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Posted at 6:45 AM ET, 01/28/2011

Wonkbook: Filibuster reform dead

By Ezra Klein

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So why did Senate Democrats agree, in principle, that simple majorities can't change the Senate's rules, and even exceedingly modest changes to the filibuster are out-of-bounds? Easy: They're a simple majority now, but someday soon, they'll be a simple minority. When that happens, they want to be able to mount constant filibusters as well.

To borrow David Brooks's schtick for a minute, there's an easy behavioral explanation for this preference: Loss aversion. Study after study shows that human beings fear the consequences of loss much more than they value the benefits of gains. And so too in the Senate, where the two parties think about the rules in terms of "what happens when I lose" rather than "what happens when I win?"

But if you really think you've got a great agenda and that the voters would agree, that would imply a fantastic upside to rules that allow you to make good on your campaign promises: Either the American people would get to judge you on all the great stuff you want to do, as opposed to all the great stuff you got stopped from doing, or they'd get to judge the other party on all the awful stuff they did, and which you could then reverse with a simple majority vote. That's a coherent theory of the way accountability encourages good ideas and wise governance in American politics. A world in which you can't enact your ideas or govern effectively and so the voters end up thinking you as feckless as the folks across the aisle isn't. That's a world in which the rules of the Senate, and not the policies of the parties, drive outcomes, and thus drive elections. That's a world where voters never know whose ideas are best because neither side can ever enact their agendas. But that's the world the Senate apparently prefers to inhabit.

Top Stories

The Senate leadership has agreed to keep the filibuster intact, reports Paul Kane: "Senate leaders announced a bipartisan deal Thursday to speed up the chamber's work by limiting the use of the filibuster and dropping the confirmation process for about 400 federal agency nominees. The broad agreement is the most significant change in the chamber's rules in 35 years. Majority Leader Harry M. Reid (D-Nev.) and Minority Leader Mitch McConnell (R-Ky.), appearing together on the chamber floor at noon, left intact the minority's right to block some legislation by requiring a 60-vote threshold through a threatened filibuster. But the leaders agreed to repeal the decades-old stalling tactics of secret holds - in which an anonymous senator could slow action on a bill - and the ability to force amendments to be read in their entirety on the floor."

More than that, they've agreed to forgo rule changes by majority vote: "'As part of this compromise,' Reid said, 'we've agreed that I won't force a majority vote to fundamentally change the Senate -- that is the so-called ‘constitutional option’ -- and he [McConnell] won't in the future.' In other words, Reid and McConnell have agreed that the Senate's rules cannot -- or at least should not -- be decided by a simple majority. That was what the constitutional option was about, and that's what Reid explicitly rejected in his speech. Why? 'Both McConnell and Reid feared what would happen if they were in the minority,' explains a Reid aide."

The IMF is warning the US that it must cut the deficit, reports Howard Schneider: "U.S. officials must act quickly to control government deficits or face slower growth and even more difficult choices in the future, the International Monetary Fund said Thursday in a report criticizing the tepid U.S. response to its rising public debt. The IMF warning comes as federal officials grapple with a congressional projection this week that the annual deficit will reach a historic $1.5 trillion this year. This was the latest report to raise concerns about how massive government debts in developed countries could undermine the global economic recovery. 'The U.S. has a lot of credibility. This does not imply their credibility can last forever,' IMF fiscal affairs director Carlo Cottarelli said as he released the IMF study."

The final version of the Financial Crisis Inquiry Commission report has been released, report Zachary Goldfarb and Brady Dennis: "The official U.S. government report on what caused the financial crisis casts blame on Goldman Sachs for fueling the subprime mortgage bubble, Merrill Lynch for not telling investors about the true state of its financial condition and the Federal Reserve for failing to stop dangerous lending practices...Released to the public online and in the form of a 633-page paperback, the report does not contain any major revelation that would fundamentally alter popular perceptions of the crisis. But it weaves together many different strains of information, garnered with subpoena powers that allowed the commission to collect testimony from dozens of insiders and review the internal documents of federal regulators and banks."

You can download the report -- and the dissents, supporting documents, summaries, etc -- here: http://www.fcic.gov/report

Obama is overhauling his White House staff, reports Jake Tapper: "President Obama has selected Jay Carney, current communications director for the Vice President, as Robert Gibbs' replacement as White House press secretary, sources tell ABC News. The announcement, expected to be made public later this afternoon, will also include the appointment of two new deputy chiefs of staff: current head of the White House Office of Health Reform Nancy-Ann DeParle and current White House director of Scheduling and Advance Alyssa Mastromonaco. Other staffing changes include a role for Assistant to the President for Special Projects Stephanie Cutter as deputy to senior adviser David Plouffe and a senior staff role for David Lane, a longtime aide to chief of staff Bill Daley, on Daley's team. Rob Nabors, currently a senior adviser to the White House chief of staff, will become director of legislative affairs."

'70s rock interlude: The Pretenders play "Mystery Achievement" live.

Got tips, additions, or comments? E-mail me.

Still to come: The Senate budget committee may vote on a deficit reduction plan; House Republicans are considering pushing to privatize Medicare; reorganizing the federal government could be more difficult than Obama expects; lawyers for oil spill victims are backing away from lawsuits; and a chinchilla playing in a bowl of dust.

Economy

The Senate budget committee may take up a deficit reduction plan, reports David Rogers: "Alarmed by new deficit estimates, the Senate Budget Committee signaled Thursday that it may go beyond its typical five-year spending resolution this spring and instead pick up where a presidential commission left off last month, forcing votes on a longer-range scheme for deficit reduction. Leading members of both parties on the committee expressed an openness to that approach, and if the initiative were to gain steam in the Senate, it could become a vehicle to bring President Barack Obama and the new House Republican majority to the table. 'I’m not certain that it’s not going to fall to us to put a plan out there for our colleagues on the floor,' said committee Chairman Kent Conrad (D-N.D.)."

