Saturday, July 19, 2008

How the Left Wing Created the Credit Crisis. Yes, Indeed!

James Grant is a knowledgeable student of the credit system, but today he goes off the rails, blaming the left wing for the credit crisis. Here is the most striking passage:
By and by, the lefties carried the day. They got their government-controlled money (the Federal Reserve opened for business in 1914), and their government-directed credit (Fannie Mae and the Federal Home Loan Banks were creatures of Great Depression No. 2; Freddie Mac came along in 1970). In 1971, they got their pure paper dollar. So today, the Fed can print all the dollars it deems expedient and the unwell federal mortgage giants, Fannie Mae and Freddie Mac, combine for $1.5 trillion in on-balance sheet mortgage assets and dominate the business of mortgage origination (in the fourth quarter of last year, private lenders garnered all of a 19% market share).

Grant, James. 2008. "Why No Outrage?" Wall Street Journal (19 July): p. W 1.

Would a publically owned agency have behaved the same way, lowering standards to increase share costs?

13 comments:

Jack said...

The Federal Reserve described as a means for the government to control money is a joke. Created by bankers.
Owned by the member banks. Directed by those anointed to do so by those member banks. Where the concept of government control comes in would certainly require a fanciful view of the creation, purpose and process of the Federal Reserve Bank. It's little more than a conduit for the government to shovel tax payer moneys to its members and to manipulate interest rates to suit the purposes of those same banks. That the avaricious greed of those same member banks has come back to bite them all in the ass has little to do with government control. It looks a bit more like things are out of control.

Has the idiot Grant lost sight of the fact that both Freddie and Fannie have been functioning as private sector public corporations.
They've had the deck stacked in their favor for so long that they seem to have forgotten how to turn a profit the old fashioned American way; a little hard work and ingenuity. I guess it must be the fault of that new fangled business model; leverage to the hilt until insolvency comes to the door. Then cry wolf with big tears, "I'm too big to fail."

Michael Perelman said...

Sadly, Grant is not an idiot, but usually a rather sharp observer of the credit system. How he wrote this, I am not sure.

Jack said...

"..but usually a sharp observer of the credit system."

But what of his political perspective. Can any argument be made for a slant on those observations? I don't read the WSJ on a routine basis. It's opinion pages are just too virulent. it publishes a pretty good newspaper so far as the actual news is concerned, but it has been obvious for a long while that its opinion and editorial writers don't read its news content.

Michael Perelman said...

This was not on the editorial page, but the cover on the Weekend Journal, which probably gets more attention than any other page.

Eric said...

A publically-owned agency would not have done anything to boost its share price, but it might lower standards to encourage more people to buy homes. (A policy end for some people.)

It is an ownership society, after all (jk, sadly).

Kevin Carson said...

On what a "Lefty" measure the Fed was, I defer to Gabriel Kolko. And anything that came out of the New Deal *must* be socialist, dominated as we all know the FDR administration was by radical Marxists like Gerard Swope and the Business Advisory Council.

I can't speak for other Lefties, but my agenda is more along the lines of putting the bleeding heads of the entire Federal Reserve Board of Governors on pikes along Wall Street.

Shag from Brookline said...

Can the case be made that Freddie Mac, Fannie Mae and Ginnie Mae is a politically incestuous menage a trois?

Max. Robespierre said...

"I can't speak for other Lefties, but my agenda is more along the lines of putting the bleeding heads of the entire Federal Reserve Board of Governors on pikes along Wall Street."

Here, here, and the motion is carried. Will the Sgt at Arms please move ahead.

rosserjb@jmu.edu said...

Of course Fannie Mae was a New Deal creation and I have heard some local conservatives here going on about how it and Freddie are "creatures of the Democrats" and so on. But while the Fed did not get adopted until Woodrow Wilson was president, it was the product of a committee of private bankers headed by J.P. Morgan who were annoyed by the "Rich Man's Panic" of 1907, and Freddie came in under Richard Nixon, that notorious leftwinger.

S. Weil said...

I think you are missing his point - mostly because he is not making it very directly. He is saying that all of the policies that the soft money progressives (lefties from a century ago) put forward have come to pass - not necessarily that lefties themselves were responsible for their enactment. Of course the "lefties" would be expected to provide the outrage - "why no outrage"?. He seems to be implying that the one reason for the lack of outrage is that the left either has been co-opted or is befret of new ideas and those of William Jennings Bryan have be exhausted.

S. Weil

juan said...

This was also brought up at Naked Capitalism where one comment linked creation of the Fed and the Communist Manifesto's 5th point re centralization of credit authority.

Well, of course the Fed must be a Marxist creation even though the working class did/does not hold state power, nevermind that wacky old Karl considered the latter something of a prerequisite.

More applicable:

The entire artificial system of forced expansion of the reproduction process cannot, of course, be remedied by having some bank, like the Bank of England, give to all the swindlers the deficient capital by means of its paper and having it buy up all the depreciated commodities at their old nominal values.

Michael Perelman said...

let me explain. Anything that fails and cannot be explained away is by definition leftist. Anything that succeeds is claimed as evidence of market success. It is simple. Get with the program.

rosserjb@jmu.edu said...

Yes, Marx did want centralization of credit creation, but William Jennings Bryan wanted silver money and inflation. He did not like bankers, and I am sure continued to support the old Democratic opposition to central banks that dated back to Jefferson and Jackson.