dollars.

Now toss in the Community Reinvestment Act (CRA).  In 1977, during the Carter Administration, Congress passed the CRA, which obligated banks to service the entire geographic area in which they operated including poor and moderate income neighborhoods.  The Home Mortgage Disclosure Act (HMDA), already passed in 1975, compelled lenders to give detailed figures regarding mortgage applications.  Each year, banks were given grades on "CRA compliance."  In 1991, HMDA statistics were expanded, which allowed for comparisons by race.  This would inevitably be followed by various reports and attack pieces by the media, activists, and advocacy groups over alleged racial discrimination.  There was little or no examination of relative creditworthiness between groups.  But this didn't matter, not with the stench of "racism" in the air. 

There is more: In 1992, Congress pushed Freddie and Fannie to provide more and more loans to low and moderate income borrowers.  In 1994, Clinton began the National Home Ownership Strategy, which expanded CRA in ways not intended by Congress.  In 1995, new Clinton CRA regulations ordered banks to loan to borrowers in poor communities regardless of qualifications under threat of penalties and litigation.  In 1996, the Department of Housing and Urban Development (HUD) mandated that Freddie and Fannie give 42% of their loans to borrowers with sub median income levels for a given area.  This target was increased to 50% in 2000 and 52% in 2005.  In 1996, HUD mandated that 12% of Freddie and Fannie mortgages had to go be "special affordable" loans to borrowers with income of less than 60% of the median for an area.  This was increased to 20% in 2000 and 22% in 2005.  The goal for 2008 (before the bust) was 28%. 

Fannie and Freddie and other banks met these goals by abandoning standard underwriting practices and employing "innovative" lending strategies: little or no down payment, teaser rates, low and adjustable rate mortgages, with little or no attention paid to the qualifications of the borrower.  The so called "sub prime" mortgage (and, hence, crisis). 

Fannie and Freddie were made to serve political and social purposes: to increase homeownership among the poor and minorities with little regard for the overall impact on the economy and our financial institutions.  The political class could boast that they had helped the underclass attain to the dream of owning their own home, in effect subsidizing low income housing without using budgetary m0ney.  By pressuring banks to offer loans to high risk borrowers, political leaders could strut and self congratulate about all they had done to defeat poverty and help everyone achieve the American Dream.  It was a free lunch for politicians, until the workings of the market decided otherwise.

The Federal Reserve also played a role: in 2003, federal loan rates hit a 40 year low.  Money was cheap.  This, together with the abandonment of standard lending practices and the push to increase homeownership among the poor and minorities, created the housing bubble.  It was not a speculative bubble but a bubble created by government policies and low interest rates from the Fed.  It had little to do with "deregulation."  Because of government policies, demand for housing increased dramatically as did housing prices.  Without this government prompted bubble, there never would have been a subprime mortgage crisis.  Without Freddie and Fannie's role in buying up risky loans to unqualified borrowers, bundling and selling them to misguided investors around the country and the world, backed by the implicit guarantee of the Federal Government (and cheap money from the Fed), there never would have been a housing bubble, subprime meltdown, credit crisis, or $700 billion bailout (and other silly, misguided "stimulus" packages, and bailouts to other failing firms for hundreds of billions already).

Another government misstep: Sarbanes-Oxley regulations that came in the wake of the Enron debacle in 2002.  The new accounting rules required that financial services companies "mark" or value their assets based on current market value, which may sound reasonable enough on the surface, but in the face of a credit crisis results in a severe marking down of assets at fire sale, liquidation rates, not unlike, for example, assessing the value of a home in the middle of a hurricane.  Mortgage companies in the midst of the credit crisis were forced to mark down their assets sharply, far more than they would have in a more steady market (perhaps the net asset values should be placed at a rolling three year average), which set off a domino effect that led to worsening stock prices and poor credit ratings, requiring the firms to put aside greater and greater capital reserves (dictated by banking regulations) to cover the losses, hence the credit crisis.

GSE lobbying shenanigans:  Fannie and Freddie, awash with incredible wealth before the inevitable collapse, spent more than $200 million in lobbying and campaign contributions over the last ten years.  They engaged the services of well known Washington insiders as executives and provided them with lucrative deals.  Many affordable housing advocates in Congress, including Barney Frank, Chris Dodd, Chuck Schumer, and Barack Obama were among the largest recipients of GSE political contributions.  GSEs also did not limit their influence peddling to members of Congress but to various charities and advocacy groups ($500 million worth) that could also exert influence on their representatives.  When opponents (usually Republicans) would raise questions about GSE operations, they would be smeared, attacked, and accused of racism (in other words, standard operating procedure), prompted by the GSEs and their backers.  They would be denounced for wanting to raise mortgages rates on the poor or depriving them of the right to own a home and receive angry calls and letters from constituents.  Not too many politicians have the stomach for that.  Far better to sit back, avoid the headache, and let the next generation deal with the inevitable collapse.  The GSEs and others have used intense lobbying pressure to intimidate detractors and critics, promote themselves as kindly benefactors of the underclass and inner city advocates, while encouraging their congressional enablers.

