The Economic Blame Game

The Economic Blame Game

By David Paul Kuhn

Bush era Republicans did not praise the poor and the working class as the engine behind the soaring housing market. Tax policy did not favor those voters to boost their spending power. Instead, a majority of George W. Bush's tax cuts went to the top 10 percent of income earners.

Yet since the stock market first crashed in mid-September, many top Republicans have largely blamed mortgage behemoths Fannie Mae and Freddie Mac. Fannie and Freddie have become a political euphemism for regular Americans now deemed the irresponsible beneficiaries of irresponsible quasi-government entities. After all, if Fannie, Freddie and Joe the Spendthrift are at fault, free market absolutism is absolved.

The scapegoating of Fannie and Freddie began as a campaign tactic. Not long after the market collapse, Karl Rove recommended on Fox News that the GOP ticket should spend more time emphasizing the "source of this contagion." In Rove's words, "bad stuff on Wall Street happened because people got greedy. And the greed started at Fannie Mae and Freddie Mac."

It soon became a ubiquitous GOP refrain. "It's not a failure of the free market" that's "going on in the economy today," House GOP Leader John Boehner reportedly said at an October Republican fundraiser, but "the excesses of Fannie Mae and Freddie Mac."

Or as Nevada Republican Senator John Ensign recently said on MSNBC's "Hardball:" "Government is what caused the problem in the first place. I think the underlying probably in all of this was the housing problem," which he flatly blamed on old Fannie and Freddie.

In early September 2004, at the peak of the presidential campaign, it was Ensign again on "Hardball" proudly telling Americans "the economy is doing incredibly well." It was this optimistic view that led Ensign to go on and defend Bush's promise to restructure social security so that younger Americans could invest their retirement in Wall Street.

"Social Security just doesn't return a good enough investment," Ensign said. "Pension systems, state pension systems do. We ought to model Social Security reform on something like that."

These same pension funds have tumbled today. States like Florida regrettably invested hundreds of millions of dollars in failed Wall Street giants like Lehman Brothers.

But back during the 2004 campaign, Ensign's home city of Las Vegas was benefiting more than most from the housing boom. It was at a Las Vegas rally attended by Ensign, late in the campaign, that Bush declared, "I believe our country can and must be an ownership society."

That ownership society depended in part on a low interest rate and easy loans. It was also inextricably tied to the same Wall Street that was inflating the housing market. Banks and rating agencies got rich by disguising bad credit risks with good credit ratings. Subprime mortgages were bundled into mortgage-backed securities. Bankers then sold these snake-oil securities as an investment to willing buyers.

Fannie and Freddie were part of the problem. Both companies lowered their standards to offer home loans to Americans who traditionally could not afford them. But they were following Wall Street bankers who first loosened their lending standards. Those loose standards became a catalyst for the subprime industry.

Even Alan Greenspan told Congress in October that these bundled subprime mortgage securities were "undeniably the original source of the crisis."

This fact has put Republicans in a bad place. A GOP credo since the early 20th century has been that free markets work best when entirely free. But in the same respect that traffic lights do not curtail freedom but ensure an efficient road system, reasonable market controls ensure an efficient economy.

Last month the rant of CNBC commentator Rick Santelli against the government aiding the "losers" who could not meet their mortgage payments struck a chord for the same reason conservative criticism of welfare once did.

By the 1970s, it was perceived that welfare provided a lifestyle for the idle poor comparable to that of the working class. Naturally, those who were working resented others getting a free leg up.

Santelli's rant is in this sense a warning to Democrats. There will be widespread push back from the "silent majority" if aid to defaulting homeowners is seen as only helping the irresponsible, as it was during welfare.

Republicans are betting that defaulting homeowners may come to be seen as "welfare queens." But placing the blame on Fannie, Freddie and Joe the Spendthrift is dishonest, yes, but also strategically clumsy. It misunderstands 2009 as 1969, confusing the dusk of a conservative era with the excesses and decline of a liberal one.

More than eight in 10 Americans believe Obama "inherited" this bad economy, according to the recent Wall Street Journal/NBC News poll. The same poll finds that the public believes Democrats, by more than a two to one ratio, are able to do a "better job of getting the country out of a recession."

This public perception has contributed to Republicans' newfound powerlessness. In time, the overreach by the majority party may again offer the GOP some control in Washington. So goes the cycle of politics.

But the Democrats partially revived themselves as a party not by touting the success of their creed but by understanding some of its key failures. They moved away from the welfare state and even gun control battles, grasping how these stances wedged them from the majority.

At some point, Republicans need to face the reality of private sector hubris. If they do not, the GOP could sound like the Democrats in the mid-1980s, a party arguing for the same welfare state that the majority had long abandoned. That Democratic dogmatism contributed to Ronald Reagan's landslide in 1984.

Today, three in four Americans believe that corporate America's moral compass is "pointed in the wrong direction," according to one Marist College Institute of Public Opinion Poll. This is the same corporate America that many Republicans believe can guide us out of this market mess. Those GOP leaders forget that the public is wary of more bailouts because they are seen to benefit the same executives that led us astray.

Unlike during welfare, Americans see the personal irresponsibility that caused this crisis in boardrooms rather than living rooms.

Republicans have long said that Democrats never fail to believe in an active government that tends to fail. Now, however, that mirror extremism seems to be afoot in the GOP -- a belief in a private sector that when unregulated never fails to fail us.