When venerable Wall Street institutions like Lehman Brothers started imploding, liberal blogs and newspapers were quick to blame Republicans. Republicans on the other, said that Democrats caused the crisis. Turns out both are wrong. The nonpartisan website FactCheck.Org has concluded, as I did in a previous post on the financial crisis, that neither party can claim innocence with respect to the financial crisis (nor can the public, for that matter).
Democrats typically point vaguely to "deregulation" as causing the banking crisis. When pressed for specifics, they most commonly blame the Gramm-Leach-Bliley Act of 1999, which allowed traditional banks, insurance companies, and investment banks to consolidate. Republicans often accuse Democrats of resisting tighter regulation of Fannie Mae and Freddie Mac. Neither explanation really works.
Let's start with the Democrats narrative. FactCheck nails it by locating the cause of the crisis in the housing and securities markets. Very low interest rates, the risky mortgage, greed among homebuyers who overextended themselves in order to reap the benefits of soaring home appreciation, and the securitization of bad debt caused most of this mess. The Gramm-Leach-Bliley Act did not effectuate this, and even if it did, many Democrats supported the legislation (including Bill Clinton and Robert Rubin).
With respect to the Republican argument, tighter regulation of Fannie Mae and Freddie Mac might have prevented their troubles, but that certainly cannot explain the poor state of US and world markets. They are just one piece of a very large puzzle. Also some of the proposals that Republicans made on this issue came very late in the game, perhaps too late to prevent the crisis .
Because we are in an election year, public officials cannot resist the temptation to distort this important issue with partisanship rhetoric. But that does not change the fact that blame is everywhere.
Update: The RSS feed for FactCheck.Org now appears in the media section on the left side of the blog. FactCheck is truly a vital resource.