Financial reforms face finger-pointing

The protests of liberals and conservatives that led to the House’s initial failure to adopt a $700 billion financial rescue package foreshadows the deep ideological divide that will characterize the ongoing debate over what happened, who’s to blame and what to do about it.

The rhetoric emerging from the presidential campaigns and from key lawmakers suggests that the battles waged next year promise to be repeats of earlier battles on Capitol Hill, pitting regulation and government oversight against deregulation and free markets.

{mosads}On the right, think tanks and likeminded lawmakers are blaming well-intentioned but heavy-handed attempts by the Clinton administration to increase homeownership among low- and moderate-income families.

On the left, Democratic members of Congress and liberal advocates blame the Bush administration for falling asleep at the wheel and failing to use the authorities it already had to stop the crisis from coming to fruition.

Both sides now see political advantages in pinning blame on each other, as evidenced by the first two days of hearings on the financial crisis by the House Oversight and Government Reform Committee.

But if the next president and lawmakers from both parties are serious about repairing the damaged economy and preventing a repeat of the credit crisis that currently is causing mortgage foreclosures, hampering business and devastating global capital markets, they will need to set aside ideological purity and second-guessing of prior legislative decisions to focus on a balanced approach.

Liberals are emphasizing banking deregulation from the 1990s, charging that the Bush administration took a hands-off approach to regulating the financial markets and spotlighting corporate “greed.”

From the right, lawmakers and experts are focusing their attention on Fannie Mae and Freddie Mac, as well as the expansion of the Community Reinvestment Act of 1977, which tasked banks to increase low- and moderate-income homeownership.

“The government at least set the stage for the problems we have now,” said Howard Husock, of the conservative Manhattan Institute and author of The Trillion-Dollar Housing Mistake. Political pressure from Democrats on Fannie, Freddie and banks encouraged them to make bad loans, he said.

Nevertheless, even experts with ideological biases acknowledge that the causes of the nation’s financial problems are related to the interplay of a variety of factors, including policies they consider to be sound.

“The [Community Reinvestment Act] would’ve been a footnote if it hadn’t collided with banking deregulation and Fannie Mae and Freddie Mac,” Husock said.

University of Michigan law Professor Michael Barr, a senior fellow at the liberal Center for American Progress, is a staunch defender of the Community Reinvestment Act and the role of Fannie Mae and Freddie Mac in the mortgage lending system, but he faults the institutions for making “a really bad business decision to lower their standards to maintain market share,” which contributed to the sub-prime crisis. Barr served in the White House and the Treasury Department during the Clinton administration.

Despite the willingness of experts outside of Congress or the presidential campaigns to acknowledge that neither the right’s nor the left’s narrative is 100 percent correct, the political debate will begin with those entrenched attitudes.

“Each side has an incentive to tell a simplified version of both of those stories,” Husock said.

During a conference call last week, Gene Sperling, who was director of the National Economic Council under Clinton, said, “You kind of expect a certain amount of absurd political finger-pointing.”

Influential experts on both sides, though, don’t think rehashing old debates is necessarily a bad thing.

“I don’t think there’s anything wrong with going back,” said Robert Gordon, a senior fellow at the Center for American Progress who was the domestic policy director for Sen. John Kerry’s (D-Mass.) presidential campaign in 2004. “It’s just a question of, going back to what?” he said.

“Some defensive postures make a heck of a lot of sense. Some defensive postures make no sense,” said Peter Wallison, a scholar at the conservative American Enterprise Institute who was formerly an adviser to President Reagan and an official at the Securities and Exchange Commission.

With Democrats in control of Congress, the legislative agenda will focus on increasing regulation on banks and other financial institutions. Democrats also will push back hard against Republican criticisms of Fannie Mae, Freddie Mac and the Community Reinvestment Act.