Mythmaking is in full swing as the Bush administration prepares to leave town. Among the more prominent is the assertion that the housing meltdown resulted from unbridled capitalism under a president opposed to all regulation. [NOfP note: see this NY Times piece](via Instapundit)
Like most myths, this is entertaining but fictional. In reality, Fannie Mae and Freddie Mac were among the principal culprits of the housing crisis, and Mr. Bush wanted to rein them in before things got out of hand.
Rather than a failure of capitalism, the housing meltdown shows what's likely to happen when government grants special privileges to favored private entities that facilitate bad actors and lousy practices.
Fannie and Freddie are "government-sponsored enterprises" (GSEs), chartered by Congress. As such, they had an implicit promise of taxpayer backing and could borrow money at rates well below competitors.
Because of this, the Bush administration warned in the budget it issued in April 2001 that Fannie and Freddie were too large and overleveraged. Their failure "could cause strong repercussions in financial markets, affecting federally insured entities and economic activity" well beyond housing.
Mr. Bush wanted to limit systemic risk by raising the GSEs' capital requirements, compelling preapproval of new activities, and limiting the size of their portfolios. Why should government regulate banks, credit unions and savings and loans, but not GSEs? Mr. Bush wanted the GSEs to be treated just like their private-sector competitors.
But the GSEs fought back. They didn't want to see the Bush reforms enacted, because that would level the playing field for their competitors. Congress finally did pass the Bush reforms, but in 2008, after Fannie and Freddie collapsed.
Sunday, January 11, 2009
Former Bush domestic-policy advisor Karl Rove in the January 7th Wall Street Journal: