“Republicans and Democrats still have wildly different interpretations about what caused the bust. GOP candidates fault government policies and low interest rates for fueling the housing bubble that preceded the crisis. Democrats say the crisis was fueled by private-sector and regulatory failures, not government policy…

…In televised debates, GOP candidates have blamed the crisis partly on the Federal Reserve, which they say maintained low interest rates for too long, and on Fannie Mae and Freddie Mac, the government-backed mortgage-finance firms that effectively set lending standards for much of the housing market. They also say the crisis response did too little to address the power of large banks and instead saddled small banks that didn’t play major roles in the crisis with a punitive compliance burden. In a November debate, businesswoman Carly Fiorinasaid the law provided a “great example of how socialism starts,” because the government, having created a problem by overpromoting homeownership, then stepped in to solve it. She cited the Consumer Financial Protection Bureau as an example of such overreach.”, Nick Timiraos, “The Financial Crisis Still Divides GOP, Democrats”, The Wall Street Journal, January 12, 2016

“The Republicans are right and liberals are wrong. I will publicly debate any politician, economist, or journalist, anytime, anywhere on this important issue. Why is it important? Because if you don’t understand what really happened, how can you decide policy/what to do?”, Mike Perry, former Chairman and CEO, IndyMac Bank

Politics

Financial Crisis Still Divides GOP, Democrats

Parties’ different interpretations on what caused bust shape their proposals for regulating Wall Street

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The George Washington statue in front of Federal Hall and the New York Stock Exchange in Manhattan. PHOTO: RICHARD B. LEVINE/NEWSCOM/ZUMA PRESS

By Nick Timiraos

The 2016 presidential campaign is offering ample evidence for why Washington, eight years after the financial crisis, remains so divided on how to regulate Wall Street: Republicans and Democrats still have wildly different interpretations about what caused the bust.

GOP candidates fault government policies and low interest rates for fueling the housing bubble that preceded the crisis. They strongly support easing financial regulations passed in the aftermath, singling out the 2010 Dodd-Frank rules signed into law by President Barack Obamaas too onerous.

Democrats say the crisis was fueled by private-sector and regulatory failures, not government policy. But they are divided over the need to break up big banks and the role of a 1999 law signed by President Bill Clinton that repealed parts of the Glass-Steagall Act, a New Deal-era statute that separated commercial and investment banking. The fight has put front-runner Hillary Clinton on the defensive by highlighting broader concerns over her willingness to stand up to the financial lobby.

Anger at Wall Street among primary voters in both parties illustrates how “extreme antibusiness populism on the left is intersecting with extreme antigovernment populism on the right,” said Will Marshall, president of the Progressive Policy Institute, a centrist Democratic think tank.

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Economists say many of the proposals floated by candidates fall short, to the degree that they turn on oversimplifications of what drove the bust.

“In this kind of environment, you want a short, punchy message to be effective,” said Douglas Holtz-Eakin, who is president of a conservative think tank and advised Sen. John McCain on economic policy during his GOP presidential run in 2008. Such catchphrases, he said, don’t always translate into good policy.

In televised debates, GOP candidates have blamed the crisis partly on the Federal Reserve, which they say maintained low interest rates for too long, and on Fannie Mae and Freddie Mac, the government-backed mortgage-finance firms that effectively set lending standards for much of the housing market.

They also say the crisis response did too little to address the power of large banks and instead saddled small banks that didn’t play major roles in the crisis with a punitive compliance burden.

In a November debate, businesswoman Carly Fiorina said the law provided a “great example of how socialism starts,” because the government, having created a problem by overpromoting homeownership, then stepped in to solve it. She cited the Consumer Financial Protection Bureau as an example of such overreach.

Former Florida Gov. Jeb Bush has said capital requirements for the nation’s biggest banks are too low, even though they are much higher now than before the crisis.

Critics of Dodd-Frank say a bigger problem is that the law doesn’t do enough to solve the problem of firms being too complex. They are also wary because the law assumes a lack of regulation—rather than the unwillingness to use regulatory powers that existed at the time—is what drove the crisis.

“Republicans have legitimate criticisms, but you have to propose some sensible alternatives” to Dodd-Frank, such as improving the mechanism for how failing banks are liquidated, said Mr. Holtz-Eakin, whom GOP lawmakers appointed to a congressional panel investigating the crisis. “I don’t see how you can say, ‘We’ll just get rid of Dodd-Frank.’ ” An additional hurdle, he said, is that Democrats have reflexively resisted even technical changes to the bill “regardless of the merit.”

Several GOP candidates have pinned blame for the crisis on Fannie and Freddie. The firms successfully used their lobbying clout to resist tougher capital standards before the boom, but the loans they backed still performed better than mortgages that were packaged into securities by the Wall Street firms, which steadily eroded Fannie and Freddie’s market share.

From 2003 to 2006, the period in which the housing bubble inflated most dramatically, the share of loans backed by Fannie and Freddie fell from more than half to around a third, according to Inside Mortgage Finance, an industry newsletter. Crisis-era loans packaged into securities by Fannie and Freddie have experienced realized loss rates of around 3%, compared with 23% for those packaged into securities by Wall Street, according to Mark Zandi, chief economist at Moody’s Analytics.

While Republicans want to undo postcrisis rules, Democrats are divided over whether Washington should go further to break up big banks by restoring the Glass-Steagall Act.

For Mrs. Clinton, restoring Glass-Steagall wouldn’t do enough to oversee large nonbank financial institutions like insurers and hedge funds. “I just don’t think it would get the job done,” she said at a Democratic debate in November.

Critics of Wall Street deregulation say her answer undersold the role global banks had in extending credit to lightly regulated nonbank firms that fueled the housing bubble. “I knew when you merge large insurance companies and investment banks and commercial banks, it was not going to be good,” said White House hopeful and Vermont Sen. Bernie Sanders, who as a House member voted against the 1999 Glass-Steagall repeal.

Mrs. Clinton’s challengers have cast resistance to reinstating the law as a reflection of the unhealthy influence of Wall Street donations to candidates of both parties.

“I would agree that Glass-Steagall is not the most important thing, but it does draw clear lines” around broader attitudes toward challenging the power of Wall Street, said Dean Baker, co-founder of the left-leaning Center for Economic and Policy Research.

In that sense, the position on the 1999 law has become a proxy for Democrats over whether a candidate would appoint regulators to aggressively enforce existing regulators and prosecutors that would bring more criminal cases against financial misconduct. “There’s a lot of pressure to side with the industry in those areas,” said Mr. Baker.

Posted on January 25, 2016, in Postings. Bookmark the permalink. 1 Comment.

  1. AMEN!

    Mark Nelson 3256 Sitio Tortuga Carlsbad, CA 92009 760.473.7558 mnelson.doit@gmail.com

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