Obama warned about the subprime crisis. So what?

Democratic presidential nominee Barack Obama has claimed that he warned about the subprime lending crisis. His claims and those of his campaign have somehow been twisted by some into the notion that Obama foresaw and predicted the later deeper problems with the threat of frozen lending capital on a large scale. I wrote about the latter notion for a "Legends of the Left" entry. The commentary on that post led me to go deeper into what the Obama campaign means to say when it talks about his warning.

I intend to focus on the claim as used in the presidential and vice-presidential debates, analyzing its significance. Without further ado:

LEHRER: All right, let’s go back to my question. How do you all stand on the recovery plan? And talk to each other about it. We’ve got five minutes. We can negotiate a deal right here.

But, I mean, are you — do you favor this plan, Senator Obama, and you, Senator McCain? Do you — are you in favor of this plan?

OBAMA: We haven’t seen the language yet. And I do think that there’s constructive work being done out there. So, for the viewers who are watching, I am optimistic about the capacity of us to come together with a plan.

The question, I think, that we have to ask ourselves is, how did we get into this situation in the first place?

Two years ago, I warned that, because of the subprime lending mess, because of the lax regulation, that we were potentially going to have a problem and tried to stop some of the abuses in mortgages that were taking place at the time.

Last year, I wrote to the secretary of the Treasury to make sure that he understood the magnitude of this problem and to call on him to bring all the stakeholders together to try to deal with it.

So — so the question, I think, that we’ve got to ask ourselves is, yes, we’ve got to solve this problem short term. And we are going to have to intervene; there’s no doubt about that.

But we’re also going to have to look at, how is it that we shredded so many regulations? We did not set up a 21st-century regulatory framework to deal with these problems. And that in part has to do with an economic philosophy that says that regulation is always bad.

(CQ transcript wire, via "Clips and Comment")

In the first debate, Obama used the claim while not answering Jim Lehrer's question as to whether or not he supported the proposed bailout bill. Obama does come up with at least two different questions that we must ask ourselves, however. But how does the claim about warning about the subprime mortgage crisis fit in?

The key, it seems, is in his claim that "we were potentially going to have a problem." As I noted in the "Legends" post, when Obama gave his warning there was already a problem. His warning was akin to a child hearing a knock on the door and subsequently announcing to others in the home that someone is at the door, in terms of predictive value. It is not plausible that Obama had anything like the current subprime crisis in mind, for the language of his letter cannot support that view for lack of emphasis.

I judge that Obama intended for the reference to his letter to portray him as highly attuned to economics. Though he can't seem to answer Lehrer's question about the buyout/bailout bill, he hints to the audience that he has what it takes to answer the two questions he suggested during the course of his non-answer.

Vice presidential candidate Joe Biden made a similar statement during his debate with Sarah Palin (transcript edited slightly for length after including the original question for context):

IFILL (to Palin):

Now, let's talk about -- the next question is to talk about the subprime lending meltdown.

Who do you think was at fault? I start with you, Gov. Palin. Was it the greedy lenders? Was it the risky home-buyers who shouldn't have been buying a home in the first place? And what should you be doing about it?

(Palin answers)

IFILL (to Biden): Senator?

BIDEN: Well Gwen, two years ago Barack Obama warned about the sub prime mortgage crisis. John McCain said shortly after that in December he was surprised there was a sub prime mortgage problem. John McCain while Barack Obama was warning about what we had to do was literally giving an interview to The Wall Street Journal saying that I'm always for cutting regulations. We let Wall Street run wild. John McCain and he's a good man, but John McCain thought the answer is that tried and true Republican response, deregulate, deregulate.

So what you had is you had overwhelming "deregulation." You had actually the belief that Wall Street could self-regulate itself. And while Barack Obama was talking about reinstating those regulations, John on 20 different occasions in the previous year and a half called for more deregulation. As a matter of fact, John recently wrote an article in a major magazine saying that he wants to do for the health care industry deregulate it and let the free market move like he did for the banking industry.

So deregulation was the promise. And guess what? Those people who say don't go into debt, they can barely pay to fill up their gas tank. I was recently at my local gas station and asked a guy named Joey Danco (ph). I said Joey, how much did it cost to fill your tank? You know what his answer was? He said I don't know, Joe. I never have enough money to do it. The middle class needs relief, tax relief. They need it now. They need help now. The focus will change with Barack Obama.

