The Financial Crisis: A Generational Curse, or Just Curse a Generation?

Leave it to a liberal publication like the Village Voice to put its finger on the core of the problem with our financial system:

It all starts, as the headlines of recent weeks do, with these two giant banks. But in the hubbub about their bailout, few have noticed that the only federal agency with the power to regulate what Cuomo has called “the gods of Washington” was HUD. Congress granted that power in 1992, so there were only four pre-crisis secretaries at the notoriously political agency that had the ability to rein in Fannie and Freddie: ex–Texas mayor Henry Cisneros and Bush confidante Alfonso Jackson, who were driven from office by criminal investigations; Mel Martinez, who left to chase a U.S. Senate seat in Florida; and Cuomo, who used the agency as a launching pad for his disastrous 2002 gubernatorial candidacy.

With that many pols at the helm, it’s no wonder that most analysts have portrayed Fannie and Freddie as if they were unregulated renegades, and rarely mentioned HUD in the ongoing finger-pointing exercise that has ranged, appropriately enough, from Wall Street to Alan Greenspan. But the near-collapse of these dual pillars in recent weeks is rooted in the HUD junkyard, where every Cuomo decision discussed here was later ratified by his Bush successors.

And that’s not an accident: Perhaps the only domestic issue George Bush and Bill Clinton were in complete agreement about was maximizing home ownership, each trying to lay claim to a record percentage of homeowners, and both describing their efforts as a boon to blacks and Hispanics. HUD, Fannie, and Freddie were their instruments, and, as is now apparent, the more unsavory the means, the greater the growth. But, as Paul Krugman noted in the Times recently, “homeownership isn’t for everyone,” adding that as many as 10 million of the new buyers are stuck now with negative home equity—meaning that with falling house prices, their mortgages exceed the value of their homes. So many others have gone through foreclosure that there’s been a net loss in home ownership since 1998.

It is also worth remembering that the motive for this bipartisan ownership expansion probably had more to do with the legion of lobbyists working for lenders, brokers, and Wall Street than an effort to walk in MLK’s footsteps. Each mortgage was a commodity that could be sold again and again—from the brokers to the bankers to the securities market. If, at the bottom of this pyramid, the borrower collapsed under the weight of his mortgage’s impossible terms, the home could be repackaged a second or a third time and either refinanced or dumped on a new victim.

Both sides are going to try to paint this as a partisan problem of the other side’s making.  But the real messes we’re in as a nation–lack of domestic energy development, inability to resolve illegal immigration, and this–are bi-partisan in nature.

Bush and Clinton have one thing in common: they are both Ivy League educated Boomers.  They were part of a generation mesmerised by home ownership as a hedge against inflation in the 1970’s, and they’ve wanted to re-create the same magic ever since.  The quest for social justice that drove Fannie Mae and Freddie Mac into subprime loans appealed to the left’s idealism, and the flow of money appealed to the right’s revenue generation thing.  They’ve had plenty of help from all kinds of lobbyists and bubbleland wizards like Alan Greenspan.

Well, they’ve created the magic, and the magic is over.  Christians like to dicker about generational curses, but the cursing in this case will go backwards from the subsequent generation to the Flower Children.

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