Social Engineering as Economic Policy

What we are witnessing today is not a failure of the free market. It is the failure of social engineering as economic policy. And it’s a disaster of epic proportions.

Nobody’s disputing that this disaster was precipitated by irresponsible lending practices, or that Fannie Mae and Freddie Mac were at the root of the whole debacle, though the ramifications have now spread far beyond them. What people are arguing about is the interpretation of the events that led us here, what should have been done differently, and what should be done to contain the fallout now that the pyramid scheme has blown up.

Hard core free market proponents, like me, will say that Fannie Mae and Freddie Mac were a mistake from the beginning. The government should have kept its nose out of the home mortgage industry, and not attempted to manipulate the market to enable people who couldn’t afford houses to buy them. On the other hand, proponents of the “government is good” and “more is better” philosophy will say the problem was that there wasn’t enough government manipulation. (Could there ever be?)

But, curiously, in 2005, when Alan Greenspan told Congress that Fannie Mae and Freddie Mac were “placing the total financial system of the future at a substantial risk,” and the Senate Banking Committee proposed a reform bill requiring tighter regulation of those two entities, the Democrats opposed it, on a strict party line vote, crushing the bill before it got out of committee. Barack Obama, Hillary Clinton, and Christopher Dodd all voted against it. (John McCain, incidentally, was one of the co-sponsors of the bill.)

Huh? Democrats voting against more regulation? Republicans voting for it? One would expect Republicans to favor less regulation, as regulation is antithetical to a free market. But, in this case, it already wasn’t a free market. A free market has its own natural checks and balances. Once the government has removed or impaired any of those natural checks and balances, the market loses its equilibrium and bad things can happen. What the Republicans were attempting to accomplish by proposing tighter regulations on Fannie Mae and Freddie Mac was to artificially restore the natural constraint that had been removed by shifting the risk from the lenders to the taxpayers.

In a free market, the desire for profit is counterbalanced by the aversion to risk. If the risk incurred by an investment or loan outweighs the profit potential, it’s not in the investor’s/lender’s best interest to participate, so the transaction doesn’t occur. However, when the government removes the risk associated with a bad transaction, by assuming the risk itself, then the natural constraint of risk aversion that would apply in a truly free market is eliminated, and investors will take risks that would otherwise be unacceptable. That’s what happened in the case of Fannie Mae and Freddie Mac. The taxpayers assumed the risk, and Fannie Mae and Freddie Mac made unsound investments.

In today’s mortgage industry, mortgages are always packaged up and sold to aggregators, who sell them to bigger aggregators, with Fannie Mae and Freddie Mac at the top of the pyramid as the granddaddies of all aggregators. Because Fannie and Freddie had no risk aversion, lenders further down the chain were free to take risks they wouldn’t otherwise take, knowing the aggregators would buy up the high risk (subprime) mortgages anyway. This was intentional.

Affordable housing is a euphemism for making home loans available to people who would not qualify for a loan under a free market system. The reason someone would not qualify for a loan in the free market is because they present too high a risk. In other words, they can’t afford to pay off the loan. Fannie and Freddie represented a wide scale experiment in social engineering. It was an attempt to use federal policy to “level the playing field” so anybody could “afford” to buy a home whether they could actually afford to pay for the home or not.

When the Republicans wanted to tighten the reins on Fannie Mae and Freddie Mac, and preclude them from making excessively risky investments, it would have meant they could no longer fulfill the mission of making homes “affordable” to those who couldn’t afford them. That’s why the Democrats opposed the bill. And that’s why we’re where we are today.

The great experiment in social engineering has now failed. Dramatically. And, because the experiment was backed by the full faith and credit of the U.S. taxpayer, it is our money, and our future, that is getting called in as collateral for this grand social experiment.

Anybody who blames this failure on the free market is either dishonest or naive. It was liberal social policy masquerading as economic policy that got us into this mess. If you want to see more of the same in the future, there are plenty of Democrats still in Congress. And there’s one running for president, too.


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32 CommentsLeave a comment

  1. Well put. However, as with many such things, there’s a potential upside: the hundreds of billions of dollars required for the bailouts will likely reduce the amount in the pork barrel for funding billion-dollar projects such as light rail and other experiments in social engineering.

