Origins of the 2008 Financial Crisis
In a 2008 Financial Times article, George Soros said:
The current financial crisis was precipitated by a bubble in the US housing market. (…) Boom-bust processes usually revolve around credit and always involve a bias or misconception (…) The super-boom got out of hand when the new products became so complicated that the authorities could no longer calculate the risks and started relying on the risk management methods of the banks themselves.
And according to the April 2008 International Monetary Fund’s World Economic Outlook, the “financial market crisis that erupted in August 2007 has developed into the largest financial shock since the Great Depression, inflicting heavy damage on markets and institutions at the core of the financial system.”
Romney Linked Gingrich to the Housing Crisis Through Freddie Mac
At the CNN Florida Republican Presidential debate in Jacksonville on January 26th, Governor Romney attempted to link Speaker Newt Gingrich to the 2007 Housing Crisis by questioning the Speaker’s role as a consultant at the troubled mortgage giant Freddie Mac. He made the same connection in the NBC debate on January 23rd. Governor Romney claimed in the debates that Speaker Gingrich peddled his influence in Washington D.C. to promote Freddie Mac when he should have been blowing the whistle on the government-sponsored entities’ practices.
Well, I think you know that Fannie Mae and Freddie Mac were a big part of why we have the housing crisis in the nation that we have. And we’ve had this discussion before.
Speaker Gingrich was hired by Freddie Mac to promote them, to — to influence other people throughout Washington, encouraging them to — not to dismantle these two entities. I think that was an enormous mistake. I think, instead, we should have had a whistle-blower and not horn-tooter.
He should have stood up and said, look, these things are a disaster; this is a crisis. He should have been anxiously telling the American people that these entities were causing a housing bubble that would cause a collapse that we’ve seen here in Florida and around the country.
Romney ignores the fact that there were prominent conservative whistle-blowers who pointed out that Fannie Mae and Freddie Mac as government-sponsored entities (GSEs) needed regulation to prevent financial trouble. In a September 2003 article, the New York Times reported that President George W. Bush introduced “the most significant regulatory overhaul in the housing finance industry since the savings and loan crisis a decade ago.” Likewise in April 2005, Fed Chairman Alan Greenspan testified before the Senate Committee on Banking, Housing, and Urban Affairs regarding the necessity of reforming and regulating Fannie Mae and Freddie Mac.
From now on, limiting the potential for systemic risk will require the significant strengthening of GSE regulation and the GSE regulator. (…) Left unresolved, such uncertainties could threaten the stability of financial markets.
Affordable Housing Was a Key Component of Romney’s Jobs’ Initiative
Mitt Romney served as Governor of Massachusetts from January 2, 2003 to January 4, 2007. As Governor, Romney aggressively promoted affordable housing as a key component of his jobs initiative. In several 2003 and 2004 press releases, Governor Romney claimed that Massachusetts needed more affordable housing to stay economically competitive and that employers weren’t moving their operations to Massachusetts for lack of affordable housing.
As was the common theme among liberal Republicans and Democrats at the time, Romney proclaimed in a March 3, 2004 press release that
“fair and affordable housing should be a right, not a privilege.”
According to a review of press releases from his administration, Governor Romney pledged approximately $350 million in state and federal funds and low-income-housing tax credits to build more affordable housing and assist low-income borrows with special mortgage financing.
Not only did Governor Romney aggressively promote access to affordable housing, he also convened private and state entities to develop ideas for creative financing programs that would allow low-income borrowers to purchase the affordable housing units the state was building. One such program developed by MassHousing and United Cooperative Bank was “Take the PVTA Home” which Governor Romney launched with a personal appearance and press release on January 31, 2003. The PVTA is the Pioneer Valley Transportation Authority.
United Cooperative Bank is currently offering the “Take the PVTA Home” mortgage with a 30-year fixed interest rate of 5.75 percent. Banks like United Cooperative are willing to make the no-downpayment loans because MassHousing insures them. As an added incentive, lenders receive enhanced Community Reinvestment Act (CRA) credit for the loans for partnering with MassHousing. (…) According to MassHousing Executive Director Tom Gleason, “When we designed the program, we took into account that people who take mass transit have fewer car-related expenses, and have more money to spend on a mortgage.”
Romney’s Jobs’ Initiative Worsened the Housing Crisis in Massachusetts
So when President Bush’s administration was attempting to regulate GSEs to avert a financial crisis, Governor Romney’s affordable housing policies in Massachusetts were significantly contributing to the bad assets on the books of Fannie Mae and Freddie Mac. According to data from the Federal Reserve Bank of Boston the number of subprime mortgage originations in Massachusetts spiked between 2003 and 2006 during Romney’s tenure as Governor of Massachusetts.
Given that there were prominent conservative whistle-blowers warning about the potential dangers of Fannie Mae and Freddie Mac, why was Governor Romney still pushing affordable housing in Massachusetts? What do his policies as Governor of Massachusetts tell us about how he will manage the national economy?