Posts Tagged ‘New Deal’

The Great Read-cession, Part III

Reckless Endangerment

We’re up to Part III of John’s breakdown of the books of the financial crisis. Click here for Part I, and here for Part II.

Reckless Endangerment: How Outsized Ambition, Greed, And Corruption Led to Economic Armageddon

by Gretchen Morgenson and Joshua Rosner, 2010

 

Reckless Endangerment is one of a specific subgenre of financial crisis literature, which might be called the “Blame X” genre. Human nature being what it is, there is a lot of demand for books that find someone or something to blame for the whole ordeal.

Reckless Endangerment’s targets are Fannie Mae and Freddie Mac, the government-sponsored entities (GSEs hereafter) designed to aid the housing market, and specifically Jim A. Johnson, the CEO who brought Fannie Mae to new heights (or depths, depending on your perspective). Morgenson and Rosner lay almost all the blame for the financial crisis on Johnson’s reckless efforts to expand Fannie’s market share: “A Pied Piper of the financial sector, Johnson led both the private and public sectors down a path that led directly to the eventual crisis of 2008.”

The GSEs are frequent targets of this kind of criticism, and for good reason: The bailouts of Fannie Mae and Freddie Mac created by far the biggest losses of all the government bailouts of 2008-09: The costs have already exceeded $180 billion and could reach $363 billion (conversely, Treasury claims to have actually profited on TARP*). And they were terribly run companies before that: In 2004, they were charged with massive accounting irregularities that led to the resignation of their CEO, and several executives were implicated in the “Friends of Angelo” bribery scandal.

*Though those claims should be taken with a grain of salt, as we’ll see later.

Morgenson’s book does a thorough job of portraying the extent and nature of corruption that was almost inherent to the GSEs. Particularly appalling is the incestuous relationship between the companies and the government. The entire concept of a “government-sponsored enterprise” sounds almost Orwellian: The institutions were created as government agencies* during the New Deal, but Lyndon Johnson partially privatized them, in what was essentially an accounting gimmick, when costs related to the Vietnam War made government expenditures look bad. Continue reading