EDITORIAL: Whitewashing Fannie, Freddie

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Former Federal Reserve Chairman Alan Greenspan’s congressional testimony yesterday on the economic crisis was surreal. During his appearance before the House Government Reform and Oversight Committee, Mr. Greenspan, and Committee Chairman Henry Waxman of California and other Democrats, spent much of their time dancing around the political decisions that created the subprime-mortgage-market collapse. This behavior should not come as much of a surprise. Both Mr. Greenspan and the liberal Democrats who control the committee have important reasons not to delve too deeply into the role of Congress in pushing Fannie Mae and Freddie Mac to the brink of collapse, a financial catastrophe that will cost taxpayers $200 billion.

As liberals, Mr. Waxman and the Democrats seek to depict what has happened to the housing market as a catastrophic failure of private enterprise brought about by “greed” and irresponsible behavior by private investors. Although he retired as Fed chairman in 2006, Mr. Greenspan remains much in demand by politicians wanting economic advice. He understands very well that the Democrats control Congress, and are likely to become much more dominant after Nov. 4, so it probably is not a very good idea to talk at length about the perverse incentives politicians created for Fannie and Freddie. That helps to explain why Mr. Greenspan (one of the least contentious people in Washington) put much of the blame for the subprime collapse on “overeager” investors rather than on the politicians interrogating him. And he gave short shrift to his own warnings about the financially questionable activities of the GSEs - which official Washington failed to act upon.

In 2003 and 2004, Fannie and Freddie were hit by accounting scandals that forced out some of their most senior officials. But Congress did nothing to fix the situation. The House Financial Services Committee crafted a reform bill that was severely weakened by GSE lobbying — so much so that the Bush administration refused to support it. Similarly, the threat of a Democratic filibuster killed a much tougher Republican bill in the Senate. During this period, Mr. Greenspan called for reforming the GSEs. In testimony before the Senate Banking Committee on Feb. 24, 2004, for example, he called on Congress to place limits on the size of Fannie and Freddie’s portfolios in order to restrict their issuance of debt. But Congress failed to listen, and the Bush administration lacked the political muscle to pressure it to do so. Instead of reining in the GSEs, powerful members of Congress put pressure on Fannie and Freddie to massively expand investment in financially risky “affordable” housing projects from 2005 to 2007, ultimately triggering the GSEs’ collapses. Irresponsible politicians — not “market failure” — bear primary blame for these financial disasters.

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