Bank of America's move to cash bonuses is aggravating competitors: http://on.wsj.com/f6J2pi

GM is withdrawing a request for more federal support, reports Peter Whoriskey: "General Motors withdrew its application for $14.4 billion in federal loans to upgrade its manufacturing operations, a move that reflects the bailed-out company's new financial strength, executives said. The automaker says it has enough cash available to cover the efficiency and modernization projects it had wanted to complete with low-interest federal loans from the Department of Energy. The decision was a marked contrast to 2008, when the company was facing collapse and went hat in hand to the government to ask for help. 'This decision is based on our confidence in GM's overall progress and strong global business performance,' Chris Liddell, GM vice chairman and chief financial officer, said in a statement."

Obama has renominated a controversial pick for the National Labor Relations Board: http://on.wsj.com/eP59NA

State legislators are pushing proposals to add gold-backed currency to their states, writes Annie Lowrey: "Imagine it's April 15 a few years from now. You need to pay your state taxes, and fast. So, you check out the latest official state exchange rate, and then reweigh your bars. You're over—thank goodness—so you hope the tax office has some ingots to change out. It's such a pain when they run out of ingots. After you pay your taxes, you need to pick up a few groceries. Luckily, you have some spare silver ore on hand and decide to use the home mint in the basement to pop out a few coins. Voilà—restocked pantry! It sounds ridiculous. It is ridiculous. But in the past few months, a few state legislators have considered letting you do something like that: Trade in gold and silver in addition to dollars."

Which industries win and which industries lose in the corporate tax code as it's written now: http://nyti.ms/hkeCnI

Obama's call for more innovation follows years of slowdown, reports Brian Vastag: "Google and the iPhone are American inventions. But the first mass-produced gas-electric hybrid car was made in Japan. And although the United States now fosters a nascent commercial space industry, if you want to speed from city to city on a smooth, fast train, you have to head to Europe. As for the world's largest solar energy generator, you won't find it in the American Southwest. It's planned for Morocco. Over the past decade or longer, U.S. innovation stalled in almost every sector except information technology and agriculture, say scholars who study innovation. Federal figures and industry surveys support their assessment."

Rand Paul identifies $500 billion in spending cuts: http://bit.ly/ehbiNt

Europe's experience doesn't support Republican policies, writes Paul Krugman: "What about Britain? Well, contrary to what Mr. Ryan seemed to imply, Britain has not, in fact, suffered a debt crisis. True, David Cameron, who became prime minister last May, has made a sharp turn toward fiscal austerity. But that was a choice, not a response to market pressure. And underlying that choice was the new British government’s adherence to the same theory offered by Republicans to justify their demand for immediate spending cuts here -- the claim that slashing government spending in the face of a depressed economy will actually help growth rather than hurt it. So how’s that theory looking? Not good. The British economy, which seemed to be recovering earlier in 2010, turned down again in the fourth quarter."

Gradually reducing spending won't increase unemployment, writes John Taylor: http://on.wsj.com/hW1IUz

Economies are designed by governments, writes Brad DeLong: "Whenever push has come to economic shove, America’s government has even deliberately devalued the dollar in the interest of economic prosperity. Franklin Roosevelt did it during the Great Depression, and Richard Nixon and Ronald Reagan did it, too. This history is worth reviewing because America is poised for another debate over whether its economy evolves or is designed, with President Barack Obama’s opponents claiming that whatever is good in America’s economy has always evolved with no guidance, and that whatever is bad has been designed by government. This claim is, of course, ludicrous. American governments will continue to plan and design the development of the economy, as they always have in the past. The question is how, and whether the design will be in any sense wise."

Everything's better with LEGO interlude: The year's Best Picture nominees, in LEGO format.

Health Care

House Republicans are considering a push to privatize Medicare, reports Ricardo Alonso-Zaldivar: "Months after they hammered Democrats for cutting Medicare, House Republicans are debating whether to relaunch their quest to privatize the health program for seniors. House Budget Committee Chairman Paul Ryan, R-Wis., is testing support for his idea to replace Medicare with a fixed payment to buy a private medical plan from a menu of coverage options. Party leaders will determine if the so-called voucher plan will be part of the budget Republicans put forward in the spring. 'No decisions have been made on the details of our House GOP budget,' Michael Steel, a spokesman for Speaker John Boehner, R-Ohio, said Thursday."

Hospice care has become one of the country's biggest employers: http://politi.co/ibtwF3

Many states are seeing child-only health plans flee, report Sarah Kliff and Lester Feder: "Health insurers in 34 states have stopped selling child-only insurance policies as a result of the health reform law, and the market continues to destablize. According to a survey of state insurance departments by Republican Senate committee staff and obtained by POLITICO, states that have seen carriers exit the market include those that have been ardent supporters of the health reform law, like California and Oregon. Twenty states now have no insurers offering child-only policies. Since September, the health reform law has barred insurers from withholding policies to children under 19 who have a pre-existing condition. Rather than take on the burdensome cost of writing policies for potentially-pricey medical conditions, many carriers decided to leave the market altogether."

Domestic Policy

Obama could face an uphill battle on reorganizing the government, report Karen Tumulty and Ed O'Keefe: "If you want to know what President Obama is up against with his pledge to reorganize the federal government, consider what happened to the last such endeavor. After the Sept. 11, 2001, attacks, nearly two dozen agencies were melded into the new Department of Homeland Security, to better coordinate the government's resources for handling terrorism and other national emergencies. But the members of Congress overseeing those agencies were loath to give up any authority...Jacob J. Lew, director of the Office of Management and Budget, said that Obama is well aware of how difficult the job will be and that the White House intends to proceed cautiously, focusing on changes that could improve national competitiveness.""

House Speaker John Boehner is backing off a call to raise the Social Security retirement age to 70: http://bit.ly/ibPgyf

Rep. Patrick McHenry is planning hearings on letting states declare bankruptcy, reports Jonathan Allen: "Rep. Patrick McHenry (R-N.C.) says he plans to hold a series of hearings next month into the question of whether states should be allowed, for the first time, to file for bankruptcy protection. It’s an issue that 'needs to be addressed,' McHenry, the chairman of the House Oversight and Government Reform Committee’s Subcommittee on TARP, Financial Services and Bailouts of Public and Private Programs, told POLITICO in a brief interview Wednesday... The idea has gained traction among some conservatives who want to ensure that taxpayers don’t bear the burden of bailing out state governments."

