Airbrushing a Crisis

"Who controls the past controls the future; who controls the present controls the past."
~Eric Blair, aka George Orwell

I don't believe I'm going out on a limb in saying that there are at present a number of troubling and unsettling currents permeating the media and the national consciousness in general. Read any newspaper, watch any news program, or talk to anybody even remotely abreast of current events, and you're likely to encounter a competing host of negative sentiments: unease, or perhaps outright fear, over the state of our teetering economy and still-falling stock markets; apprehension about the upcoming presidential election and what the outcome will mean for all of us; and in general, a certain dread as to what the immediate and distant future will bring to a country that already believes itself to be on the wrong track. And marching in lockstep with the advancing malaise comes a growing interest in blame: blame for our present woes, and the parties who deserve it.

Liberal politicians and influential opinion-shapers didn't have to look very far for the villain responsible for failing banks and plunging 401(k) portfolios. Free-market capitalism has been caught red-handed, they announce;all those misguided theories about deregulated markets and laissez-faire economics have delivered us unto the brink of disaster and now deserve the intellectual equivalent of euthanasia. Harold Meyerson of the Washington Post makes the case for the prosecution with as much self-assured rectitude as the most zealous Marxist: "What exactly do economic conservatives believe now that their god is dead? What's become of the glories of privatized Social Security? Of the merits of 401(k)s vs. defined-benefit pensions?"

His prose might border on the florid, but Meyerson is representative of the entire political Left, which has already delivered a guilty verdict in the case against capitalism. Wealthy Wall Street hucksters, the popular narrative runs, spent years trafficking in shoddy mortgage-backed investments they either didn't understood, or understood to be junk, eager only to cash in before the bottom fell out. And now, with the Dow Jones Industrial Average down a tidy 6,000 points or so since last year, the bottom has well and truly fallen out. The agreed-upon catalyst in this version of the story -- the recent collapse of the housing market -- was all that was required to bring the whole shaky edifice down.

It all makes for compelling op-ed pieces, and it almost certainly guarantees that the liberal intelligentsia's political champion will ascend to the presidency this fall, but something is missing. Lost in all the recriminations over who's to blame and the ominous rumbles about nationalizing banks is a question that isn't being asked. Why exactly did the housing market, which had been red-hot for so many years, start to crater recently? And why were there so many of these so-called "toxic" mortgage-backed securities for Wall Street vandals to dabble in? The answer calls the popular narrative vilifying capitalism into question, and might spread the blame around a bit more evenly.

In 1999, long before anyone had heard of "collateralized debt obligations" or "asset-backed securities" or any of the other wreckage that litters today's financial landscape, The New York Times printed a brief article that today sounds stunning, and even chilling, in its prediction of things to come. It's short, it's comprehensible, and I implore anyone interested in understanding today's crisis to read it.

The upshot: that government-backed Fannie Mae and Freddie Mac deliberately steered billions of dollars in mortgage financing to risky borrowers, with potentially ruinous implications: "In moving, even tentatively, into this new area of lending, Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980's." And one Peter Wallison, of the unabashedly free-market American Enterprise Institute, anticipated the consequences with remarkably acuity: ''From the perspective of many people, including me, this is another thrift industry growing up around us ... If they fail, the government will have to step up and bail them out the way it stepped up and bailed out the thrift industry.'' Nine years later, Fannie and Freddie failed, the government had to bail them out, and taxpayers are left with the bill.

I offer this quick trip back in time not as a categorical refutation of the charges that unchecked, capitalist greed is at the root of all our troubles, but simply as a reason to stop and think. Anyone who tries to sell you a quick and easy explanation of an economic recession or a financial crisis, with well-defined villains and heroes, is offering a false bill of goods. Times such as these call for honest historical inquiry into the roots of the problem, not political witch trials seeking scapegoats. A decade ago, at least a few prescient observers saw the seeds of today's crisis taking root, and they discerned the unmistakable influence of government at work in the sewing. Consider this the next time you hear some demagogue of the Left try to take ownership of the past while doling out damnation in the present.