The Bush years will be remembered for the cruel triumph of realism over illusion.
He could have included the politicians who enabled the irresponsible lending of Fannie Mae and Freddie Mac because they knew these “government-sponsored enterprises” — since bailed out by the government at a potential cost of $200 billion to taxpayers — would line their campaign coffers. Fannie and Freddie were the “patient zero” of the financial contagion, encouraging and blessing the “subprime” loans that were a toxin spread throughout the financial system. Many Republicans, including McCain, wanted Fannie and Freddie reformed. As a largely Democratic cash cow, it was protected by Democrats, enamored of its mission of extending homeownership to those who — it turns out — couldn’t afford homes.
With the financial system teetering on collapse, the federal government has become the backstop. “Raw capitalism is dead,” Treasury Secretary Hank Paulson has said. With Paulson and Fed Chairman Ben Bernanke deciding case by case which companies the federal government will save or not, he’s not kidding. After letting Lehman die, they essentially took over $1 trillion insurance giant AIG, making the taxpayers instant stakeholders in its far-flung businesses from life insurance to aircraft leasing and a ski resort.
In this environment, it’s hard to resist calls for more regulation. But it has to be intelligent and measured, an extremely difficult task when the market is constantly adapting and the next excess will come in a new form. A basically solvent company, AIG was rendered illiquid by so-called mark-to-market accounting rules that say assets must be marked down to their value in the current market, even if they are ultimately worth more. This was a reform adopted in response to the Enron scandal that has worsened the current crisis.
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