Romney’s MA Jobs’ Initiative Directly Contributed to the 2008 Financial Crisis

The current financial crisis was precipitated by a bubble in the US housing market. (…) Boom-bust processes usually revolve around credit and always involve a bias or misconception (…) The super-boom got out of hand when the new products became so complicated that the authorities could no longer calculate the risks and started relying on the risk management methods of the banks themselves.

And according to the April 2008 International Monetary Fund’s World Economic Outlook, the “financial market crisis that erupted in August 2007 has developed into the largest financial shock since the Great Depression, inflicting heavy damage on markets and institutions at the core of the financial system.”

At the CNN Florida Republican Presidential debate in Jacksonville on January 26th, Governor Romney attempted to link Speaker Newt Gingrich to the 2007 Housing Crisis by questioning the Speaker’s role as a consultant at the troubled mortgage giant Freddie Mac. He made the same connection in the NBC debate on January 23rd. Governor Romney claimed in the debates that Speaker Gingrich peddled his influence in Washington D.C. to promote Freddie Mac when he should have been blowing the whistle on the government-sponsored entities’ practices.

Well, I think you know that Fannie Mae and Freddie Mac were a big part of why we have the housing crisis in the nation that we have. And we’ve had this discussion before.

Speaker Gingrich was hired by Freddie Mac to promote them, to — to influence other people throughout Washington, encouraging them to — not to dismantle these two entities. I think that was an enormous mistake. I think, instead, we should have had a whistle-blower and not horn-tooter.

He should have stood up and said, look, these things are a disaster; this is a crisis. He should have been anxiously telling the American people that these entities were causing a housing bubble that would cause a collapse that we’ve seen here in Florida and around the country.

Romney ignores the fact that there were prominent conservative whistle-blowers who pointed out that Fannie Mae and Freddie Mac as government-sponsored entities (GSEs) needed regulation to prevent financial trouble. In a September 2003 article, the New York Times reported that President George W. Bush introduced “the most significant regulatory overhaul in the housing finance industry since the savings and loan crisis a decade ago.” Likewise in April 2005, Fed Chairman Alan Greenspan testified before the Senate Committee on Banking, Housing, and Urban Affairs regarding the necessity of reforming and regulating Fannie Mae and Freddie Mac.

From now on, limiting the potential for systemic risk will require the significant strengthening of GSE regulation and the GSE regulator. (…) Left unresolved, such uncertainties could threaten the stability of financial markets.

Mitt Romney served as Governor of Massachusetts from January 2, 2003 to January 4, 2007. As Governor, Romney aggressively promoted affordable housing as a key component of his jobs initiative. In several 2003 and 2004 press releases, Governor Romney claimed that Massachusetts needed more affordable housing to stay economically competitive and that employers weren’t moving their operations to Massachusetts for lack of affordable housing.

As was the common theme among liberal Republicans and Democrats at the time, Romney proclaimed in a March 3, 2004 press release that

According to a review of press releases from his administration, Governor Romney pledged approximately $350 million in state and federal funds and low-income-housing tax credits to build more affordable housing and assist low-income borrows with special mortgage financing.

Not only did Governor Romney aggressively promote access to affordable housing, he also convened private and state entities to develop ideas for creative financing programs that would allow low-income borrowers to purchase the affordable housing units the state was building. One such program developed by MassHousing and United Cooperative Bank was “Take the PVTA Home” which Governor Romney launched with a personal appearance and press release on January 31, 2003. The PVTA is the Pioneer Valley Transportation Authority.

United Cooperative Bank is currently offering the “Take the PVTA Home” mortgage with a 30-year fixed interest rate of 5.75 percent. Banks like United Cooperative are willing to make the no-downpayment loans because MassHousing insures them. As an added incentive, lenders receive enhanced Community Reinvestment Act (CRA) credit for the loans for partnering with MassHousing. (…) According to MassHousing Executive Director Tom Gleason, “When we designed the program, we took into account that people who take mass transit have fewer car-related expenses, and have more money to spend on a mortgage.”