Senate Majority Leader Harry Reid is still defending earmarks against Obama's criticism: http://politi.co/fFw78m

Adorable animals being adorable interlude: A chinchilla hangs out in a bowl full of dust.

Energy

Obama has rhetorically given up on "climate change", reports Joseph White: "President Barack Obama’s calls this week for more spending on research for clean energy have omitted a certain, politically charged seven-letter word: Climate. In his remarks at a solar energy technology plant in Wisconsin Wednesday, and in Tuesday’s State of the Union address, Mr. Obama called for federal funding to develop more cost competitive, low-emissions energy technology - without using the word 'climate' or the phrase 'climate change' once. (In Manitowoc, Wis., he did suggest creating jobs through low-emissions energy technology could make 'the planet safer.' But he never said the word 'climate.') Mr. Obama has long been a strong advocate of technology to cut the use of coal and oil, and that hasn’t changed."

Sen. Lisa Murkowski will chair the Energy and Natural Resources committee: http://politi.co/hoX44s

Obama's goal of using 80 percent clean energy is fanciful, writes Keith Schneider: "Let's quickly evaluate the 80 percent electrical generation goal. To achieve 80 percent clean energy generation essentially means replacing at least 500 gigawatts of conventional coal-fired generation with cleaner alternatives. In essence, the U.S. would have to nearly completely rebuild its electrical generating infrastructure, which last year had about 940 gigawatts of electricial generating capacity. By 2035, according to Department of Energy projections, electrical generating demand in the U.S. could grow to 1,200 gigawatts. Today, less than a quarter of electrical generating capacity is supplied by nuclear power, hydro, wind, and geothermal in the U.S -- roughly 225 gigawatts."

Closing credits: Wonkbook is compiled and produced with help from Dylan Matthews, Mike Shepard, and Michelle Williams. Photo credit: Alex Wong Photo.

By Ezra Klein  | January 28, 2011; 6:45 AM ET
Categories:  Wonkbook  
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Next: Why corporate tax reform will be hard, in one graph

Comments

The assumption in thinking about what rules you'll want when you're in the minority is that you'll still be there when your party is in the minority. This is a rules set which ensures that neither party gets to act on their agenda (most of the time), so they can always argue that "We didn't get to pass the stuff we talked about during the last election because of obstruction! Send me back, and I'll keep fighting!"

If a party were able to enact its agenda after it campaigned on that agenda, there might not be a reason for the individual legislators to be reelected now that their major issues had been addressed. I don't think this necessarily has to be totally cynical. Senators probably honestly, if vainly, think that they're the absolute best ones to be guiding national policy, so its important that the system maximize their chances for reelection. Either way, it's all just self-preservation, which I don't think we particularly need, or should want, in elected government.

Posted by: MosBen | January 28, 2011 7:41 AM | Report abuse

In refusing to reform the filibuster, and more specifically, in trying to make it harder for future, reform-minded Senators to do that, the Senate again entrenches itself as the body protecting the US against audacious change. And the reason for this is that, above all other things, the Senate is currently designed to protect the interests of the wealthy and the powerful.

Posted by: lauren2010 | January 28, 2011 7:42 AM | Report abuse

How can the Senate be "alarmed by new deficits"?

They KNEW before voting for the recent tax deal this would happen.

They are all a bunch of liars and cowards.

Posted by: lauren2010 | January 28, 2011 7:43 AM | Report abuse

I fully support Rand Paul's budget cuts.

Indeed, I think we should cut twice that much.

Posted by: lauren2010 | January 28, 2011 7:45 AM | Report abuse

Of course economies are designed by the gvmts.

What blithering idiot believes otherwise?

That's why the wealthy and powerful seek to control gvmt, so they can control the economy.

Posted by: lauren2010 | January 28, 2011 7:49 AM | Report abuse

not surprising that we're seeing child only plans flee. They should have seen this coming a mile away and taken the necessary precautions.


I love the quote from Sen. Enzi too. “It’s absolutely devastating,” Enzi said. “The outcome is predictable as a result of the drafting that would allow people to buy a policy on the way to the emergency room.”


Well maybe not quite but you get the idea. Its amazing to me that Dems wouldn't see this coming. Sure they wanted to get some of the goodies in there early before a mandate is in place but they also should have placed market safeguards in there too and there certainly weren't enough of them. Then you have Sebelius backtracking again.


“While there was an initial flurry of announcements, [insurance companies] in many states are reconsidering,” Sebelius said

in other words we're begging them to come back and lose money in these markets.

Good luck with that Mrs. Secretary.


Posted by: visionbrkr | January 28, 2011 8:16 AM | Report abuse

and another thing i noticed this morning (not on here).

http://money.cnn.com/2011/01/28/pf/credit_cards_interest_rates/index.htm?hpt=T2


I still can't seem to fathom how some Democrats can't understand that you can act like you're taking the bite out of banks and credit card companies but when you target one portion (fees) then they'll simply just get their monies somewhere else. Its not as if they're going to take those billions in fees and say 'oh well you got me I'll just make do with less'

Posted by: visionbrkr | January 28, 2011 8:20 AM | Report abuse

That is too bad that Dems were not courageous enough to change the fillibuster rules; that is why nothing really progressive or heroic can get done in this country and we are at such a standstill. We need heroes in this country; people who will do the courageous and morally responsible actions; if not for themselves, then surely for the people who count on them -- who need them.

Posted by: wdsoulplane | January 28, 2011 8:32 AM | Report abuse

I can see how government education has failed the people. We are talking about "acting" on an agenda. "Bending" to the will of the people. The House is where that happens. It is where gut reactions become law and the majority sets the rules and runs the agenda. The Senate was designed to be the body where legislation was held up. Where a simple majority wasn't going to be good enough. It wasn't about coming together it was about getting it right. It really was about protecting the rights of each State, and the people of each state from bad Government. If you have to take the time to debate and get a true majority the legislation tends to be better than if you rush it don't debate it. In the end it is suppose to be a slow process. Good bills will get passed and bad bills, should wither and die on the vine.

