Lobbying works on two fronts. First, is the appeal to public welfare. In the 1980's the interests in favor of creating Fannie Mae appealed to the dream of home ownership and the idea of making homes more affordable. They convinced Congress that a quasi-public company would make interest rates cheaper and housing more affordable ( in the short run this is true, since with implicit government backing, they could borrow more cheaply). Later in the 1990's Fanne Mae convinced Congress that in the goal of opening up home ownership to more people, they should lower the down payment requirements. Again, there is the appeal to helping the poor achieve the American dream.
Of course, the lobbyists are also looking out for their own self-interest. Lowering the down payment requirements would help them sell more loans and make more money. Perhaps the lobbyists were being cynical about the benefits to the poor. Or perhaps they believed their own marketing and genuinely believed it was win-win. It doesn't matter, the effect is the same.
The second part of lobbying is the campaign contributions and the golf games. This provides the Congressman the personal incentive to support the lobbyists' plan. Most of this happens right out in the open - the days of passing around suit cases full of cash are over (although if you want to read about those times check out Caro's Master of the Senate). The amount of the contributions is not enormous, but in an election every bit helps. It's enough money that the Congressman will try to find away to help the lobbyist if he can.
The end result is disastrous. By having the implicit government backing and by lowering the down payment requirements, Fannie Mae was able to make massive number of irresponsible loans Its managers made tens of millions. Then the whole thing crashed and the taxpayer is now footed with part of the bill. But no Congressman will pay any price for the debacle, so they never learn the lesson. Most voters won't even know who is responsible. And the general voting public has no ability to vote out the members of the banking committee - voters can only vote out the member of their own district. Of course the voters of that particular district don't want to vote their particular Congressman out. If they did, they would lose the earmarks that come from having a senior Congressman. Thus, there ends up being no accountability. Congress ends up with a 98% reelection rate and a 20% approval rating.
For the Congressmen involved, it is just a case of good intentions gone awry. In fact, I actually think Congressmen genuinely believed they were doing the right thing when they created Fannie Mae. Righteousness has an amazing ability to align itself with self-interest.
I find it amusing when people subscribe to the "throw the bums out" theory of politics. If you've every worked in Washington, you realize that the people running the show are generally no worse than anyone else in the country. Most are pretty decent, a few are rotten. The real problem is the incentive structure of our current political system. The only solution to fixing Washington is major Constitutional reform.
Priceless.
Also, great info thanks for the posts.
The real solution is that we need someone like Mark Cuban to start a competing stock market. He could create listing requirements that would include mandatory rules such as 1) requiring that companies only pay dividends (instead of doing stock buybacks 2) CEO's must get paid based on how the company does for the decade after they leave 3) all shareholders must either vote for the board members or hire a proxy voting firm, etc. etc.
I don't know what the exact rules would be, but I'm sure someone could design a set of rules that would be both less obtrusive and more effective than our current regulations. If the rules are designed well, this new well managed market will give investors higher returns. That will force the existing markets to shape up or lose their investors.