  2. But the reason we object to pork barrel funding is the cost to the taxpayers. If they’re going to soak us anyway, we might as well get something for it — like maybe an extension of the O&C safety net funding, since they won’t let us cut our timber…

    Or better yet, why don’t they keep their pork, let us have our timber, get their hands out of our pockets, and leave us alone!

  3. “Nobody’s disputing that this disaster was precipitated by irresponsible lending practices, or that Fannie Mae and Freddie Mac were at the root of the whole debacle”

    Nobody in the Right-wing that is.

    “But, curiously, in 2005, when Alan Greenspan told Congress that Fannie Mae and Freddie Mac were ‘placing the total financial system of the future at a substantial risk,’”

    Ahhh, the Right-wing opinion piece by the likes of Kevin Hassett…a senior economic adviser to the McSame campaign & coauthor of “Dow 36,000: The New Strategy for Profiting From the Coming Rise in the Stock Market”, which was published back in 1999 before the dot-com bubble burst (it was a book that predicted that the Dow Jones industrials index would rise to *36000 within three to five years*–i.e., 2002 or 2004). What a surprise that he’s absolutely clueless…I wonder how his AIG stock is doin’??

    I swear that you guys on the Right must all go to the same meetings…lol…

    “yet in 2005 Alan Greenspan told Congress how urgent it was for it to act in the clearest possible terms”

    Hmmmm…was that before or after both he & the Bush Regime pushed ARMs so hard?? Oh yea, it was after…and we’ll just ignore the fact that McSame’s campaign manager used to lobby for Fannie Mae & Freddie Mac as well…sure, sure…

    “John McCain, incidentally, was one of the co-sponsors of the bill”

    Yea, and do you know when he became a “co-sponsor” of that bill?? Some 14 months AFTER it was introduced…now that’s what I call real leadership…real bad leadership that is…

    “One would expect Republicans to favor less regulation, as regulation is antithetical to a free market.”

    And one would be correct in that expectation. This crisis was caused by a complete lack of regulation & oversight of the whole financial system of the USA (a position championed by the GOP for *decades* now). The GOP was in control of Congress for almost 13 years in a row, and in control of the Presidency since 2001…what have they done to stave off this coming disaster?? Absolutely, positively nothing, period.

    “A free market has its own natural checks and balances.”

    Only in your own mind it does…worship at the altar of the “free market” on your own time GOP…not on taxpayer time.

    “Affordable housing is a euphemism for making home loans available to people who would not qualify for a loan under a free market system.”

    No, affordable housing is what it sounds like…housing that average people with average incomes can afford to live in, period. We are not all serfs yanno.

    Oh, and heaven forbid that the govt. champions any form of mass transportation, like light rail…lol…give me a break, please!

    The market that developed for mortgage-backed securities, which were backed by pools of shaky mortgages, was one of the keys to this fiscal disaster. That nonesense should have never been allowed to happen. The term “subprime” refers to loans that do not meet Fannie Mae or Freddie Mac guidelines in the first place…so it’s kind of hard to blame them for that kind of stuff eh? Some lenders obviously engaged in predatory lending practices…just look at the rates (~99.9%!) that were offered for the so-called “payday loans”. These types of loans have cripped thousands, including many military personnel. According the Wall Street Journal of all places, in 2006 61% of all borrowers receiving subprime loans had credit scores high enough to qualify for prime conventional loans! Many subprime borrowers also took out ARMs, which were pushed heavily by the former Fed chairman & the Bush Regime.

    Really, I was happy enough to let you spin your wheels endless on this issue NYD…since we’re getting a bailout whether you & your Right-wing cronies want one or not…but you just protest too much…it’s all just silliness…

  4. “…what should have been done differently, and what should be done to contain the fallout now that the pyramid scheme has blown up.”

    As long as the Democrats are in power, you can bet the pyramid will be built up again.

    The continued belief by the left in this country that people are “entitled” to houses, and health care ensures another implosion in the not to distant future. One would think a failure of this magnitude would be enough evidence that social engineering does not work in a “free” country.