Posted by: daveo2324 | January 28, 2011 8:36 AM | Report abuse

Ezra said: "They're a simple majority now, but someday soon, they'll be a simple minority."
======================================
You nailed this one 100% Ez.

Posted by: illogicbuster | January 28, 2011 9:37 AM | Report abuse

Alas, if only someone had foreseen the problem created by the PPACA regarding child-only health insurance! If only someone had noted that defect, and others, in the PPACA and had attempted to tell others about it!

But knowledge of the PPACA-induced problems is not enough. Why, just look at the efforts of Republican Senator Hatch, who proposed -- unsuccessfully -- last year that the PPACA be given expedited review before the Supreme Court. Despite Republican efforts to hasten review by the Court, obstructionists preferred taking the slow route.

Posted by: rmgregory | January 28, 2011 9:38 AM | Report abuse

"American governments will continue to plan and design the development of the economy, as they always have in the past."

Keep that in mind when the busts occur.

Rating agencies are paid by issuers of debt securities, creating moral hazard? Government design.

Banks make risky loans with government insured deposits? FDIC. At the same time, alphabet soup of regulators fail to spot and contain the risks.

The occasional credit bubble? Made by the Fed.

Low income house prices start increasing in the late 1990s, leading to the subprime disaster? Fannie and Freddie sparked that.

30 year fixed mortgages *without prepayment penalties* - sharply increasing interest rate sensitivity in the housing market - would almost certainly not exist without government.

Massive failures of banks in the Great Depression because they were too small and thus unable to diversify their credit risk exposure? State unit banking laws.

What is done after the sharp initial downturn in late 1929 and 1930? Smoot Hawley and Revenue Act of 1932 which sharply raised taxes.

Abrupt end to rapid 1933 industrial production recovery? FDR signs NIRA, which came with a massive wage shock among other things. Industrial production stagnates for several years.

Too much production and use of dirty fossil fuels? Production and distribution subsidized by government.

Low American savings? Social insurance programs take what Americans would otherwise need to save for retirement, and transfers it to current elderly for consumption.

High cost for profit health insurance? Government intervention and regulation helped destroy the non profit fraternal plans, and pushed individuals into the employer group plans. Between that and direct government provision of comprehensive insurance, prices could no longer balance supply and demand, demand curve artificially became vertical as a result.

High cost of tertiary education? Government subsidies weaken price mechanism - funds are largely used by universities in an 'arms race' to make their respective schools more attractive (no need to compete on price for millions of subsidized students).

This isn't to say that everything the government has ever done is negative. At the same time, we shouldn't presume that government successes wouldn't have occurred without the government's involvement.

Posted by: justin84 | January 28, 2011 10:19 AM | Report abuse

"Fannie and Freddie sparked that."

That's a lie and you know it.

Many other countries didn't have a fannie/freddie and experienced the same problems you speak of.

Several strong studies exist now, and much has been written to dispel that lie. It is beyond a doubt that the private mortgage institutions first pursued these high-risk subprime mortgages and that they comprise the BULK of them and that fannie/freddie later made the mistake of trying compete with them in that market.

Reagan started the ARMs and started trying to get more people into new homes, as per developers desires. All that has followed was just throwing gas on the fire Reagan started, and was a natural outgrowth of what he and developers envisioned in the 80s.

Many libs have acknowledged certain Dems like Clinton made mistakes, but I've yet to see an honest conservative admit Reagan's and the two Bushes roles in the subprime mess, as well other causes of the Great Recession, which are not limited to subprime factors.

Posted by: lauren2010 | January 28, 2011 11:15 AM | Report abuse

"That's a lie and you know it."

Nope.

"Several strong studies exist now, and much has been written to dispel that lie."

And I'll bet those studies miss the point. They probably focus on the fact that most subprime origination after 2003 was by private mortgage origniators.

Now I'll agree that the subprime problem which emerged in the mid 2000s had to do with private subprime loans, and by that point in time Fannie and Freddie were only adding incremental demand.

However, why did private lenders all of a sudden start making subprime loans in large numbers? Why did they drop their lending standards / downpayment requirements so aggressively - and just as important, how were originators able to sell these low standard loans to others? What could they point to?

Rapid home price appreciation.

This raises the question of WHY home prices were rapidly rising for low cost homes in poor neighborhoods (where much of the subprime lending was targeted).

Fannie and Freddie's aggressive actions in the low income housing market were instrumental in getting the house price appreciation ball rolling for that portion of the market.

Once those prices started rising rapidly, private originators piled on.

Read section 8 in this document:

http://mercatus.org/publication/gambling-other-peoples-money

More data here, from economist Russ Roberts:

http://cafehayek.com/2010/05/two-mysteries.html#

"In four American cities, the prices in the bottom tier doubled or more than doubled in five years. The average increase across these cities in the bottom tier was 71%. For the top tier it was 50%. In the previous five year period, 1993-1998, the growth rate among the bottom tier was 27%. In the top tier, 20%. Something happened between 1998 and 2003."

We're talking about a change in annualized price appreciation from 4.9%/yr to 11.3%/yr, for a demographic disproportionally hurt by the 2001 recession, and which tradionally had impaired access to credit. More importantly, home prices were rising more rapidly for the poorest buyers than the wealthiest buyers.

"fannie/freddie later made the mistake of trying compete with them in that market."

So you also admit that Fannie and Freddie were adding to demand for subprime loan origination in the mid 2000s via buying hundreds of billions of subprime mortgages.

That's in the paper too (also in section 8).

"They purchased hundreds of billions of subprime mortgage-backed securities and were a significant part of the demand for those securities."

"Many other countries didn't have a fannie/freddie and experienced the same problems you speak of."

Many countries had housing bubbles, due to cheap credit which was available worldwide, BUT, the subprime fiasco was largely an American problem.

Posted by: justin84 | January 28, 2011 12:13 PM | Report abuse

Every organization that has economic or fiscal credibility has given dire warnings regarding getting our deficits under control or risk losing our country as we know it. Now the IMF, which bailed out Greece in part with our money, is warning us.

