The financial crisis: Looking for a scapegoat

Have you heard the latest fairy tale? asked The Wall Street Journal in an editorial. Democrats are trying hard to pin the financial panic of recent weeks on financial deregulation engineered by dastardly Republicans, and runaway “greed” on Wall Street. But the reality is that liberal government meddling in the free market is “deeply implicated in this meltdown.” As far back as 1977, when Congress passed Jimmy Carter’s Community Reinvestment Act, liberals have been arm-twisting banks to finance “affordable” homes for the poor. House Financial Services Chairman Barney Frank and other Democrats ratcheted up the pressure in the 1990s and early 2000s, using Fannie Mae and Freddie Mac to back billions in shaky, subprime loans—and resisting attempts to curtail these agencies’ reckless credit policies. As a result, said Charles Krauthammer in The Washington Post, millions of low-income people borrowed “over their heads,” leading inexorably to defaults—and our current economic “calamity.”

Now that takes nerve, said Cynthia Tucker in The Atlanta Journal-Constitution. Conservatives are actually blaming the financial crisis on … yes, minorities. But the Community Reinvestment Act was in place for decades without a crisis, and it applies only to banks and thrifts, which made just 25 percent of mortgage loans during the recent frenzy. To buy the conservative explanation of what went wrong, said Thomas Frank in The Wall Street Journal, you have to believe that government forced predatory lenders like Countrywide Financial to peddle loans with absurd terms bound to cause defaults. Then liberal policymakers tricked financial institutions into buying securities in which this bad debt was bundled. So, it wasn’t greed or lack of government oversight that brought the financial system crashing down. It was those damn poor people!

Blaming the poor is misguided, said Sebastian Mallaby in The Washington Post, but so is blaming a lack of government regulation. The real scapegoat is the Federal Reserve, which, in the early 2000s, adopted a policy of easy credit at the same time that a capital surplus from China was flooding global markets. With trillions available at negligible interest rates, borrowers from Main Street to Wall Street binged, “driving up the price of everything from Florida condos to Latin American stocks.” That’s what caused the bubble and bust—not deregulation. If the next president doesn’t understand that, and responds by imposing heavy regulatory schemes on the financial system, it will only “make the backlash nastier.”

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