  5. Mr, Guy, I wasn’t quoting Kevin Hassett; I was quoting Alan Greenspan. You’re the one who quoted Kevin Hassett.

    I don’t know about McCain’s campaign manager lobbying for Fannie Mae, but I do know that Obama himself has received more campaign contributions from Fannie Mae and Freddie Mac than any other politician, with the single exception of Christopher Dodd.

    The subprime loans may not have met Fannie Mae and Freddie Mac guidelines “in the first place,” but Fannie Mae and Freddie Mac did become the key driving forces behind the mortgage-backed securities fiasco by being the primary customers of all AAA-rated subprime-mortgage pools.

    You can spin it all you like, Mr. Guy, and resort to retorting with vague ad hominem cliches like “nobody in the Right wing, that is” and “only in your mind” (you forgot “says you”), but the facts are still facts, and your glib attempts to dismiss them do not refute them.

  6. “I wasn’t quoting Kevin Hassett; I was quoting Alan Greenspan. You’re the one who quoted Kevin Hassett.”

    LOL…so now it’s gamesmanship time?? You WERE quoting what Hassett wrote about what Greenspan had said. You even used Hassett’s bogus opinion piece as “eivdence” in the other thread on this topic…please…you can’t worm your way out of this one…

    “I don’t know about McCain’s campaign manager lobbying for Fannie Mae, but I do know that Obama himself has received more campaign contributions from Fannie Mae and Freddie Mac than any other politician, with the single exception of Christopher Dodd.”

    And the Right-wing noise machine rumbles on. The vast majority of Fannie & Freddie political contributions to Dodd & Obama, especially in Obama’s case, were from *individuals* (people that merely worked at those institutions) and not from PACs. A look at the next 3 top beneficiaries of Fannie/Freddie donations were Republicans, and their donations were mainly from PACs. Two of those three, by the way, were named in a later program as intrinsic to the House’s bailout negotiations – Spencer Bachus & Roy Blunt.

    http://www.opensecrets.org/news/2008/09/update-fannie-mae-and-freddie.html

    “but Fannie Mae and Freddie Mac did become the key driving forces behind the mortgage-backed securities fiasco by being the primary customers of all AAA-rated subprime-mortgage pools.”

    And, as I said before, these “pools” should have never been allowed in the first place by the GOP. The cause of this subprime meltdown that is cascading through the global economy was the repeal of key New Deal-era regulations of the financial markets, most notably the Glass-Steagall Act. Its explicit intent was to prevent a “repeat of the 1920′s era scams in which banks made speculative investments, turned the debts into securities, and sold them off to unsuspecting investors with the blessing of the bank.” Sound familiar? And guess what law repealed that Glass-Steagall Act? It was the Gramm-Leach-Bliley Act of 1999. Yes, the same Phil Gramm that said that we’ve become “a nation of whiners”; the same Phil Gramm that is the head economic advisor to John McCain; the same Phil Gramm whose legislation led to the Enron scandal; and the same Phil Gramm who is likely to be the new head of the Treasury if McSame is elected.

    http://www.prospect.org/cs/articles?article=the_bubble_economy

    “the facts are still facts”

    You have little to NO facts in your ideas on this subject NYD…it’s all just more Right-wing hot air…deal with it…

  7. Mr. Guy, Alan Greenspan’s quote is all over the Web. Google it and see.

    I guess it doesn’t strike you as curious that so many “employees” of Fannie and Freddie decided to contribute so much more to Dodd and Obama than to any other politicians. (You’re not a very curious fellow, are you?)

    And the fact does remain a fact that, in a free market, this could not have happened. It could not have happened without government interference removing the risk from the lenders and transferring it to the taxpayers.

    No lender would ever make the kinds of loans they were strongly encouraged to make by the CRA if they had to risk their own capital to make them. And that’s at the very root of the whole debacle. Everything that came after that would never have occurred had it not been for the fact that the government instituted a social engineering policy for the purpose of making sure people could get mortgages who could not get them in the free market because they were bad credit risks.

    That’s where this story began. Where it will end is still hanging fire. But we’re all going to end up paying dearly for this failed social experiment, one way or another.

