Feds Busy Rewriting the History of the Collapse
The talking points have been written and the official spokesmen have been briefed. Now all that remains is for them to deliver the government-approved version of the history of the financial collapse that has led to the worst economic disaster since the Great Depression.
In recent comments to the Council of Institutional Investors, Deputy Treasury Secretary Neal Wolin's prepared remarks examined at length the causes of the collapse without mentioning the Federal Reserve system once. Nor did he mention Fannie Mae or Freddie Mac. He did blame AIG, Enron, and the "opaque, unregulated market we have today[.]" The suggestion that the financial markets are unregulated will be news to anyone who has worked in the financial sector, but what we are seeing again and again is a public relations machine that has been dispatched to make it clear that the Federal government and its quasi-government monopolies will be relegated to the background as but marginal players in the system, or even as victims.
We see this attitude in the often-repeated claim by Fed representatives, such as Bernanke himself, that the Fed would have regulated better if only Congress had given it the power to do so. Thus, the Federal Reserve, the engine behind the absurdly low mortgage rates and the moral hazard that drove the bubble to such destructive ends, would have prevented the collapse if only Congress had given it more power. Ignored is the fact that, had the Fed not flooded financial institutions with cheap money, millions of high-risk and soon-to-be-delinquent loans would never have been made in the first place.
In a January speech to the American Economic Association in Atlanta, Bernanke declared that "Economists who have investigated the issue have generally found" that the Fed is blameless, and that the money being pumped into the mortgage market via the Fed contributed to only a "small portion" of the run-up in home prices. Bernanke also claims to this day that the Fed was doing its best to head off the crisis in spite of the fact that, at least until 2007, if not later, Bernanke repeatedly denied the existence of a housing bubble at all, while denying that a housing bust would have any substantial impact on the economy.
While the Fed gets defensive, Treasury simply ignores it. Wolin's remarks omit the Fed from the discussion in toto, and after a few months of Bernanke and Greenspan denying that the Fed had any role in the crisis at all, it seems that the current method among the spokesmen for the regime will be to simply distract the public from the central role the Fed had in the collapse. It has done this by providing a narrative that focuses on anyone but the Fed or the GSEs. Wolin's remarks make it clear that the focus is now on regulation and on using populist rhetoric to yet again augment and cement the power of the very rich through the Fed and through a new managerial apparatus that will allow the federal government to directly control trillions of dollars that were once considered private property.
The GSEs, Fannie and Freddie, are apparently innocent bystanders as well. As the U.S. Senate's Permanent Subcommittee on Investigations kicks off a week of hearings, the committee's chair, Carl Levin, has already set the tone for the investigations, and it seems that Fannie and Freddie will hardly be center stage. Amazingly, Levin's remarks on the perfidy of the secondary market did not appear to mention Fannie and Freddie at all, despite the central role of these institutions in purchasing countless numbers of securitized loans, and in making the sale of those loans profitable for the originators.
Before they finally admitted insolvency and entered a state of conservatorship in 2008, the GSEs had long maintained that they were private institutions. Yet, the fact that they were exempted from state and local regulations and taxation while wielding massive influence on Capitol Hill, and the fact that everyone simply accepted that the GSEs would be bailed out in case of failure, ensured that Fannie and Freddie would always have ready access to the capital necessary to keep buying up a nearly limitless supply of securitized loans that, in many cases, few others were willing to purchase.
Calling them "securitization factories" Levin condemned the banks that sold large numbers of securitized loans on the secondary market. But to whom on the secondary market did these lenders sell their securitized loans? They sold them to Fannie and Freddie in enormous quantities, and the GSEs, having been created by the Federal Government to accelerate the purchase of mortgage loans on the secondary market, were the engine behind securitization. Fannie and Freddie also were the driving force behind the proliferation of the Mortgage Electronic Registration Systems (MERS) that further accelerated the process of securitization and also virtually eliminated transparency in ownership of the securitized loans. In short, the volume of securitized loans on the secondary market would have been a mere fraction of its true size without the GSEs since the loan originators were often only responding to repeated requests from Fannie and Freddie to sell them loans that proved to be extremely bad investments.
Yet, in the rhetoric coming out of Treasury and the Senate about transparency and securitization Fannie and Freddie are mere bit players. At the same time, mentioning the Fed in the discussion on limiting risky behavior at banks is allowed only as long as no one mentions the fact that the Fed provided the gasoline for the fire that ended up wiping out the value of so many loans.
The stakes are enormously high in the present rhetorical battle. Just as it was essential for Roosevelt and the Keynesians to convince the public that the Great Depression was caused by an unfettered free market, it is equally true that the Federal government must now avoid a situation in which the public actually recognizes the widespread and central role of the Federal Government in the present collapse. The talking points center on transparency and risk management, yet no organization in recent decades has created more moral hazard and provided less transparency than the Federal Reserve. The official spokesmen decry securitization and low-quality loans, yet the bloated secondary market and its securitized loans are the product of decades of Federal subsidization of the housing market through the GSEs and the Fed.
The present rhetoric blames the lenders who sold securitized loans into a market that would have been far smaller and much more risk-averse were it not for the Feds. Securitization doesn't happen unless there's a market for it. The present rhetoric blames the market for providing loans to borrowers who should never have borrowed. Yet the money to make those loans would have never existed without the Fed. Even those who favor regulation can agree that there is no need to regulate loans that are never made, and there is no need to regulate securitized mortgages that are never sold.
The Fed is today facing criticism far beyond what it has ever experienced since its creation. The legitimacy of the federal government is at a historical low point. The public senses that the Federal Government — bloated, corrupt, and incompetent — had a role in the collapse.
However, if the Feds are successful in directing the public's gaze toward a few organizations of secondary importance such as the financial institutions that merely followed the lead of Fannie, Freddie and the Fed, it could take decades to undo the damage that will be done.
April 15, 2010
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