DEAN: Main street's moral mess

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By Warren L. Dean, Jr.

OP-ED:

History will tell us whether the Stabilization Act was the right answer. But history should not have to tell us who and what is to blame for getting us into this fix. We have plenty of candidates. Senate Democrats blamed Wall Street for its failure to absorb Main Street's bad debt. House Speaker Nancy Pelosi and the House Democrats blamed president Bush. House Republicans retaliated by rebelling against both the president and their candidate for president, and probably succeeded in spiking the presidential campaign. They then blamed theSpeaker for the rebellion. It was a priceless performance.

Call it the "Farce on Capitol Hill." To quote Pogo, "Congress met the enemy, and it is them." The seeds of this crisis were sown right here in Washington, D.C. - not on Wall Street, not on Main Street. Like the guilty do, members of Congress invented one alibi after another, looking for a scapegoat. It isn't working. There's something rotten in the nation's capital, and the public knows it. Congress got its 10 percent approval rating the old-fashioned way - it earned it.

At the heart of this crisis lies bad mortgage debt. That bad debt metastasized throughout the financial system. Blaming the system for the disease makes as much sense as blaming a patient for cancer. In order to cure it, you have to find out where the bad debt came from, figure out where it is, and take it out if you can.

We all know where the bad debt came from. Right here. No-money-down loans, interest payments only, adjustable rates, mortgage-backed securities and poor credit lending were all pioneered or promoted by two federally chartered, sponsored and supposedly regulated monsters called Freddie Mac and Fannie Mae. They even helped make the market for securities backed by so-called subprime mortgages, facilitating the spread of these toxic risks throughout the financial system worldwide and precipitating the crisis.

They subsidized and fueled the growth of the speculative bubble that became the real-estate market. Thirty years ago, when the personal savings rate was 10 percent, a prospective homeowner had to put down 20 percent in cash to get a mortgage. The risk of the asset's value was the homeowner's responsibility. How old-fashioned. With no-money-down mortgages and interest-only payments, lenders assume the risk of the asset's value. Add appraisers on steroids and you have the ingredients of a witch's brew. In a society already intoxicated with debt, we brewed both real-estate inflation and a higher debt burden on American families.

Washington actually welcomed it. The liquidation of personal savings and the real-estate bubble provided fuel for economic growth over the last decade. The consumer economy survived on a super-sized diet of increasing indebtedness. And without Main Street, none of this would have been possible. Millions of homeowners were encouraged to buy these mortgage products, fearful that they might miss the boat. Some worried that the prospect of homeownership would pass them by forever. It was the new economy. Were they imprudent? Yes. But they had good company.

Washington itself was living off of borrowed money. Like a medieval monarchy, it financed its overseas adventures with money borrowed from other sovereigns. Deficits didn't really matter. Why would a federal government nearly $9 trillion in the red suddenly be worried about $700 billion? The second bailout bill was even more expensive than the first, and it increased the debt ceiling to over $11 trillion. Is there moral hazard here? Of course. The real moral hazard is Washington itself.

So, should Washington have intervened in the market to try to stabilize this chaos? You bet. Washington created it, and it should fix it. Granted, this much intervention is not a good idea. But the time to think about that is before you create the conditions that make the intervention inevitable. Congress should have seen it coming. Financial scandals and high-risk lending at Freddie Mac and Fannie Mae were common knowledge.

Fannie Mae and Freddie Mac spent over $15 million a year on lobbyists. Major recipients of their campaign contributions included members of Congress responsible for their oversight. With so much at stake, you would think that members would avoid contributions from these institutions and question their lobbying expenditures. If for no other reason, that would at least show some respect for the interests of the people and political system they represent, not to mention the nation's fiscal integrity.

Washington's mantle as the leader of the free world is now tarnished. It has become a symbol of mismanagement and irresponsibility. Congress should know that blaming others won't work. It should get its houses in order, and make very sure it never creates these conditions again.

Warren Dean practices law at Thompson Coburn LLP in Washington, D.C., and serves as an adjunct professor at Georgetown Law Center.