    And, if you really believe this happened without intentional government manipulation, try Googling Bill Clinton’s National Homeownership Strategy. Here’s an article from last February in BusinessWeek for a start, and here’s one in Investor’s Business Daily.

  8. A look at the next 3 top beneficiaries of Fannie/Freddie donations were Republicans

    Oh, really? When did John Kerry change parties? (He’s next on the list after Dodd and Obama.)

  9. This truly is a SAD day in America. The CRA and Barney Frank have screwed the American people! The events of the last several days have proven beyond any reasonable doubt that the members of the DNC have no concept of what a FREE MARKET ECONOMY is. This over-regulated, monstrosity will (more than likely) weaken the dollar, and decrease the spending power of each and every American. I (for one) am very disgusted with the piss poor performance of the Pelosi led Congress. Harry Reid is an abomination in the Senate. The “conservatives” in the house had a chance to redeem the Congress-it appears they failed! I find it VERY hard to vote for ANY incumbent!

    My apologies for venting NYD!

  10. [...] Social Engineering as Economic Policy notyourdaddy.wordpress.com [...]

  11. Three words. NO ONE CARES.

    I love your space here and agree with everything you say, but have come to a private conclusion that trying to educate people about the thievery, Marxism, and anti-religion going on in front of their faces is a futile effort.

    To better come to grips with this confusion I have likened them (the self-aware liberal, MoveOn, Open Society Institute types) to extreme Islam, in that I was trying to educate and inform people who simply would not change their perception as it is an integral part of their identity.

    Nothing short of shipping most of these folks to various countries in, oh say, Africa, and leaving them to fend for themselves is going to change the minds of the enemies of reason, spirit, and economic reality.

    Raum Emanuel just got done telling me how this financial crisis was a clear demonstration of “an ideology out of control.”

    How do you counter that?

    To them, there is ONLY government. It is who they are.

  12. “I guess it doesn’t strike you as curious that so many ‘employees’ of Fannie and Freddie decided to contribute so much more to Dodd and Obama than to any other politicians.”

    Please…as if the PAC supporting a candidate and a few individual people supporting a candidate are the same thing…I guess it’s intellectual dishonesty time too eh??

    “And the fact does remain a fact that, in a free market, this could not have happened.”

    I wouldn’t expect you to waver from your religious belief in the “market” NYD…facts be damned!

    “No lender would ever make the kinds of loans they were strongly encouraged to make by the CRA if they had to risk their own capital to make them.”

    In favor of “redlining” then?? According to the current Fed chairman, the Bush Adminstration put LESS restrictions on CRA loans in 2005. Approximately half of the subprime loans were made by independent mortgage companies that were not regulated by the CRA and thus had no government obligation to offer credit to minorities. These mortgage companies made subprime loans at *twice the rate of CRA banks*. Another third of the major subprime lenders were regulated but had very little CRA involvement.

    “Bill Clinton’s National Homeownership Strategy”

    You mean the one that NEVER gained approval?? IBD editorials are nothing more than a part of the Right-wing noise machine, period.

    Here’s some more about McSame’s buddy Phil Gramm’s actions though:
    http://www.bloggingstocks.com/2008/09/15/100-year-crash-mccain-advisor-spurred-62-trillion-derivatives/print/

    “When did John Kerry change parties?”

    Keep spinning NYD…the GOP members got waaaay more from the PACs than the Dems, period.

    “To better come to grips with this confusion I have likened them (the self-aware liberal, MoveOn, Open Society Institute types) to extreme Islam”

    Right, because we’re the ones trying to force our religious beliefs down the throats of the American people…oh wait, nope, that was the Religious Right…

  13. [...] manner. Such is the case with a post at Government is Not Your Daddy. The post is entitled Social Engineering as Economic Policy. I invite you to slowly read and digest what the author is saying. Here is just a brief portion of [...]

