How the Leader Herald Gets the Financial Crisis Wrong
I mentioned a few posts back that I was focusing some time trying to understand the drivers for the current financial crisis. So I was a bit surprised to see the Leader Herald claim the following in its endorsement of John McCain:
Had Congress reacted properly to an initiative McCain helped lead in 2005, the current financial crisis may not be occurring. McCain was a co-sponsor on the Federal Housing Enterprise Regulatory Reform Act of 2005, which would have reined in many of the abuses involving subprime mortgages. Congress defeated the measure.
By any reading of the current financial crisis, the passage of this specific bill would have not addressed any aspect of the unregulated derivative markets and credit default instruments that play(ed) a significant role in the crisis amongst a myriad of other financial market issues. This is not to say that Fannie and Freddie did not play a role but to cast this singular piece of legislation as the remedy for the current financial crisis displays a remarkable lack of insight into how financial markets work on the part of the Leader Herald. While they certainly may endorse candidates of their choosing, I’d expect a higher standard of due diligence to support their endorsements especially for President.
As a case in point, I spent 45 seconds on Google to discover this:
McCain may repeat the claim that Democrats caused the fiscal crisis by obstructing a Republican attempt to impose new capital reserve requirements on Fannie Mae and Freddie Mac. “My opponent (Obama) was silent and his Democratic buddies opposed every effort to rein them in.” (McCain, Lacrosse WI., 10/10)
Fact: It’s technically true, but the lack of mortgage reserves didn’t cause the crisis. First off, there’s an emerging consensus among economists that both parties slept through the derivative and debt swap revolution, leaving these products unregulated – and making the current valuation of mortgage backed securities so difficult. The number of bad subprime loans, estimated at around 4 per cent of the total, could not by itself trigger the crisis we now face.
But how how about the “silent” claim? Republicans base this on the fate of Senate bill 190, the Federal Housing Enterprise Regulatory Reform Act of 2005 sponsored by Senators Hagel, McCain, Dole and Sununu. According to Senate Banking staffers in both parties, the bill made it out of committee but never came to an official vote on the floor because the sponsoring Senator, Republican Richard Shelby of Alabama, concluded he did not have the votes he needed. These staffers recall most Republicans were for the bill and most Democrats against. Was Obama silent? No way to know, he never voted. And if he was, so were most Senators. The bill never reached the floor.