Nonetheless, various leaders warned of the coming calamity.  In 1999 and 2000, Clinton Treasury Secretary, Lawrence Summers sounded the alarm.  In 2001, Republicans in Congress endeavored to restore financial soundness to Fannie and Freddie.  In 2003, Bush proposed regulatory overhaul of the finance industry.  In 2005, Fed Chairman, Alan Greenspan, warned Congress of the risk to the nation's financial system posed by Freddie and Fannie.  That year, Senator McCain sponsored a Fannie and Freddie reform bill.  At every turn, prominent Democrats, their coffers awash with GSE contributions, blocked efforts to revamp the mortgage giants and revise the various federal policies and regulations that led to the subprime crisis.

In a nutshell: Freddie and Fannie, CRA, subprime loans, "affordable housing" initiatives, government pressure on banks to abandon standard lending practices to support basically Democrat constituencies, cheap money from the Fed, and Sarbanes-Oxley led to a housing bubble that burst with defaults, foreclosures, toxic debt, and the collapse of the financial markets.  Most of this was government inspired.  Not the free market, not deregulation, not Bush.  Yes, there were greedy investors and firms; yes, Wall Street played a role, along with speculators and borrowers in too deep, but ultimately, all roads lead to Freddie,  Fannie, and the government.  A recession with the loss of trillions for investors caused by Democrat programs, who, of course, had the best of intentions.  And all efforts to reform the failing, ill-conceived programs and policies, blocked by Democrats.

Is it too much to ask for McCain, Palin and Republicans to nail this down, demand investigations into the role of government and especially the Democrats in creating this debacle, and then offer free market solutions to get out of it?  Instead of bailouts, and borrowing or printing trillions, increasing debt, weakening the dollar, and heating up inflation, how about massive tax cuts: capital gains at ten percent.  Top marginal rate at 25%.  Corporate rate at 25%.  How about rescinding the CRA completely?  How about dismembering the Freddie and Fannie behemoths and selling the pieces to private investors?  How about getting the government out of the housing business?   How about ending the perverse incentives and ridiculous business model of the GSEs whereby profit is private but risk is public by privatizing them?  How about making sure this debacle is never repeated again?  How about an independent special prosecutor to look into the government role in causing this?

McCain should properly point the finger of blame at the Democrats for the current economic crisis.  More failed liberalism at work.

Two: Energy independence.  This ties in with the economic crisis.  The money we can make with energy can offset the losses needed to bail the country out of the economic crisis the Democrats created.  Democrats talk about wind and solar.  It's hard to keep a straight face.  Republicans are strong on this.  This is their issue.  Drill now, drill here.  Nuclear.  Shale.  Clean Coal.  Flex Fuel.  Alternative Fuels.  And, if you want to make the enviros happy and so you can sound "green," throw in all the wind and solar they want (but without the subsidies).  This is a national security issue as well.  It is a winner for McCain and the Republicans.  Obama and the Dems are weak here, beholden as the are to radical ecomarxists.  It is an easy argument to make.  Americans will understand immediately how dangerous it is both in terms of national defense and economic security to send $700 billion overseas annually (less now with falling oil prices) to nations that do not like us.

Three: National Security.  Obama will weaken our military.  He and the Democrats have done everything they can to undermine our fighting forces and our effort in Iraq.  They are invested in defeat.  They are weak on surveillance and other measures necessary to defend the homeland.  Obama and the Democrats cannot be trusted to protect the nation.

Four: Personal Character.  Still a big winner and issue for McCain.  There are many question marks about Obama, very few of which, by the way, have been explored by the media who, of course, are in the tank for him.  His radical associations are well known and raise legitimate questions about who he is.  He spent twenty years sitting in the pews of the United Trinity Church of Christ, listening to his racist, bigoted, and anti American pastor, Jeremiah Wright.  He was closely involved with terrorists Bill Ayers and Bernadette Dorn.  He has been actively connected with the radical group ACORN, an organization that is under indictment in multiple states for voter registration fraud, and that uses taxpayer dollars to promote left wing causes.  There is the radical socialist, Saul Alinsky, the father of "community organizing," whose "Rules for Radicals" was an inspiration for the young Obama.  And then there is corrupt Chicago business man Tony Rezko, found guilty of fraud and money laundering.  Basically, Obama is a leftist, smoothed over for purposes of a general election.  He is also a standard elitist who looks down on the "bitter clingers."  McCain should question his prior associations and his overall character.  The reality is that Obama is a flawed candidate, whom, even in a Democrat year, the Republicans should handily defeat.

Fifth: And most controversial perhaps for a Republican.  McCain must reject Bush.  His policies have been ruinous for his party and his country.  He performed miserably in Iraq until finally settling on Petraeus and the surge, but by then the damage had been done (in terms of popular support) and the entire project had been discredited.  He did not rebuild the military after the Clinton era of underfunding.  He expanded government.  Created new unfunded entitlements (Medicare Prescription Program).  Was miserable on immigration (here, McCain is no better).  Worst, he has been a profligate spender.  Thoroughly ruined the Republican name brand for fiscal responsibility.  He has done nothing to ensure energy independence, especially when he could have in his first six years with a Republican Congress (Republican majorities that he squandered with his fecklessness).  The recent turn for Obama with the economic crisis is because of Bush's deep unpopularity.  Rightfully or wrongfully, the electorate blames Bush for its economic woes because of its disgust with him in general.  If he was a respected and beloved figure, or at least moderately popular, the sinking economy would not necessarily accrue to  him, at least not totally.  The entire election is in fact a referendum on Bush.  Dems continue trying to tie McCain to Bush, to defame him.  It is time to repudiate the man who has done so much to ruin his party, in order to save it.

 McCain can still win this.  These are the five big issues in the remaining days.