Another Washington Subprime Whitewash

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Subprime scandal: As we predicted, a "bipartisan" Financial Crisis Inquiry Commission next month will deliver a highly partisan report blaming Wall Street and Republicans for the mess - not government.

Last year, Nancy Pelosi and Harry Reid sold the congressionally appointed panel as a serious investigation of the root causes of the crisis.

They promised an authoritative report, similar to the one the 9/11 Commission produced, to help ensure the U.S. doesn't repeat past mistakes.

But they packed the commission with Democrats, including chairman Phil Angelides, a longtime Democratic Party activist and former California Treasurer who helped steer the former Golden State's finances onto the rocks during his tenure from 1999 to 2007.

True to form, he kicked off hearings by pillorying Wall Street CEOs. It was clear to us from the opening bell that the fix was in.

Now our fears are confirmed by a mutiny of minority members on the commission.

Led by Vice Chairman Bill Thomas, a former Republican lawmaker, they say the final report is shaping up to be a "hit piece" on the financial sector and the GOP, while whitewashing government's role in the mortgage meltdown. For those reasons, they insist they cannot support it.

Thomas explains that Angelides and the other five Democrats on the 10-member panel refused to remove anti-market language, such as "magic" and "alchemy," to describe Wall Street trading.

He also claims Angelides is under political pressure to provide findings that Democrats can use to demand more Wall Street probes and regulations.

So the minority members have preempted the official report, scheduled for late January release, with their own.

Their nine-page rebuttal asserts that both the Clinton and Bush administrations laid the groundwork for the financial crisis by trying to expand U.S. homeownership through private lenders and government-sponsored Fannie Mae and Freddie Mac.

The government, in fact, was the buyer of two-thirds of the subprime and other bad loans that triggered the financial collapse.

Through Fannie and Freddie, FHA, the Community Reinvestment Act and other programs, the report says, "the government subsidized and, in some cases, mandated the extension of credit to high-risk borrowers, propagating risks for financial firms, the mortgage market, taxpayers and ultimately the financial system."

Through banking regulations - enforced by HUD and several other federal agencies - the government directed investments into "affordable" mortgages and pressured the financial community to lower credit standards.

Why? Because Washington wanted more people to buy homes.

By focusing on deregulation, the Angelides Commission misses the point. The root problem was in fact social policy emanating from Washington, not financial practices on Wall Street.

While financial deregulation allowed Wall Street to turn mortgages into complex assets, overregulation of the mortgage lending business gave birth to the subprime market.

In effect, Washington created a risky new asset class underlying securities, while guaranteeing its safety and soundness for investors.

"We believe the government deserves quite a lot of the blame for getting our financial system and our nation into trouble in the first place," concludes the minority report, signed by Thomas and fellow commissioners Keith Hennessey, Douglas Holtz-Eakin and Peter Wallison.

Not surprisingly, the media elite have panned the report. New York Times columnist Paul Krugman, for one, fumed: "It's hard to overstate how wrongheaded all of this is."

Forgive us for doubting Krugman's acumen. Here's what he suggested in an August 2002 column: "To fight this recession the Fed needs more than a snapback; it needs soaring household spending to offset moribund business investment. And to do that, as Paul McCulley of Pimco put it, Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble."

He and other Democrats got their "affordable" housing bubble. Now they're trying to blame everyone else for the fallout.

 

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