Those who cannot learn from history are doomed to repeat it.

– George Santayana

What we do about history matters. The often repeated saying that those who forget the lessons of history are doomed to repeat them has a lot of truth in it. But what are ‘the lessons of history’? The very attempt at definition furnishes ground for new conflicts. History is not a recipe book; past events are never replicated in the present in quite the same way. Historical events are infinitely variable and their interpretations are a constantly shifting process. There are no certainties to be found in the past.

– Gerda Lerner

History is a guide to navigation in perilous times. History is who we are and why we are the way we are.

– David McCullough

Perhaps it has to do in part with my personal academic training in the biomedical sciences; we learned a great deal of medical / biomedical “history” in training.  That “history” was critically foundational in terms of the formation of concepts and principles that were later expanded, improved upon, and very often served as stepping stones to greater, more important, and more useful discoveries and interventions. 

Not surprisingly as the nation grows increasingly frustrated with our leadership as well as restless and concerned regarding the future of our nation’s economy, the “blame game” express is gaining momentum daily. 

It is our concerted opinion that there is not a single event, person, or construct that has led to our current economic woes; the root causes are multiple and varied.  We do feel that it is critical to understand what the problem is in order to truly fix it.  Back to my personal biomedical background – appropriate, efficient, targeted treatment cannot be rendered without an appropriate diagnosis.  Diagnosis – in the simplest laymen’s terms – that’s what is wrong with the system (whether that system be a human body or an economic system). 

It is also our fervent belief that those who best understand the failures of the past (investors, leaders, regulators, etc.) can best position themselves to avoid the mistakes of the past, though we will all make new mistakes in the future.  That is part of the process of living in the “real world”. 

That said, it is our intent to dig up salient articles and other resources to take a look at what went awry in housing, credit, and the world of finance.  Recently there has been some damning evidence brought to light that mismanagement of the GSEs and deferment of attempted reform efforts contributed to the current debacle.  We don’t believe the GSEs were the root cause of the current mess; though we do find the evidence strongly supports they played a key role. 

Peter Wallison and Charles Calomiris have penned a stunning history of the GSEs leading to their failure in the September issue of the AEI’s Financial Services Outlook.  The title of the piece is The Last Trillion-Dollar Commitment: The Destruction of Fannie Mae and Freddie Mac. 

Here’s the synopsis –

The government takeover of Fannie Mae and Freddie Mac was necessary because of their massive losses on more than $1 trillion of subprime and Alt-A investments, almost all of which were added to their single-family book of business between 2005 and 2007. The most plausible explanation for the sudden adoption of this disastrous course–disastrous for them and for the U.S. financial markets–is their desire to continue to retain the support of Congress after their accounting scandals in 2003 and 2004 and the challenges to their business model that ensued. Although the strategy worked–Congress did not adopt strong government-sponsored enterprise (GSE) reform legislation until the Republicans demanded it as the price for Senate passage of a housing bill in July 2008–it led inevitably to the government takeover and the enormous junk loan losses still to come.

Fact check to your level of need; we’re plowing through the references in our “spare time”.  If you’re like me, you’ll be on the phone to your legislators’ offices shortly after reading this one.

Here’s another interesting piece that ran today – titled “What They Said About Fan and Fred”.  The authors have looked back to House and Senate Committee hearings held in 2003 and 2004 and dug up quotes from key senators and representatives relative to the GSEs.  Most interesting reading. 

Compare those speakers to the top recipients of donations from Fannie and Freddie here; BTW there appears to be quite a disparity in monies received by current candidates for office. 

Finally, Barry Ritholtz writing at The Big Picture today makes a great point about how partisanship is contaminating the discussion about what went wrong and what must be done to fix things – and then marches on to more or less excoriate conservatives and their point of view.  Barry is a very bright guy and has good things to bring to the discussion; we hope he continues to focus on economic principles and leaves partisan rhetoric to the bobble-heads in DC. 

Last time we checked, folks from both the right and left sides of the aisle had a hand in the cookie jar, and a hand in creating today’s mess. 

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