So when President Bush’s administration was attempting to regulate GSEs to avert a financial crisis, Governor Romney’s affordable housing policies in Massachusetts were significantly contributing to the bad assets on the books of Fannie Mae and Freddie Mac. According to data from the Federal Reserve Bank of Boston the number of subprime mortgage originations in Massachusetts spiked between 2003 and 2006 during Romney’s tenure as Governor of Massachusetts.

Given that there were prominent conservative whistle-blowers warning about the potential dangers of Fannie Mae and Freddie Mac, why was Governor Romney still pushing affordable housing in Massachusetts? What do his policies as Governor of Massachusetts tell us about how he will manage the national economy?

I believe the following words should have been blockquoted to show they are Romney's words:

Well, I think you know that Fannie Mae and Freddie Mac were a big part of why we have the housing crisis in the nation that we have. And we’ve had this discussion before.
Speaker Gingrich was hired by Freddie Mac to promote them, to — to influence other people throughout Washington, encouraging them to — not to dismantle these two entities. I think that was an enormous mistake. I think, instead, we should have had a whistle-blower and not horn-tooter.
He should have stood up and said, look, these things are a disaster; this is a crisis. He should have been anxiously telling the American people that these entities were causing a housing bubble that would cause a collapse that we’ve seen here in Florida and around the country.

This is one of Romney's lies that especially infuriates me (though it's really hard to choose!) -- that Newt "lobbied" for Fannie and Freddie. It would hard to choose a lobbyist more fated to be ineffective than Newt: The Dems in Congress hate him, and the GOPe hate him maybe more. I have read, though, that a couple of people associated with and supporting Romney (Susan Molinari is the only name I remember) actually did lobby Congress to forestall any investigation of F&F's practices.

Romney Linked Gingrich to the Housing Crisis Through Freddie Mac

At the CNN Florida Republican Presidential debate in Jacksonville on January 26th, Governor Romney attempted to link Speaker Newt Gingrich to the 2007 Housing Crisis by questioning the Speaker’s role as a consultant at the troubled mortgage giant Freddie Mac. He made the same connection in the NBC debate on January 23rd. Governor Romney claimed in the debates that Speaker Gingrich peddled his influence in Washington D.C. to promote Freddie Mac when he should have been blowing the whistle on the government-sponsored entities’ practices.

Well, I think you know that Fannie Mae and Freddie Mac were a big part of why we have the housing crisis in the nation that we have. And we’ve had this discussion before.

Speaker Gingrich was hired by Freddie Mac to promote them, to — to influence other people throughout Washington, encouraging them to — not to dismantle these two entities. I think that was an enormous mistake. I think, instead, we should have had a whistle-blower and not horn-tooter.

Yell at Romney, not me; this was just another accusation by Romney in a long list of bearing false witness against his neighbor that he has done against both Newt and Rick.

“The super-boom got out of hand when the new products became so complicated that the authorities could no longer calculate the risks and started relying on the risk management methods of the banks themselves.”

This I cannot abide, and can’t imagine why anyone could be so ignorant as to believe. Firstly, without easy money—which the market, save perhaps through a new Comstock lode, cannot conjure on its own—and assumed future bailouts—which the market, even with J.P. Morgan-sized private intervention, cannot conjure on its own—there would be no risk, and therefore nothing to fear from “complicated products.” So there’s that. More importantly, let’s say the regulators didn’t rely on bankers’ own standards. Does that impy their own standards would have shot down the complicated leverage schemes? Hell no.

The housing market was doing just exactly what the government wanted it to do. Can anyone honestly imagine the SEC or any other watchdog saying, “Whoa, hold on there, American Dream. I’m not so sure. Let’s do it this way, instead.” Ha! They wanted a housing boom. They needed a housing boom. Anyone standing in the way of the housing boom would’ve been flayed and burned at the stake on the Capitol steps for depriving poor children of shelter.

This I cannot abide, and can’t imagine why anyone could be so ignorant as to believe. (...) More importantly, let’s say the regulators didn’t rely on bankers’ own standards. Does that impy their own standards would have shot down the complicated leverage schemes?

Respectfully, you're missing the point. Soros's point, and that of many other financial experts, was that the mark-to-market accounting rule used by the banks is what sent the crisis spiraling out of control.

It is true that the root of this crisis is bad mortgage loans, but probably 70% of the real crisis that we face today is caused by mark-to-market accounting in an illiquid market."