Biden's answer, unlike Obama's, does address the question. And as with many answers in a VP debate, his answer attempts to shine a spotlight on the top of the ticket. Is it more than a coincidence that both Biden and Obama mentioned his warning? It is almost impossible that it is not a coincidence. The campaign wants that warning as part of the message.

What meaning is a voter supposed to draw from the message?

Biden effectively explains it within his answer. Biden blames unregulated Wall Street for the difficulties of the subprime market. And while blame can be placed partially on poorly-regulated trading in mortgage-backed securities, Biden doesn't utter a peep about the government regulation that was instrumental in encouraging bad loans and the concurrent housing bubble in the first place.

Biden implies that Obama had the answer for the present problem two years ago but went unheeded ("while Barack Obama was warning about what we had to do" contrasted with McCain's general view favoring less government regulation--the latter a Biden misrepresentation that others have and will cover).

Thus, Biden delivers the same message that Obama tried to communciate: that Obama knew things would get worse and tried to fix things early on. As I pointed out in the earlier post, the text of Obama's warning hardly supports that version of events.

From the second Obama-McCain debate:

BROKAW: Sen. Obama?

OBAMA: Well, Oliver, first, let me tell you what's in the rescue package for you. Right now, the credit markets are frozen up and what that means, as a practical matter, is that small businesses and some large businesses just can't get loans.

If they can't get a loan, that means that they can't make payroll. If they can't make payroll, then they may end up having to shut their doors and lay people off.

And if you imagine just one company trying to deal with that, now imagine a million companies all across the country.

So it could end up having an adverse effect on everybody, and that's why we had to take action. But we shouldn't have been there in the first place.

Now, I've got to correct a little bit of Sen. McCain's history, not surprisingly. Let's, first of all, understand that the biggest problem in this whole process was the deregulation of the financial system. Sen. McCain, as recently as March, bragged about the fact that he is a deregulator. On the other hand, two years ago, I said that we've got a sub-prime lending crisis that has to be dealt with.

I wrote to Secretary Paulson, I wrote to Federal Reserve Chairman Bernanke, and told them this is something we have to deal with, and nobody did anything about it.

A year ago, I went to Wall Street and said we've got to re-regulate, and nothing happened.

OBAMA: And Sen. McCain during that period said that we should keep on deregulating because that's how the free enterprise system works.

Now, with respect to Fannie Mae, what Sen. McCain didn't mention is the fact that this bill that he talked about wasn't his own bill. He jumped on it a year after it had been introduced and it never got passed.

And I never promoted Fannie Mae. In fact, Sen. McCain's campaign chairman's firm was a lobbyist on behalf of Fannie Mae, not me.

So -- but, look, you're not interested in hearing politicians pointing fingers. What you're interested in is trying to figure out, how is this going to impact you?

This is not the end of the process; this is the beginning of the process. And that's why it's going to be so important for us to work with homeowners to make sure that they can stay in their homes.

The secretary already has the power to do that in the rescue package, but it hasn't been exercised yet. And the next president has to make sure that the next Treasury secretary is thinking about how to strengthen you as a home buyer, you as a homeowner, and not simply think about bailing out banks on Wall Street.

Again, Obama's words seem like an attempt to cast him as the guy who noticed the sky was about to fall but who got ignored, with the result a national and international calamity.

Barack Obama's public references to his warning letter strike me as a technique very much from the Bill Clinton notebook. Clinton was a master at carefully constructing sentences that were true in a sense but at the same time would mislead the listener.

Obama seems to have some of that same guileful gift. Yes, he warned about the subprime mortgage crisis but after it had already begun, and with only the most subtle hint that the subprime crisis would deepen and spread. His recommendations for action seemed geared toward addressing the immediate fallout from defaulted loans--and certainly "a potential wave of coming foreclosures"--rather than systemic failure.

Bottom line: The Obama campaign uses the warning claim in a misleading way, leading people to believe that the warning was more expansive and specific than appears was the case. In terms of the literal warning that Obama provided, there was no significant relevance to the current subprime mortgage crisis where the stock market drops and credit markets freeze up.

I note the PolitiFact seems to disagree with me. More on that in a later post.

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One final note. Obama's claim in the second debate that "nobody did anything about it" appears false.