Probably the greatest blunder of the Obama White House over the past two years has been its abject failure to make certain the public understood that it was conservative misgovernance that was at the root of the great economic meltdown of 2008
March 2, 2011

Probably the greatest blunder of the Obama White House over the past two years has been its abject failure to make certain the public understood that it was conservative misgovernance that was at the root of the great economic meltdown of 2008 -- especially because it was that very downturn that propelled him into office.

That failure has functionally given conservatives -- the architects of the disaster -- the ability to cover their tracks by erecting a narrative in which the blame was instead laid at the doorstep of Fannie Mae and Freddie Mac and minority-lending programs. And that narrative is now widely believed by over half the country.

Now the Washington Times is trying to muddy the water even further, running a bizarre and thinly sourced piece claiming that perhaps terrorism -- maybe even Chinese terrorists, colluding with radical Islamists, perhaps? -- were actually behind the meltdown.

Here's the piece.

Evidence outlined in a Pentagon contractor report suggests that financial subversion carried out by unknown parties, such as terrorists or hostile nations, contributed to the 2008 economic crash by covertly using vulnerabilities in the U.S. financial system.

The unclassified 2009 report “Economic Warfare: Risks and Responses” by financial analyst Kevin D. Freeman, a copy of which was obtained by The Washington Times, states that “a three-phased attack was planned and is in the process against the United States economy.”

But as you can see from reading the piece, Freeman presents no evidence other than the economic catastrophes themselves that these were terrorist attacks. Indeed, it's nothing but unadulterated wild speculation from start to finish.

Nonetheless, Megyn Kelly invited Freeman onto her Fox News yesterday and treated it as if it were potentially the biggest story in the whole wide world. She was duly wowed -- even though, as you can see, Freeman couldn't even tell her whether these were Chinese terrorists or Islamic radicals, or mebbe they were working in collusion! (As if!)

No wonder everyone involved in analyzing the markets is pretty much laughing at Freeman and the reporters who gobbled up this nonsense so gullibly.

Then, of course, Kelly capped it all off with the classic "minority lending programs did it" narrative as the safe story everyone believes:

KELLY: But how could they have done it? Because, you know, I think the conventional wisdom in this country is, uh, you know, you had Fannie and Freddie giving out tons of mortgages that never should have been given out, then you had the Wall Street folks trading these so-called credit default swaps, basically doubling down on the bad investments, and ultimately things just started to implode in a way where, you know, we had to step in, the government bailed out those banks, and we all know the history that happened after there.

That's a pretty remarkably dense thicket of lies that have little or no relationship to reality whatsoever. Let's try to unpack it a little:

-- Fannie and Freddie's role in the economic crash was so minor as to be nearly farcical. As McClatchy explained at the time:

As the economy worsens and Election Day approaches, a conservative campaign that blames the global financial crisis on a government push to make housing more affordable to lower-class Americans has taken off on talk radio and e-mail.

Commentators say that's what triggered the stock market meltdown and the freeze on credit. They've specifically targeted the mortgage finance giants Fannie Mae and Freddie Mac, which the federal government seized on Sept. 6, contending that lending to poor and minority Americans caused Fannie's and Freddie's financial problems.

Federal housing data reveal that the charges aren't true, and that the private sector, not the government or government-backed companies, was behind the soaring subprime lending at the core of the crisis.

Subprime lending offered high-cost loans to the weakest borrowers during the housing boom that lasted from 2001 to 2007. Subprime lending was at its height from 2004 to 2006.

Federal Reserve Board data show that:

* More than 84 percent of the subprime mortgages in 2006 were issued by private lending institutions.

* Private firms made nearly 83 percent of the subprime loans to low- and moderate-income borrowers that year.

* Only one of the top 25 subprime lenders in 2006 was directly subject to the housing law that's being lambasted by conservative critics.