Yet Obama in his State of the Union address envisions new spending on infrastructure, dubious green energy and other projects. This man and his Party of Big Government are in denial. They are GONE.

Posted by: bbwk80a | January 28, 2011 12:27 PM | Report abuse

Many libs have acknowledged certain Dems like Clinton made mistakes, but I've yet to see an honest conservative admit Reagan's and the two Bushes roles in the subprime mess, as well other causes of the Great Recession, which are not limited to subprime factors.

************************************

Good to hear that Democrats at least acknowledge Clinton's mistakes, which were considerable. Clinton was the guy in his 2006 State of the Union address who said "the era of big government is over". Included were his insistance in revising the 1995 Community Reinvestment ACT, pushing his Budget Chief, sub prime loan experimenter and subsequent convicted crook Franklin Raines into the CEO job at Fannie Mae in 1999. Clinton also signed into law the dismantling of the 1933 Glass Steagall Act which prevented banks from engaging in investment banking activity such as Collatoralized Debt Obligations and Credit Default Swap creation and their trading, and signing into law rather than veto the Commodity Futures Modernization Act of 2000 which deregulated financial deriviatives such as Credit Default Swaps.

And REagan didn't create ARM's or sub prime mortgages. A guy by the name of Angelo Mizzolo is responsible for that invention. He started a mortgage company called Countrywide, which is now owned by B of A. Mr. Mizzolo was recently fined about $60 million after his conviction for his role deceptive lending practices.

Sub prime's were first experimented with in 15 states by Fannie Mae in 1999 under acting president Franklin Raines. The authority to do such came from the revised 1995 CRA. The experiment was expanded to permanent status throughout the US a few months later.

Fannie Mae does not originate mortgages, but buys them from orinators. They have certain minimum standards beyond which they will not buy an existing mortgage from an originator, thus their standards are adopted by originators to facilitate the mortgage's resale if the originator wants to liquidate to Fannie.

Since inception, the country's mortgage lenders have adhered to Fannie's standards just in case they may want to resell to them for liquidity purposes. So Fannie very definitely, with their 1999 launch of sub standard qualifications that all the industry adopted, were the culprits who perpetrated the subprime boom of the 2000's. Among the first to default en masse were the sub prime borrowers. The subsequent credit market crisis affected other country's overseas.

Barney Frank, whose House Financial Services Committee over saw Fannie and Freddie, staunchly stood in the way of the Bush administration's multiple efforts to increase regulation on the two Government Sponsored Enterprises. Frank admitted in 2008 in an interview with a NY Times reporter that he had 'misunderstood' Republican efforts to reign in Fannie and Freddie during the Bush administration.

Posted by: bbwk80a | January 28, 2011 1:48 PM | Report abuse

justin

you changed your tune mid stride.

Here's what you said which I called a lie.

"Low income house prices start increasing in the late 1990s, leading to the subprime disaster? Fannie and Freddie sparked that."

Fannie/freddie neither caused housing prices to climb in the late 90s and neither did it spark the subprime disaster.

Housing prices climbed worldwide too. So did the bubble, so did the crash.

Private mortgage companies started the race to create subprime mortages and to this day they hold the vast majority of them.

Housing prices climbed in the late 90s because of unparrallelled wealth creation around the world due to the hi-tech boom and people cashed out at various points and paid high prices for new homes whereever thhy went. And then developers paid 100s millions bucks to politicians to allow them to build excess inventory which turned out to be unneeded after everyone cashed out and moved.

Krugman (and others) shows data that fannie/freddie were off the scene during the peak of the bubble. They jumped into the game AFTER it got big. They don't even make the loans, private companies do then fannie/freddie guarantee them.

http://krugman.blogs.nytimes.com/2010/09/20/fannie-and-freddie-again/

http://krugman.blogs.nytimes.com/2010/06/03/things-everyone-in-chicago-knows/

This wiki has lots of info....including quotes from fed reserve governors and leading economists who have debunked this propaganda.

http://en.wikipedia.org/wiki/Community_Reinvestment_Act#Relation_to_2008_financial_crisis

Posted by: lauren2010 | January 28, 2011 2:40 PM | Report abuse

thank god. if the senate were, i don't know, USEFUL, lord knows what we might get done in this country...

this is just further proof the two-party system is destroying america.

Posted by: lestro | January 28, 2011 2:47 PM | Report abuse

lauren,

unfortunately i'm going to jump in here (i'm sure to my detriment). I'd agree that a major part of the problem was predatory lending but predatory lending would NEVER be an issue if people that could not afford mortgages were told NO at the outset. i guess that's what we need to do at this point. But then that's descriminatory against the poor, right?

I guess you forgot about this part of the linked wikipedia entry.

"Economist Stan Liebowitz wrote in the New York Post that a strengthening of the CRA in the 1990s encouraged a loosening of lending standards throughout the banking industry. He also charges the Federal Reserve with ignoring the negative impact of the CRA.[95] In a commentary for CNN, Congressman Ron Paul, who serves on the United States House Committee on Financial Services, charged the CRA with "forcing banks to lend to people who normally would be rejected as bad credit risks."[102] In a Wall Street Journal opinion piece, Austrian school economist Russell Roberts wrote that the CRA subsidized low-income housing by pressuring banks to serve poor borrowers and poor regions of the country"


Again you lean HEAVILY on Krugman who has an axe to grind as we all know. (well most of us know)

Posted by: visionbrkr | January 28, 2011 3:11 PM | Report abuse

Wow, and now there are three:

“But if you really think you've got a great agenda and that the voters would agree, that would imply a fantastic upside to rules that allow you to make good on your campaign promises: Either the American people would get to judge you on all the great stuff you want to do, as opposed to all the great stuff you got stopped from doing, or they'd get to judge the other party on all the awful stuff they did, and which you could then reverse with a simple majority vote.” -- Klein

“The bad news is that this move [ending the filibuster] will allow a lot of right-wing legislation. The good news is that, eventually, it will allow liberal legislation that will gain public approval and stand the test of time better than right-wing legislation does.” – Chait, January 19th, 2011, at:

http://www.tnr.com/blog/jonathan-chait/81829/republicans-learn-hate-the-filibuster

