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Subprime Lending Spree Is at Heart of Latest Debacle

“These two entities — Fannie Mae and Freddie Mac — are not facing any kind of financial crisis. The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing.” (New York Times, Sept. 11, 2003)

[IMGCAP(1)]So said Rep. Barney Frank (D-Mass.), then-ranking member on the House Financial Services Committee, in response to a Bush administration proposal offered five years ago by then-Treasury Secretary John Snow to reform Fannie and Freddie. Snow’s plan would have gone a long way toward depoliticizing the two housing giants and reining in their subprime lending spree that is at the heart of today’s economic crisis. In fact, the Times called the proposal “the most significant regulatory overhaul … since the savings and loan crisis.”

Over the past month, Democrats have blamed the economic meltdown on Bush and a lack of oversight and regulation. Yet its origins can be traced back to the Clinton administration and Congressional Democrats, led by Frank and current Senate Banking, Housing and Urban Affairs Chairman Chris Dodd (D-Conn.), who pushed a reckless economic policy to achieve an important and well-intentioned social outcome — increased low-income and minority home ownership.

Republicans aren’t against regulation, but they are against mindless and needless regulation that makes American business less competitive. They created the idea of an “ownership society” that encourages home ownership, but they also believe regulation is necessary to prevent fraud or injustice, whether on Wall Street or Main Street.

In fact, it was Republicans starting with Snow, former House Financial Services Chairman Richard Baker (La.) and former Reagan Treasury official Peter Wallison who first raised the alarm bells about Fannie and Freddie’s dubious lending policies. Even as late as 2005, reform legislation sponsored by Sens. Chuck Hagel (R-Neb.) and Elizabeth Dole (R-N.C.), and co-sponsored by Sen. John McCain (R-Ariz.) among others, went nowhere as Democratic leaders blocked consideration. Unwilling to buck his party, Sen. Barack Obama (D-Ill.) failed to support these crucial reforms as well.

Ironically, it was because of Democratic opposition to Republican reform that the very people Democrats said they wanted to help have been hurt the most. In their criticism of the Democrats’ role in the housing crisis, Republicans aren’t “blaming the poor” as Frank recently charged.

To the contrary, Republicans understand that the majority of low-income and minority borrowers didn’t fail the system when they reached for the American dream of owning their own home. They didn’t cause the problem. It was the system that put a reckless policy ahead of proper standards that failed them.

In her controversial remarks before the first vote on the housing bailout, Speaker Nancy Pelosi (D-Calif.) said of the housing crisis, “Democrats believe in the free market, which can and does create jobs, wealth and capital, but left to its own devices it has created chaos.” In truth, over the past decade or so, the free market wasn’t “left to its own devices” when it came to mortgage lending.

Before the Clinton administration’s “subprime surge” in the late ’90s, the free market, the lending industry, had solid standards in place to prevent exactly the kinds of defaults on home loans that have led to the demise of Fannie and Freddie, cost thousands of families their homes and now threaten the entire economy.

In fewer than 20 days, the American people will go to the polls under the shadow of an economic crisis that most thought could not happen here. The country is at an ideological tipping point, which is why the integrity of the political debate about this economic crisis is so important. To misread the cause of this crisis is to misread the solution.

To see the Great Panic of ’08 as a failure of capitalism or free-market economics is to misunderstand what happened. Seeking a beneficial societal outcome, increased home ownership for low-income people, Democrats forced banks unnecessarily into risky economic behavior and, in doing so, abandoned the free-market principles that have served this country well since its founding.

On Nov. 4, voters will determine far more than who controls Washington for the next four years. They will decide whether this country remains committed to the values of a free-market economy or moves left to embrace the principles of socialism and a command economy.

They will choose between two very different presidential candidates and political ideologies — one who believes in the inherent strength of free markets to provide jobs and opportunity and one who believes in government intervention to achieve social outcomes. We’ve seen in the past four weeks the catastrophic results the latter can bring. Every American is footing the bill for what was a misguided ideological decision that vividly illustrates the law of unintended consequences.

Thomas Jefferson said, “Information is the currency of democracy.” More than 200 years later, his words were never more relevant.

Only an American electorate that understands the history and dynamics of this extraordinary economic collapse will have the tools to make an informed choice. And that choice couldn’t be any starker.

David Winston is president of the Winston Group, a Republican polling firm.

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