The "turmoil in financial markets clearly was triggered by a dramatic weakening of underwriting standards for U.S. subprime mortgages, beginning in late 2004 and extending into 2007," the President's Working Group on Financial Markets reported Friday.

Conservative critics claim that the Clinton administration pushed Fannie Mae and Freddie Mac to make home ownership more available to riskier borrowers with little concern for their ability to pay the mortgages.

"I don't remember a clarion call that said Fannie and Freddie are a disaster. Loaning to minorities and risky folks is a disaster," said Neil Cavuto of Fox News.

Fannie, the Federal National Mortgage Association, and Freddie, the Federal Home Loan Mortgage Corp., don't lend money, to minorities or anyone else, however. They purchase loans from the private lenders who actually underwrite the loans.

It's a process called securitization, and by passing on the loans, banks have more capital on hand so they can lend even more.

This much is true. In an effort to promote affordable home ownership for minorities and rural whites, the Department of Housing and Urban Development set targets for Fannie and Freddie in 1992 to purchase low-income loans for sale into the secondary market that eventually reached this number: 52 percent of loans given to low-to moderate-income families.

To be sure, encouraging lower-income Americans to become homeowners gave unsophisticated borrowers and unscrupulous lenders and mortgage brokers more chances to turn dreams of homeownership in nightmares.

But these loans, and those to low- and moderate-income families represent a small portion of overall lending. And at the height of the housing boom in 2005 and 2006, Republicans and their party's standard bearer, President Bush, didn't criticize any sort of lending, frequently boasting that they were presiding over the highest-ever rates of U.S. homeownership.

The "Fannie and Freddie did it" narrative has been ridiculed from a number of market and economic experts. As Barry Riholtz put it:

Some people (especially the political hacks) are focusing their energies in the wrong places. According to a recent investigation by Barron’s, Fannie’s biggest problem was not the subprime mortgages they bought — it was the better quality Alt A mortgages that caused their demise ...

The folks who want to place the entire crisis at FNM/FRE ‘s doorstep miss the point — and let me hasten to add that I was never a fan of the company, and we were short FNM from over a year ago, at $42+ — these people seem to miss all of the big picture issues, and are focsing on minor factor and outright irrelevancies.

... While I understand that reducing the complexities of economic history into bumper sticker phrases is politically expedient, it does not help us understand the root cause of the problems. And, it gets in the way of helping us fashion a solution for the future. Hence, why I hold the weasels who are attempting to obscure reality and rewrite history in such disdain.

For the non-partisan, non hacks amongst you, for the policy makers and academics and economists who are truly interested in how this came to pass, and what we can do to fix it, the bottom line remains: The CRA was irrelevant to the current crisis, and Fannie Mae and Freddie Mac were mere cogs in a very complex financial machine, with many moving parts.

But the primary cause of the mess? Not even close . . .

Ritholtz -- like hundreds of other economists and market experts who understand what happened -- says the primary cause, in fact, were "a nonfeasant Fed, that ignored lending standards, and ultra-low rates."

This nonfeasance under Greenspan allowed banks, thrifts, and mortgage originators to engage in all manner of lending standard abrogations. We have detailed many times the I/O, 2/28, Piggy back, and Ninja type loans here. These never should have been permitted to proliferate the way they did.

The fact that they did proliferate as they did, in fact, can be laid directly at the doorstep of conservative ideologues, whose mania for deregulation -- particularly in the financial-services sector -- is what led directly to the policies creating, condoning and even encouraging such dubious financial instruments.

Though one might argue, in fact, that this kind of depredation committed by the oligarchical class, with working-class people taking the hit, and with little if any consequence whatsoever to the wealthy, is a kind of terrorism -- economic terrorism against working Americans. But don't expect the experts and anchors at Fox News to ever let you hear that.

-- Oh, and about those bailouts: Not only were they a success, they also wound up being a lot cheaper than everyone expected. That seems to be a bit of the "history" that never makes it onto Fox News, either.

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