“The great good the Democrats would do with the filibuster eliminated – things like universal healthcare, or perhaps someday Medicare for all, free four years of college…once enacted, and people saw the truth of how good they were, as opposed to the Republican propaganda, would be permanent. The Republicans would never dare get rid of them, and if they did, it would be very temporary; next election, the Republicans would be decimated, and the programs would be restored easily…

By contrast, the things the Republicans would push through with 51 votes would usually be bad, or horrible, to the vast majority, and so once people actually experienced them, and saw firsthand how the lies about them were really false, like how they, in fact, only helped the rich, they would not last. The public would vote for change, and they would be repealed, AND the Republicans would be revealed.” -- Serlin, August 25th, 2009, at:

http://richardhserlin.blogspot.com/2009/08/key-reason-why-51-democratic-senators.html

If we can really make the majority of Democratic opinion leaders and people in power aware of this, then we can really increase the pressure for ending this scourge.

Who will be number four?

Posted by: RichardHSerlin | January 28, 2011 4:03 PM | Report abuse

"you changed your tune mid stride."

Um, I focused prices for low income housing the entire time.

"Fannie/freddie neither caused housing prices to climb in the late 90s and neither did it spark the subprime disaster."

For low income households? They absolutely did cause prices to rise. Unemployment rose heavily for low income folks over that time period, and lenders traditionally would be cautious to lend to that group anyways.

I mean seriously, if the government creates an agency dedicated to increasing access to housing for lower income folks - and then leans on it to do more to support lower income housing - even a skeptic like me will acknowledge that the demand for houses and as a consequence home prices for lower income folks.

"Housing prices climbed in the late 90s because of unparrallelled wealth creation around the world due to the hi-tech boom"

Why did homes in lower income areas rise in price by 70%? Wages for the lower middle class didn't grow 70% or even 25% over that time period. Why didn't prices for homes purchased by the top of the income distribution - who created and owned most of the new wealth - rise faster than for those at the bottom? Were poor people far better off near the end of the Bush's first term than in the middle of Clinton's second term? I thought people like Krugman were telling us that 2003 was an economic disaster, especially for the lower rungs of the income distribution.

"Krugman (and others) shows data that fannie/freddie were off the scene during the peak of the bubble."

Krugman is a partisan hack.

From 2003-2007 in his chart, agency MBS accounted for 56.8% of issuance, on average.

More than half of the market is "off the scene"? Is Pepsi "off the scene" in the carbonated beverages market? How on Earth can you take Krugman seriously?

In any case, Krugman isn't focusing on the right period so the whole issue is moot. Lots of private MBS issuance occurred in the mid 2000s - we all agree on that. The question is what triggered such a surge of private credit being made available to lower income households in the first place?

Private lenders have, since time immemorial, been reluctant to lend to lower income individuals and those with bad credit. So much so that all sorts of laws and regulations were passed in order to combat this historical reluctance.

So, if we assume (as you do) that private lenders got into subprime due to profits, what changed? You'd need something pretty solid in your elevator pitch to convince you to get into the market.

Soaring house prices.

That's why private actors got into the subprime game in the mid 2000s - AFTER the 70% surge in house prices. And Fannie and Freddie certainly poured fuel on the fire by buying these privately issued subprime MBS by the billions - all that extra demand for paper has secondary effects.

Posted by: justin84 | January 28, 2011 4:08 PM | Report abuse

"even a skeptic like me will acknowledge that the demand for houses and as a consequence home prices for lower income folks."

Should read as "even a skeptic like me will acknowledge that *will increase* the demand for houses and as a consequence home prices for lower income folks." Missed it in editing.

But I suppose I'll accept from you an admission that the government can intervene in an industry and implicitly guarantee billions worth of loans in order to obtain a given result (increase home demand and homeownership for low income households) and still somehow achieve zero progress towards its stated goals.

You either have to accept that government action was successful in generating access to the housing market for lower income folks, and that this helped push up prices, or that the government is wildly ineffective.

Given that nominal income for the bottom 50% of taxpayers only rose by 14% from 1998-2003 (see link) compared with a 70% gain in home prices, I think you'll agree that access to credit played the dominant role. As Krugman's chart shows, the private sector didn't really get involved until ~2003, at which point prices had already risen tremendously.

http://www.taxfoundation.org/news/show/250.html

Posted by: justin84 | January 28, 2011 4:26 PM | Report abuse

@justin,

looking at the mess that is the CRA and all its subsidiaries I'm wondering if it'd be cheaper overall to the country to just relent and hand "low income" individuals direct subsidies (tax credits??) as opposed to the bureaucratic mess that is that system that liberals seemed to prefer to push low income housing. In fact I remember reading on some crazy blog out there that no one reads that now that they've gotten healthcare (to a certain extent) the next big ticket items were guaranteed jobs and housing for all).

back onto your point its amazing how short-sighted some liberal minds are that don't see that they whined for the last year or so that credit was tight (etc). Well sure it was for people who didn't deserve to have that credit in the first place (ie didn't have the wherewithal to pay it off). Did they expect the banks and the Fed to inflate the bubble back to its original size immediately? It'll take many years of liberal policies to stealthly put this back into place and heaven forbid they actually have strict mortgage standards that these idiot banks actually adhere to and only finance someone to some crazy amount of say 80% of the value of their home and no more.

Posted by: visionbrkr | January 28, 2011 4:51 PM | Report abuse

"Clinton also signed into law the dismantling of the 1933 Glass Steagall Act which prevented banks from engaging in investment banking activity such as Collatoralized Debt Obligations and Credit Default Swap creation and their trading, and signing into law rather than veto the Commodity Futures Modernization Act of 2000 which deregulated financial deriviatives such as Credit Default Swaps."

Which were passed by Republican controlled Congresses. The main sponsors of the Glass-Stegall repeal were Sen. Phil Gramm and Reps. Jim Leach and Tom Bliley--Republicans all. Sen. Gramm was also the prime congressional force behind the Commodity Futures Modernization Act. All Clinton did was sign, and if he had vetoed he probably would have been overridden by a large bipartisan majority. Nice try at putting the financial crisis and recession on the Democrats' head, but the GOP had at least as much, and probably more, reponsibility.