Thus the outcry, at the time, to suspend "mark-to-market."

“Soros’s point, and that of many other financial experts, was that the mark-to-market accounting rule used by the banks is what sent the crisis spiraling out of control.”

I don’t think I am missing the point. Can you imagine federal regulators/Congressmen/whatever fixing the false boom by going after mark-to-market? Neither can I, because they liked it. They may not have liked mark-to-market, or have known what the heck it means (if anyone does), but they certainly wouldn’t have risked derailing the wildly politically popular New American Dream of perpetually rising house prices.

Some people, it is true, raised eyebrows and blew whistles. But no one listened, and why? Because Washington wanted it to happen. What guidlines were followed and whose rules carried the day were not decided by the market nor wise disinterested people filled with the public spirit. It was decided, as these things always are, by political expediency.

Unlike many, I am fully aware of the paradox of specific deregulation within a general system of hyper-regulation. Deregulation is fine, but not so much when there’s all this free money floating around and little risk because of collective responsiblity for entities like Freddie and Fanny. So the libs have a point there, though not as big a one as they think since banking and securities are among the most heavily regulated industries. If it appears that the Fed, the SEC, Congress, and every other related government entity you can think of was asleep at the wheel while bankers wrote the rules and ran away with the loot, that’s because the regulators weren’t asleep. What happened is what they wanted to happen, in the broad strokes.

My point is, even if there hadn’t been fuzzy banker-inspired rules concerning leverage of the leveraging you’ve leveraged on top of your leverages, there would have been a superbubble. Because, if you haven’t noticed, Washington likes bubbles. That’s why we have a Fed. That’s why we have Freddy and Fanny. To pyramid money on top of money on top of securities on top of mortgages on top of insurance policies on top of streets paved with gold and marshmallow chocolate fountains. Anything to keep the money flowing.

I’m not saying they knew what they were doing with mark-to-market. I’m saying if someone had told them, and if they had believed it, they wouldn’t have cared. Stopping at that point would have endangered all the American Dreams at stake and made millions of poor children homeless, and so forth.

I don’t think I am missing the point.

It seems to me you understand the consequences of banks manipulating their leverage ratios but miss the finer points of mark-to-market (MTM) valuations that allowed such manipulation.

MTM rules were federally mandated in response to the 80's Savings & Loan crisis specifically to address the problem of banks manipulating their leverage ratios, which they did under historical-cost accounting rules. However, as with most federal regulation designed to address one very specific problem, MTM didn't work well with hard-to-vaule assets during the housing crisis.

Banks originated loans (mortgages), took the fees associated with same, and then shifted the risk off to exotic derivatives such as collateralized debt obligations (CDOs) which were reasonable in a booming market, to free up more capital to take more risk. (Clearly you realize the consequences of manipulating leverage ratios.) Applying MTM rules to those hard-to-value assets in a declining market worsened the crisis.

Can you imagine federal regulators/Congressmen/whatever fixing the false boom by going after mark-to-market?

Yes, I can because they're the ones who mandated MTM in the first place.

Unlike many, I am fully aware of the paradox of specific deregulation within a general system of hyper-regulation.

That's a whole nother subject, FRiend.

If it appears that the Fed, the SEC, Congress, and every other related government entity you can think of was asleep at the wheel while bankers wrote the rules and ran away with the loot, that’s because the regulators weren’t asleep.

The bankers didn't write the rules. The SEC did. As I said, MTM was federally mandated. The problems occur when the free market tries to find ways around hyper-regulation and we then realize the unintended consequences of same.

I’m not saying they knew what they were doing with mark-to-market.

They knew what they were doing with MTM when they mandated it for a specific purpose in a specific environment (S&L crisis) but they didn't know "what they didn't know" when the housing crisis hit and MTM made it worse with hard-to-value assets.

I’m saying if someone had told them, and if they had believed it, they wouldn’t have cared.

You may be right, but that doesn't negate the original point of Soros's statement.

Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.

And the Un-Masking of Mitt Romney, the left-wing, Progressive Liberal, continues . . .

"If we must have an enemy at the head of Government, let it be one whom we can oppose, and for whom we are not responsible, who will not involve our party in the disgrace of his foolish and bad measures." - Alexander Hamilton