Insider's Game

The Washington Post   came up with a tally of $400 million spent by Koch Brothers to fund right wing political organizations, though few people consider that number to be comprehensive. It  excludes those dollars funneled to their loose networks of professors are regularly called upon to parrot the standard party line on financial reform.

Consider the  Mercatus Center, a think tank funded by the Koch Family Foundations and the Charles Koch Foundation, which serves as the primary brain trust for Rep. Jeb Hensarling’s  Protect Taxpayers and Homeowners Act, or PATH.

Mercatus maintains a stable of academics–all avowed disciples of  Edward Pinto of the American Enterprise Institute–who are trotted out every year or so to reiterate the Mercatus party line, which blames the government sponsored enterprises, Fannie Mae and Freddie Mac, for just about everything that went wrong in the mortgage markets.

Pinto and the Mercatus experts all share the same defining characteristics. They refuse to acknowledge empirical data on loan performance, and they refuse to consider the impact of mortgage fraud. They all reference the same carefully selected metrics, from which they draw unsupportable inferences. These experts frequently cite, and endorse, one another’s research.

But to a large extent, people like Dwight Jaffee of Berkeley, Michael Lea of San Diego State, and Lawrence J. White of NYU keep their common Mercatus affiliations on the down low. For instance, when they made a joint appearance at a hearing convened by Hensarling titled, “Beyond GSEs: Examples of Successful Housing Finance Models without Explicit Government Guarantees,” they avoided any mention of their Mercatus ties.

So almost everyone who witnessed the hearing in Room 2128 of the Rayburn Building on June 12, 2013 came away with the false impression that three professors from Berkeley, San Diego State and NYU did independent research and just happened to arrive at similar conclusions. They had no idea that their testimony simply recapitulated the contents of the White Papers* they wrote for Mercatus in February 2011, and the book they co-wrote for Mercatus in March 2012.

Prof. Michael Lea encapsulated the Mercatus style in a single paragraph for the Mercatus book published in 2012:

David Min of the Center for American Progress [now a Professor at U.C. Irvine Law School] has written  that “the 30-year fixed-rate mortgage remains the gold standard for mortgages throughout the world, offering superior stability for both homeowners and financial systems.” If this statement is true, why is the United States one of only two countries with this instrument? And why is the United States the country most afflicted by a housing bust? Given the catastrophic conditions of Fannie Mae and Freddie Mac, it is clear that the 30-year fixed-rate mortgage is outright dangerous–not a gold standard. Perhaps his musing should be rewritten to say, “The 30-year, fixed-rate mortgage remains the fool’s gold standard for mortgages throughout the United States, offering superior stability for some homeowners and potential catastrophe for U.S. and global financial systems.

So if you were looking for compelling evidence that Lea is an intellectual prostitute, there you have it.

Lea uses techniques catalogued by George Orwell in his immortal essay, “Politics and the English Language.” He insinuates things that, if restated as simple declarative sentences, would be instantly recognizable as–dare I say it–lies.

It is a lie to state that the loan performance of 30-year fixed rate mortgages has not been vastly superior to that of adjustable rate mortgages. (Which is why Min referred to the loan product as “the gold standard.”) It is also  lie to state that the loan performance at Fannie Mae and Freddie Mac has not been vastly superior to that of any other segment of the mortgage market.

And it is a lie to claim that Fannie and Freddie’s loans caused the U.S. to suffer mortgage losses that were worse than those of other developed countries, because the majority of losses were concentrated in a small subsegment, representing 20% of the residential market. Private label mortgage securitizations and their synthetic progeny incurred more dollar losses than the other 80% of the market.

And, as the IMF demonstrated as early as 2008, private label deals were the primary reason why the U.S. suffered mortgage problems disproportionate to those of other developed countries.

You will notice that Lea does not ask why other countries failed to offer Option ARMs or liar loans, because, again, the topic of fraud is kept strictly off limits in Mercatusworld.

(Prof. Min is particularly loathed by the Mercatus crowd, because, in his research for the Center for American Progress, he called out Jaffee, White, and Mercatus scholar Peter Wallison for promoting the crackpot narrative of Edward Pinto, who claimed that, Fannie and Freddie held $1.6 trillion in “default-prone” loans, which, for the most part, were never delinquent during the worst housing crash in U.S. history.)

Lea, Jaffee, White and Hensarling all parrot one another by citing the same data from international surveys of housing finance, which are used to promote the same bogus narrative about the GSEs’ failed business model. They all show the same impressive-lookingcharts to make the same three points. Their argument goes something like this:

1. Home ownership rates are higher in foreign countries, so the GSE business model is a failure.
2. Mortgage loan performance is worse in the U.S. than it is in other countries, so the GSE business model has failed.
3. Interest rates are lower in other countries, so the GSE business model has failed.

These arguments have a veneer of plausibility to an ignoramus, who would be unaware of the following:

1. The distribution of income is such that the bottom third of Americans have a lot less purchasing power than the bottom third of, say, Germans.
2. Mortgage performance is better in other developed countries, where citizens benefit from a social safety net. The leading cause of personal bankruptcy in the U.S., heath care costs, is not a factor in Canada or Japan.
3. Interest rates are driven by a lot of there things besides the GSEs.

Watch for “experts” like Jaffee, White, Lea and others to be trotted out again in the next few weeks, as the debate heats up between both Houses of Congress as to the best template for housing finance reform. The framing is pretty familiar. In the House, PATH represents  “Repeal Fannie and Freddie,” and in the Senate, Johnson-Crapo represents, “Repeal and Replace  Fannie and Freddie.”

Republicans are deeply invested in The Big Lie, which is why any bipartisan agreement on reforming housing finance must be predicated on killing the GSEs.