"Barney Frank, whose House Financial Services Committee over saw Fannie and Freddie, staunchly stood in the way of the Bush administration's multiple efforts to increase regulation on the two Government Sponsored Enterprises."

For most of the Bush Administration (six of eight years, including those of the housing "bubble"), the GOP controlled the House and thus that committee. If the Republicans really believed so firmly that Fannie and Freddie needed reform, then it seems that they should have had the votes to regulate it further no matter what Barney Frank said or did. Instead my main memory of the GOP and housing in that period was bragging about record high homeownership under Bush, and Karl Rove's theory that handing out mortgages to lower-income voters would turn them into Republicans out of gratitude for the wealth they supposedly would accrue, which of course turned out to be a bad call both economically and politically.

Posted by: mkarns | January 28, 2011 5:57 PM | Report abuse

Vision

I posted the wiki link so objective people could read the entire contents.

You just posted one small part providing one opinion.

Read the entire wiki and you'll see there is overwhelming evidence that the fannie issue is just a baseless myth.

Krygman us a partisan hack but proves his case with solid data.

Posted by: lauren2010 | January 28, 2011 7:26 PM | Report abuse

All if clintons major mistakes came as a result of compromise with the GOP.

Posted by: lauren2010 | January 28, 2011 7:31 PM | Report abuse

http://m.motherjones.com/mojo/2010/05/dear-gop-fannie-mae-freddie-mac-cause-financial-crisis-subprime-mortgage-gse

Yet another story with excellent links substantiating that Fannie/Freddie did not spark the rise in housing prices and the subprime crisis as Justin claims and his sycophant, vision, is desperate to believe.

Of course Justin will now respond with bunches of fuzzy numbers and vision will make declarations that all liberals are feeble minded. Yawn.

Posted by: lauren2010 | January 28, 2011 7:52 PM | Report abuse

Lauren

Really. You linked to wiki but every word you typed was liberal propaganda which is why I posted the dissenting view you linked to krugman and then to mother jones? Why not new republic too? I guess to be equal I should link to Beck or Palin or some conservative idiot. my simple point is that if we weren't forcing the issue of home ownership by those who can't afford it we'd not be in this predicament. That being said mortgage servicers and banks were 1000% wrong in how they took advantage of homeowners that never should have been in the homes they were or given second or third mortgages but I can't get past the fact that if we didn't shove home ownership down all of our throats as some sort of American dream requirement then we'd never have given the banks or the servicers the chance to do the wrong they did.

But go ahead and post about me lying or being an idiot or a sycophant to show your level of maturity on the subject as opposed to having a substantive discussion

Posted by: visionbrkr | January 28, 2011 10:59 PM | Report abuse

The Filibuster was enacted by the Founding Fathers just as the Presidency , Congress and the House was. It's amazing how well those people could see into the future. It's as though they knew of the Corruption that would befall our Great Country . Maybe they learned a little from their English Heritage . Little by Little , Washington tries to stamp out the Constitution and the brilliant work done by the " Founding Fathers ". The Filibuster is there so that even one person that disagrees can get up and stop the process before something is steamrolled through like, " We have to pass this bill and then read it afterwards " Can you imagine what Jimmy Stewart could have done with that , along with greed trying to steal a little " Boy'Scout's camping grounds ?

Posted by: puck-101 | January 29, 2011 5:48 AM | Report abuse

Vision

You discredit each and every dissenting opinion that disagrees with your Data-less declarations.

Krugman has extensive data yet you can bring yourself to look at it.

The wiki article contains irrefutable evidence of objective nature by many other people who can't be described as propagandists yet I can't agree with them without being called a propagandist by you.

The mother earth article in no way compares with lunatics like beck and it contains links and evidence of objective nature.

You are an ostrich with your head in the sand.

It is clear that every western country had banking and subprime difficulties and high housing prices and a collapsed bubble, yet only America had a Fannie/Freddie.

F/f has it's problems, but the evidence shows it did not cause high prices and subprime loans.

Greedy nontraditional bankers from wallstreet with help from politicians starting from Reagan, including Clinton and bushes did all that.

The fact you and numbskull Justin try to point to gvmt only and have nary a drop of criticism for any Ill-advised laws designed by wallstreeters and pushed mostly by republicans shows you are the propagandists.

Most informed objective people understand this problem is complex and involves needed fixes in both gvmt and private sources.

Posted by: lauren2010 | January 29, 2011 6:40 AM | Report abuse

More proof that fannie/freddie did not cause the subprime mess or cause house prices to skyrocket.... Instead they were "chasing" the private giants like countrywide. Fannie/freddie certainly have their problems and need reform or even abolishment, but they did not CAUSE these problems.

The source of the fannie/freddie myths are billionaires who are trying to preserve their predatory business models.

Ideologues and apologists like Justin and vision are merely supporting them because of their hatred of liberals (just look at most of their posts where they routinely attack ALL liberals and claim they can not think or have illformed brains). It's not like justin and vision attack only certain politicians or policies, no they speak in broad sweeps of the brush and lump all liberals together as some kind of unnthinking species of animal.

You will have to slog through these stories to truly understand why justin's lie is a lie. Don't believe me and don't believe him.

JUST READ THE DAMN ARTICLES AND THINK FOR YOURSELF.

Here are more links debunking justin's lie. Ritholtz is not a liberal by the way.

http://weblogs.baltimoresun.com/business/hancock/blog/2010/08/fannie_freddie_did_not_cause_t.html

http://www.ritholtz.com/blog/2010/06/fannie-freddie-chasing-profits-market-share/

Ritholtz: "Blaming the government for what are obviously private sector motives is a blatant attempt to exonerate the guilty."

http://economix.blogs.nytimes.com/2010/08/26/an-autopsy-of-fannie-mae-and-freddie-mac/

"The market share of the two government-sponsored companies plunged after 2003, and did not recover until 2008. In 2006, at the peak of the mania, the companies subsidized only one-third of the mortgage market"

Posted by: lauren2010 | January 29, 2011 7:42 AM | Report abuse

Repubs want you to believe only the laws Democrat presidents passed are somehow connected to the crisis.