  14. Please…as if the PAC supporting a candidate and a few individual people supporting a candidate are the same thing.

    You can spin it until you get dizzy, but those “few individual people” contributed more to Dodd and to Obama than the big powerful PAC, plus all the individual contributors combined, contributed to any other candidate. I wonder who these “few individuals” might be, and why they felt the need to contribute so much…

    Opposing strongarming lenders into making high risk loans is not the same as supporting redlining. That’s the kind of spin liberals typically use to bully people into agreeing with them. Basically, it goes back to the same old argument we discussed before: If you don’t agree with me, you must be a racist. Try fighting facts with facts, instead of innuendo. It’s more seemly.

    If you have a link to your source of information about half the banks that made subprime loans not being subject to the CRA, please post it. I haven’t seen any figures on that yet, and would like to see that data.

    “When did John Kerry change parties?”
    Keep spinning NYD.

    You were the one who said “The next 3 top benefiiciaries of Fannie/Freddie donations were Republicans.” I just looked it up in the source to which you linked, and found that the next top beneficiary was John Kerry. It’s your quote and your source. Who’s spinning now?

  15. “those ‘few individual people’ contributed more to Dodd and to Obama than the big powerful PAC, plus all the individual contributors combined, contributed to any other candidate.”

    First of all, you apparently don’t know how to do math anymore. Second of all…so, now we’re against individuals having the right to give small amounts of money (there ARE limits yanno) to a candidate of their chosing?? Please…you are twisting yourself into knots again NYD…stop it…

    “Opposing strongarming lenders into making high risk loans is not the same as supporting redlining.”

    I don’t think that I’ve ever called you a racist NYD…I might have come close back when you were advocating sterilization of “certain types” of people though. No one was being “strongarmed” to make, for instance, ARMs…frequently lending institutions on their own were making more in commissions on such deals, which is why a lot of people that qualified for a fixed rate got an ARM instead…it’s called predatory lending for a reason.

    “If you have a link to your source of information about half the banks that made subprime loans not being subject to the CRA, please post it.”

    en.wikipedia.org/wiki/Community_Reinvestment_Act#Controversies

    “Who’s spinning now?”

    You still are, because…my minor typo aside, the point is that the PACs were supporting the GOP members and individuals were supporting the Dems, period.

    Here’s some more info on McSame’s many, many lobbyist links as they relate to this current crisis:

    McSame’s economic policy shaped by lobbyists –
    http://www.msnbc.msn.com/id/24844889

    McSame’s campaign manager on the doll to Freddie Mac -
    http://www.newsweek.com/id/160561/output/print

    McSame’s campaign manager STILL on the payroll for Freddie Mac – http://www.rollcall.com/news/28629-1.html

  16. Mr. Guy, I’m not “against individuals having the right to give small amounts of money to the candidate of their choice,” and nothing I’ve ever posted could be interpreted (by any rational person) to suggest as much. But keep spinning. You’ll make yourself dizzy before you succeed in confusing me, or anybody else reading this. I only pointed out that it’s curous that so many “individual employees” of Fannie Mae and Freddie Mac contributed so much to Dodd and Obama that they outstripped the Fannie Mae and Freddie Mac contributions to any other candidate — regardless of whether they came from PACs or individuals.

    As for racism, you were the one who accused me of being in favor of redlining. And, just for the record, I did not advocate sterilizing “certain types” of people. I advocated making tubal ligation a viable option for women seeking abortions, and promoting that option for women seeking abortions at government expense. Today, it is not an option for most women. I never suggested anybody should be sterilized who didn’t want to be. That was your spin.

  17. “I’m not ‘against individuals having the right to give small amounts of money to the candidate of their choice,’”

    Then why openly question the motives of the people that gave money then (as you did above with the “I wonder who these ‘few individuals’ might be, and why they felt the need to contribute so much” baloney)??

    I’m not out to “confuse” anyone…your motives here are very, very clear…to pin the meltdown of the Bush economy on anyone other than the people that were repsonisble for it…”personal responsibility” be damned. You’re NOT getting away with it either, and the American people are *more* than onto you guys…finally…

    “I only pointed out that it’s curous that so many ‘individual employees’ of Fannie Mae and Freddie Mac contributed so much to Dodd and Obama”

    Give me a break here…what do Dodd, Obama, and Kerry all have in common over the period from 1989-2008?? They all ran for President, and ALL Presidencial candidates get lots & lots of money from individuals, period. Do I have to point every little thing to you NYD?? Hillary Clinton ran as well, and she got a lot individual contributions as well. That’s the way our current (flawed IMO) campaign finance system works, and there ARE limits on how much one can contribute at a time yanno.

