Politicians & The 2008 Financial Crisis
by Guinandra Jatikusumo
My stay in New York has been primarily filled with melodies and scenes for a Theater internship I am a part of, but strangers I accidentally meet within the hustle bustle of Manhattan sometimes divert me from my main preoccupation. Just a few of days ago I encountered a group surrounding a person wearing a mask of Llyod Blankfein–the current Chairman & CEO of Goldman Sachs–and dramatized how, according to them, his avaricious mind brought the U.S. financial system into a steep precipice. I walked back to my dorm thinking that their disappointment is understandable, as a large portion of our society believe that Goldman Sachs was ‘betting’ against their own customers for profit. They purchased credit default swaps (‘insurance’) to protect the firm from suffering losses on the collateralized debt obligations-which contained subprime mortgage-backed securities-the firm sold to private investors.
In line with their fundamental opinion, I agree that people should not acquit the bankers of the crisis that happened in 2008; after all, financial intermediaries–investment banks, insurance companies, rating agencies–were the ones who, according to most economists & members of Congress, performed reckless proprietary trading and (deliberately) overvalued bonds. However, I also think that the crisis should not be solely attributed to those associated with Wall Street corporations. Politicians also played a vital role in bringing the U.S. financial system down four years ago.
Some people might speculate that one of the politicians being referred to is Alan Greenspan, Chairman of the Federal Reserve famous for his free-market philosophy on Economics, who had set interest rates to a low level ever since he assumed office. Or Larry Summers (71st U.S. Secretary of Treasury) & Roberto Rubin (70th U.S. Secretary of Treasury) who are known as Greenspan’s accomplices when he was in charge of the Fed. Indeed, they contributed to the crisis by allowing excessive spending, but I do not regard them as politicians as they do not have legitimate constituents, nor were they affiliated with a particular political party.
The politicians who signed the Federal Housing Enterprises Financial Safety and Soundness Act of 1992 are the ones to whom I am referring. The Act reaffirms government’s commitment to supporting Fannie Mae and Freddie Mac in ensuring that Americans can achieve one of their monumental dreams: having a house. The involved politicians’ intention was undoubtedly great, providing Americans with easy credit for their housing benefited the American society as a whole. Additionally, the move is politically favorable. These politicians had proved themselves as competent representatives of their states as they successfully appeased their constituents. House affordability is one of the popular issues that constituents demand their representatives to deal with.
The Act worked flawlessly until 2008. From multiple reports garnered, it seems to me that Fannie Mae and Freddie Mac had less incentive to lend based on borrowers’ creditworthiness, as the government guaranteed the sustainability of the firms and because they were less dependent on the amount of profit gained from interest, for the government heavily sponsored them. In other terms, they had less risk to fail in managing their financials. Statistics shows that the Act made the two enterprises assist most of their customers, which resulted in approximately 18% of their loans being Alt-A loans. Another 2008 report further concluded that up to 56% of the two government-backed lenders’ acquisitions are subprime.
I suspect that this high percentage of subprime borrowers would not have existed had Congress and/or Senate not passed an Act mandating these government-sponsored enterprises to finance most of their requesters’ mortgages. While further research is still required to confirm the accuracy of the statistics, still, those protesting against Wall Street should consider channeling their energy to questioning politicians’ act of populism in exchange for kindling a predicament.