However, it is fact that Reagan signed the law that created Adjustable Rate Mortages (ARMs), and that many experts believe this law was the cause of many followon types of "creative financing" loans.

Clinton was NOT the first to encourage poor people to buy houses. That trend started under Reagan.

I'm not blaming Reagan for the subprime crisis. But I'm pointing out the subprime crisis is more complex than ideologues like justin and his billionaire masters at countrywide loans want you to believe. Dema and repubs both (Presidents and congresses) made mistakes. The ONLY difference is that Dems want to scale back these mistakes while Republicans want to continue them and place the blame only on Clinton. BUT NOT ON MY WATCH.

http://www.homebuyinginstitute.com/news/adjustable-mortgage-111/

In 1982, during the Reagan administration, the U.S. Congress passed the Alternative Mortgage Transactions Parity Act (AMTPA). This legislation allowed non-federally chartered mortgage lenders to offer adjustable-rate mortgages. Before the passage of this act, banks were mostly limited to making conventional fixed-rate mortgages.

This legislation also paved the way for balloon loans, option ARM loans, negative amortization loans, and other so-called “exotic” mortgages. In more recent years, this act has been criticized for allowing lenders to obscure the total cost of a loan (and here the term “fuzzy math” comes to mind).

Adjustable-rate mortgages gained popularity through the latter half of the 1980s. In the mid 90s, when the housing boom was heating up, ARM loans exploded in popularity. At the height of the boom, one in three mortgage loans came with an adjustable rate. Through 2011, however, these loans will probably only account for about 5 percent of total mortgage applications.

Posted by: lauren2010 | January 29, 2011 7:55 AM | Report abuse

vision

if you are going to try to contribute to this discussion, please provide meaningful links and not just rely on your propensity for incoherent babbling. I'm looking through your posts for data and details and links, but all I get from you is that liberals cant think, and nobel economists are hacks.

My posts however, have numerous links and excerpts from important voices on the subject. At least justin provides some attempt to provide data, though when I read it, I get nauseous because it all seems disjointed and fuzzy and would require too much of my time to try to parse and respond to directly. I'd have to ask justin lots of questions just to try to grasp what he is trying (in vain) to convey, but I don't have that much time or energy for meaningless endeavors like that.

Posted by: lauren2010 | January 29, 2011 8:06 AM | Report abuse

Dropping Holds is a huge improvement. Reid and McConnell should be congratulated.

Howard Dean used to say that the only reason he would run for the Senate was to put a hold on everything until they stopped the practice and then he would resign the Senate.

Dean 2016

Posted by: avraamjack | January 29, 2011 11:41 AM | Report abuse

lauren:

I'm late to the party so you may never see this. You wrote:

"All if clintons major mistakes came as a result of compromise with the GOP>

I would add that his financial mistakes were a result of the fact that he was and is a financial nitwit who was led around by the nose in turn by Robert Rubin and then Larry Summers. As little as the Obamas know about the subject the Clintons knew less!

Posted by: johnmarshall5446 | January 29, 2011 8:23 PM | Report abuse

"You will have to slog through these stories to truly understand why justin's lie is a lie. Don't believe me and don't believe him."

Lauren, you continually miss the point. All I claim here is that the GSEs created the initial conditions which made the subprime boom possible - and it didn't require a single 'subprime' loan to be made. All it required was credit which pushed up prices in low income areas.

The housing boom itself? That was easy money, absolutely.

Historically, people with low income and bad credit did not have great access to credit.

This used to be the norm:

http://www.usmayors.org/publications/home.htm

"HMDA data document that each year hundreds of thousands of households apply for mortgage credit, but are denied. Since a disproportionate number of those denied credit seek to buy homes in urban areas, closing the mortgage credit gap is of vital concern to the nation's mayors. Far and away, expanding homeownership opportunities is the best urban policy available. Homeownership not only enhances the well-being of individual families, it helps build the tax base of urban areas and enhance the social stability of communities.

Understandably, private mortgage industry is reluctant to accept the risk associated with low downpayment loans."

Why did this change?

I say it's because price inflation made it look far less risky to get involved. As already documented, home prices in low income areas soared 70% from 1998 to 2003. What caused that? The only plausible answer is credit. Where did a lot of that credit come from? The data strongly suggest that GSEs were a very important factor.

After that price surge, suddenly a surge of private subprime lending took place. Why? Because a lender can offer far easier lending standards if collateral prices are rising at double digit rates.

In sum, easy money world wide created the housing bubble. The GSEs effectively gave low income borrowers tickets to the global housing party. I'll add that this doesn't excuse the more predatory mortgage originators or people like Dick Fuld for their own specific crimes and failings.

Posted by: justin84 | January 30, 2011 12:42 PM | Report abuse

"The fact you and numbskull Justin try to point to gvmt only and have nary a drop of criticism for any Ill-advised laws designed by wallstreeters and pushed mostly by republicans shows you are the propagandists."

I've stated plenty of times that we should simply let bad banks fail instead of bailing them out. I'm not sure how advocating letting banks fail makes me a wall street propagandist.

Trust me, I'm perfectly happy to whack Republicans and their policies. It is just that this is a liberal blog with predominately liberal individuals commenting that I often criticize Dems.

I'm a Libertarian, not a Republican.

Posted by: justin84 | January 30, 2011 1:36 PM | Report abuse

justin,


my points were I believe similar to yours. If you don't have A and B happening you don't have C happening. In that scenario A and B are legislation used to push low income housing which Lauren linked to himself and C is the housing crisis. That being said (as i've said before) unscrupulous banks and mortgage servicers played a large part as well and it would've taken much longer for the crash to happen without them but the steps put in place by administrations before the last two have made the problem possible. Without it (if mortgages were only given to those that can truly afford it and second mortgages not given out like candy) then there would not have been the mess we saw.

Posted by: visionbrkr | January 31, 2011 8:14 AM | Report abuse

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