WaPo: Government distortion created the financial collapse

(By Ed Morrissey, Hot Air) - The editorial board of the Washington Post corrects the record today at the expense of Democrats in Congress desperately spinning the financial crisis as a failure of deregulation. Practically alone among the national media, the Post firmly affixes blame to the social engineering of Congress that allowed Fannie Mae and Freddie Mac to create a Ponzi scheme with subprime loans for political gain:

IS THIS the end of American capitalism? As financial panic spread across the globe and governments scrambled to contain the damage, reality seemed to announce the doom of U.S.-style free markets and President Bush’s ideology. But this is wrong in two ways. The deregulation of U.S. financial markets did not reflect only the narrow ideology of a particular party or administration. And the problem with the U.S. economy, more than lack of regulation, has been government’s failure to control systemic risks that government itself helped to create. We are not witnessing a crisis of the free market but a crisis of distorted markets. …

No subsidy would prove more fateful than the massive federal commitment to residential real estate — from the mortgage interest tax deduction to Fannie Mae and Freddie Mac to the Federal Reserve’s low interest rates under Mr. Greenspan. Unregulated derivatives known as credit-default swaps did accentuate the boom in mortgage-based investments, by allowing investors to transfer risk rather than setting aside cash reserves. But government helped make mortgages a purportedly sure thing in the first place. Home prices seemed to stand on a solid floor built by Washington.

Government support for housing was well-intentioned: Homeownership is a worthy goal. But when government favors a particular economic activity, however validly, it must seek countervailing control to ensure the sustainable use of public resources. This is why banks must meet capital requirements in return for federal deposit insurance. Congress did not apply this sound principle to Fannie Mae and Freddie Mac; they were allowed to engage in profitable but increasingly risky activities with an implicit government guarantee. The result was that taxpayers had to assume more than $5 trillion of their obligations. Contrast U.S. experience with that of Canada, where there is no mortgage interest deduction and the law requires insurance on any mortgage over 80 percent of a home’s purchase price. Delinquency rates at Canada’s seven largest banks are near historic lows.

It should be the end of social engineering by Congress by distorting private lending markets. That won’t happen until people hold the architects of this failure to account. That starts with honest and high-profile reporting of the causes of the collapse, and the Post takes an important step with its lead editorial today.

Next, perhaps the Post can report on the distortions Democratic politicians are making in hiding this truth from the voters. Perhaps they can publicly scold Barack Obama for blaming the collapse of Fannie Mae and Freddie Mac on “deregulation” and the policies of an administration that tried on numerous occasions to get Congress to act responsibly in regulating business practices at the GSEs. Maybe other newspapers can finally mention how Barney Frank and Chris Dodd kept insisting that all was well at Fannie and Freddie, the latter while taking sweetheart loans from a Fannie Mae-linked lender and taking over $160,000 in Fannie/Freddie contributions — while chairing the committee that oversaw the industry.

At least this is a start.