Lessons From the Bailout

Walter E. Williams

10/8/2008 12:01:00 AM - Walter E. Williams

In my more cynical moments, I think that we Americans deserve what we get from our politicians, many of whom can be generally described as nothing less than loathsome. You say, "Williams, that's a pretty heavy putdown." My question to you is how else would you describe these congressmen who are now blaming the financial mess on the failure of the free market? Starting with the Community Reinvestment Act of 1977, that was given more teeth during the Clinton administration, Congress started intimidating banks and other financial institutions into making loans, so-called subprime loans, to high-risk homebuyers and businesses. The carrot offered was that these high-risk loans would be purchased by the government-sponsored enterprises Fannie Mae and Freddie Mac. Anyone with an ounce of brains would have known that this was a prescription for disaster but there was a congressional chorus of denial.

Five years ago, Congressman Barney Frank (D-Mass.) vouched for the "soundness" of Fannie Mae and Freddie Mac, and said, "I do not see any possibility of serious financial losses to the treasury." In 2004 congressional hearings, where the Bush administration sought greater oversight over Freddie Mac and Fannie Mae, congresswoman Maxine Waters (D-Calif.) said, "We do not have a crisis at Freddie Mac and particularly at Fannie Mae," adding that "the GSEs have exceeded their housing goals." Congressman Gregory Meeks (D-N.Y.) said, "There's nothing wrong with Fannie Mae and Freddie Mac." In these hearings Barney Frank said that he doesn't see "anything in the reports that raises safety and soundness problems." Earlier this year, Sen. Christopher Dodd (D-Conn.) praised Fannie Mae and Freddie Mac for "riding to the rescue" to help people get home mortgage loans, adding that they "need to do more" to help high-risk borrowers get better loans.

The financial collapse of Fannie Mae and Freddie Mac is not a failure of the free market because lending institutions in a free market would not have taken on the high-risk loans. They were forced to by the heavy hand of government. The solution is not a taxpayer-financed bailout. The solution is to let them fail and allow the people who invested in them, as well as the people who purchased homes they couldn't afford, suffer the losses. Of course that takes a level of political courage that is in short supply. There are other measures that should be taken as part of a second-best solution.

In 2002, when the Enron and WorldCom scandal broke, the Congress held hearings and some chief executives were jailed. Who did what was the big story in the major news media almost every night. Congress rushed to enact the Sarbanes-Oxley Act, also known as the Public Company Accounting Reform and Investor Protection Act of 2002. The act placed unnecessary, onerous and costly accounting standards on American businesses. The Enron and WorldCom debacle is a drop in the bucket compared to the financial mess that Congress has created through Fannie Mae and Freddie Mac, in the name of "affordable" housing. Have you heard Congress calling for hearings? They haven't called for hearings because many of them, both Democrats and Republicans, receiving hundreds of thousands of dollars, were in cahoots with Fannie Mae and Freddie Mac. If Americans are going to be on the hook to bail out these government-sponsored enterprises, at the minimum congressional hearings ought to be held to find out who did what and when.

Corporations employ accounting practices promulgated by the Financial Accounting Standards Board (FASB) that established Generally Accepted Accounting Principles (GAAP). Fannie Mae, Freddie Mac and government agencies have accounting practices that don't come close to, and never did, the honesty of private accounting practices. Accounting fraud and deception are the dominant features of government agencies. If a private business kept and cooked the books, like government agencies do, the top executives would go to jail. Shouldn't the accounting standards businesses have to meet be applied to Washington? My answer is yes and if a congressman says no, I'd like for him to tell us why.