Legends of the Left: Obama foresaw the subprime mortgage crisis

Presidential candidate Barack Obama appears to have achieved a prophetic status rivaling that of Nostradamus, at least when it comes to having vague statements interpreted as specific predictions.

I first encountered this "Obama knew" claim from an acquaintance. He argued that Obama saw the subprime mortgage crisis coming. I could not induce him to offer any specifics, however.

Senator Biden made the claim during his debate with Sarah Palin.

Barack Obama pointed out two years ago that there was a subprime mortgage crisis and wrote to the secretary of Treasury. And he said, "You'd better get on the stick here. You'd better look at it."

Naturally I developed a curiosity about that letter.

And I quickly ran across a link at The Daily Kos under the headline "Obama saw it coming." The blogger "free speech zone" dressed up a portion of an Obama speech with hotlinks:

If you want to understand the difference between how Senator McCain and I would govern as President, you can start by taking a look at how we've responded to this crisis. Because Senator McCain's approach was the same as the Bush Administration's: support ideological policies that made the crisis more likely; do nothing as the crisis hits; and then scramble as the whole thing collapses. My approach has been to try to prevent this turmoil. In February of 2006, I introduced legislation to stop mortgage transactions that promoted fraud, risk or abuse. A year later, before the crisis hit, I warned Secretary Paulson and Chairman Bernanke about the risks of mounting foreclosures and urged them to bring together all the stakeholders to find solutions to the subprime mortgage meltdown. Senator McCain did nothing.

I infer that "free speech zone" added the hotlinks because they do not occur in the version of the speech to which the post links.

Note that Andrew Sullivan also considers this letter a warning about the subprime mortgage crisis.

So what mounting risks did Obama talk about? It's always wise to get the point rapidly in a letter ...

Dear Chairman Bernanke and Secretary Paulson,

There is grave concern in low-income communities about a potential coming wave of foreclosures. Because regulators are partly responsible for creating the environment that is leading to rising rates of home foreclosure in the subprime mortgage market, I urge you immediately to convene a homeownership preservation summit with leading mortgage lenders, investors, loan servicing organizations, consumer advocates, federal regulators and housing-related agencies to assess options for private sector responses to the challenge.

We cannot sit on the sidelines while increasing numbers of American families face the risk of losing their homes. And while neither the government nor the private sector acting alone is capable of quickly balancing the important interests in widespread access to credit and responsible lending, both must act and act quickly.

There simply isn't anything at all in the first two paragraphs that a reasonable person could take as predicting the subprime mortgage crisis. Obama focuses on the risks of foreclosure, not on the risk of a system-wide dissipation of liquidity.

On the other hand, Obama does express some concern over liquidity at number six among six bullet points where he recommends a direction for a summit between private entities and regulators:

• How to ensure adequate liquidity across all mortgage markets without exacerbating consumer and housing market vulnerability.

Sounds a bit vague, doesn't it? But here's the kicker: Obama wasn't foreseeing anything. He wrote his letter after the crisis had already hit. His letter is dated March 24, 2007. The Telegraph (UK) provides a timeline of the crisis showing how Obama predicted a crisis that had already occurred.

30 June 2004 The US Federal Reserve starts a cycle of interest rate rises that will lift borrowing costs from 1%, their lowest level since the 1950s, to the current level of 5.25%.

The central bank will go on to increase interest rates 17 times in a row as it tries to slow inflation. It pauses in June 2006, and has not lifted borrowing costs from 5.25% since then.

August 2005 through 2006 Higher borrowing costs start to impact on the US housing market and the property boom starts to unwind.

Building rates drop sharply to decade lows and prices also start to come down.

Defaults on sub-prime mortgages - where lenders give cash to people with poor or no credit history at higher than normal repayment levels - start to increase.

12 March 2007 Shares in New Century Financial, one of the biggest sub-prime lenders in the US, are suspended amid fears it may be heading for bankruptcy.

It's generally easier to predict things that have already happened, obviously.

What we have here, it seems, is an Obama trying to burnish his reputation for good judgment despite having no real foundation in fact. Biden goes along for the ride, parroting the campaign talking point for the sake of higher office. Andrew Sullivan ... I'm not sure what he gets out of the deal.