Saturday, December 18, 2010

Ideology Trumps Reality, Again

I know all the liberals are blogging about this, but I can't resist commenting on the Republican version of the Financial Crisis Inquiry Commission report. It fits so well with one of my constant themes, that our beliefs have a bigger impact on the way we interpret events than events do on our beliefs.

Having voted to issue a document without the words “deregulation,” “shadow banking,” “interconnection,” and “Wall Street,” the Republicans on the commission produced a nine-page memo nearly devoid of facts and numbers. After all, if they had included any facts or numbers, they would have shown that their own argument was garbage. That argument, such as it is, blames the whole mess on our meddling government. The problem started with the Community Reinvestment Act, which forced banks to lend to poor and minority people; then those insidious mortgage schemes, Fannie Mae and Freddie Mac, got involved, further pumping up the market for low-end mortgages and convincing people that the government was somehow guaranteeing the whole thing. All private bankers did was, as Paul Krugman put it, "get suckered into going along with this government-created bubble."

Where to start? First, other countries had real estate bubbles without any Community Reinvestment Act -- the NY Times has a great feature today on the ghost towns of Spain, and things were just as bad in Ireland and Latvia. Not that I expect Republican Congressmen to know any of this, since these are the people who know so little about Europe that they think our health care system is better than theirs. But mightn't people who were appointed to a commission to look into the financial crisis have noticed that it was a worldwide event?

The Republican version ignores the mechanisms that made the real estate bubble into a financial crisis, the whole web of connections and deals -- credit default swaps, mortgage-backed securities, etc. -- that made the failure of Lehman Brothers into a nearly fatal event for our whole banking system. It was the bankers themselves who went to the Treasury in the summer of 2008, saying that the whole system was about to go belly-up. Nobody at the time was blaming the CRA or Fannie Mae. That "explanation" was dreamed up later by Republican operatives desperate to keep the crisis from becoming the occasion for further banking regulation. And the thing is, it seems to be working. I have recently seen two comment posts on blogs that regurgitated this whole argument as faithfully as Marxists used to regurgitate the dialectic. Instead of being a fact that forces us to confront it rationally, the banking crisis has become another football of partisanship, kicked back and forth with a great deal of shouting, but having no great effect on how anyone understands the world.

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