    “As for racism, you were the one who accused me of being in favor of redlining.”

    And you’re the one that’s completely opposed to the The Community Reinvestment Act that merely requires banks and savings & loan associations to offer credit throughout their *entire* market area. The act prohibits financial institutions from targeting only wealthier neighborhoods with their services, a practice known as “redlining.” The purpose of the CRA is to ensure that under-served populations can obtain credit, including home ownership opportunities & commercial loans to small businesses. I wish that an Act like this wasn’t necessary, but it still is IMO.

    The record is clear in this blog about what you “advocated” before AND where the history behind that kind of policy comes from.

  18. Mr. Guy, the purpose may have originally been to eliminate redlining. It’s the methods I question. The means they used to implement their lofty goal required lending institutions to make high risk loans. That’s what I object to. That’s what got us here today.

    As far as your innuendo about what you think I may have advocated, if you have something to say, say it. If you want to accuse me of something, state it in a forthright manner so we can debate it with hard facts and cold logic. I don’t deal in innuendo.

  19. “state it in a forthright manner”

    Really, NYD, Do you, for one moment think Comrade Guy or ANY other Socialist is capable of this? I applaud your optimism sir.

  20. “The means they used to implement their lofty goal required lending institutions to make high risk loans.”

    No one was asked to make any “high risk loans”. These institutions did that on their own and then bundled them up to sell them in a market that was only allowed to exists after deregulation. What was done was wrong, and the record is quite clear on it.

    I’m not interested to re-debating issues that have already been discussed in this blog at some length before. One only needs to look up the thread in question to see what each side said.

  21. No one was asked to make any “high risk loans”.

    You’re in denial. This is well docuemented.

  22. “This is well docuemented.”

    Not by the likes of you or anyone else NYD.

  23. Mister guy is treated with more tolerance on this blog than a right winger would ever get treated on a leftist forum. I know.

    “I’m not out to “confuse” anyone…your motives here are very, very clear…to pin the meltdown of the Bush economy on anyone other than the people that were repsonisble for it…”personal responsibility” be damned. You’re NOT getting away with it either, and the American people are *more* than onto you guys…finally…”

    Tell me Einstein, who is the troll?

  24. No troll feedings over here either troll…bye-bye now…lol…

  25. I tried to post this address before and it disappeared. Since no one can tell me where universal health care has succeeded, such as the Democratic Party advocates, I would like to post where a version of it has crashed and burned.

    http://news.yahoo.com/s/ap/20081017/ap_on_re_us/child_health_hawaii

  26. Wamba, I rescued your comments from the spam bin.

    BTW, there are posts about universal health care on this blog. You can find them using the Search function. Please try to keep your comments relevant to the post on which you’re commenting. Thanks.

  27. Not Your Daddy,

    Sorry for shoehorning my posts in to your forums. I’ve accumulated a number of anti-socialist items, which unfortunately are difficult to match precisely in to your boards. My bad.

  28. “Please try to keep your comments relevant to the post on which you’re commenting.”

    LOL…trolls don’t have the ability to do this! This troll especially has a history of changing the subject whenever he feels that he’s losing an argument, which is quite frequently BTW. Good luck enforcing that…sheesh…

  29. Comrade Guy has a history of changing the subject whenever he feels that he’s losing an argument, which is quite frequently BTW.

  30. More utter nonsense from you “DJ”…what a surprise eh?? Still rooting for that loser McSame?? LOL…

  31. NYD the only mistake you made was talking about the 2005 attempt. The bill made it out of committee on a party line vote but the democrats told the GOP they would filibuster the bill if it went any further effectively killing it. The GOP tried at least two other times to fix Fannie Mae and Freddie Mac but every time the dems killed it.

  32. [...] created this economic crisis by establishing social engineering as economic policy, and now they’re pretending to get us out of it the same way they got us into it – by [...]


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