Monday, September 29, 2008
Who caused “the biggest financial crisis since the Great Depression?”
The Root Cause
* According to Senator Chris Dodd (D. CT) the “root cause” of the problem is “the housing foreclosure crisis.”
Not 100% accurate, perhaps–it’s really a credit crisis–but close enough for government work, especially from someone who has just happens to chair the Senate Banking Committee and who, completely coincidentally, has been such a conspicuous beneficiary of preferential mortgages and who, also coincidentally, leads the list of those who have received campaign contributions from Fannie Mae and Freddie Mac. (Guess who comes in 2nd and 3rd?)
* But what caused the housing crisis to which Senator Dodd alludes? The housing “bubble.”
* And what caused the housing bubble? “Sub-prime,” i.e., risky, mortgages; that is, mortgages made to people who, in the normal course of things would have to pay a premium in order to obtain a mortgage (if they could obtain one at all) because
a) they had bad or non-existent credit
b) their income was insufficient or
Packaging the American Dream
A home of your own. It’s part of the American dream. Work hard, save up for a down payment, pay your bills on time and, presto, you, too, can buy a home.
For decades the government has done things to help Americans to realize the dream, e.g., graciously allowing citizens to keep some of their own money to help pay for the interest on a mortgage (the official term for this is a “tax deduction,” but I prefer my locution since it emphasizes the fact that it is YOUR MONEY we are talking about).
But what about people who do not work hard (if they work at all)? What about people who have not saved up for a down payment? What about people who do not pay their bills on time (if they pay them at all)? Why shouldn’t they get to live the American dream?
That was the question that led to
”The Community Reinvestment Act” (see here for more).
* The original Community Reinvestment Act was signed into law in 1977 by Jimmy Carter. Its purpose, in a nutshell, was to require banks to provide credit to “under-served populations,” i.e., those with poor credit.
The buzz word was “affordable mortgages,” e.g., mortgages with low teaser-rates, which required the borrower to put no money down, which required the borrower to pay only the interest for a set number of years, etc.
* In 1995, Bill Clinton’s administration made various changes to the CRA, increasing “access to mortgage credit for inner city and distressed rural communities,” i.e., it provided for the securitization, i.e. public underwriting, of what everyone now calls “sub-prime mortgages.”
Bottom line? It forced banks to issue $1 trillion in sub-prime mortgages.
$1 trillion, i.e., a thousand billion dollars in sub-prime,i.e., risky, mortgages, in order to push this latest example of social engineering.
But wait: how did it force banks to do this? Easy. Introduce a federal requirement that banks make the loans or face penalties. As Howard Husock, writing in City Journal way back in 2000 observed: “Bank examiners would use federal home-loan data, broken down by neighborhood, income group, and race, to rate banks on performance. There would be no more A’s for effort. Only results—specific loans, specific levels of service—would count.” Way back in 1994, for example, Barack Obama sued Citibank on behalf of a client who charged that the bank “systematically denied mortgages to African-American applicants and others from minority neighborhoods.”
* In 1997, Bear Stearns–O firm of blessed memory–was the first to get onto the sub-prime gravy train.
* Fannie Mae & Freddy Mac–were there near the beginning, too.
Anatomy of a bubble
Step 1. The intoxication: “My house is worth millions!” From 1995 - 2005, the number of sub-prime mortgages skyrocket. So did the house prices.
Step 2. The hangover: “Oh my God, my house isn’t selling. What went wrong?”
Why didn’t someone try to stop it?
Someone did: “The Bush administration today recommended the most significant regulatory overhaul in the housing finance industry since the savings and loan crisis a decade ago,” The New York Times, September 11, 2003.
But someone intervened to stymie the Bush administration. Who? The New York Times reports:
Supporters of the companies said efforts to regulate the lenders tightly under those agencies might diminish their ability to finance loans for lower-income families. . . . “These two entities — Fannie Mae and Freddie Mac — are not facing any kind of financial crisis,” said Representative Barney Frank of Massachusetts, the ranking Democrat on the Financial Services Committee. “The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing.”
Why didn’t someone else ring the alarm?
Someone else did. In 2005, John McCain co-sponsored the “Federal Housing Enterprise Regulatory Reform Act,” which among other things provided for more oversight of Freddie & Fannie. The bill didn’t pass. Guess who blocked it?
The bill was reintroduced in 2007. But again, no luck. Fannie Mae and Freddie Mac had friends in the Senate:
* Chris Dodd, a recipient of “sweetheart” loans from a Freddie and Fannie backed company.
* The junior senator from Illinois, i.e., Barack Obama, who turned to Jim Johnson, former head (1991-1998) of Fannie Mae, to help advise him on whom to pick for the vice-presidential slot on his ticket. From 1985 to 1990, incidentally, Johnson was managing director of Lehman Brothers. Remember them?
* You might also want to check out one of Barack Obama’s other advisors: Franklin Raines, former CEO of Freddie Mac: see here , for example, or here , or here.
Towards the end of the video, we read this salutary observation: “Everyone deserves a home, not a house of cards.”
Who gave us the house of cards? Watch the whole thing here (original link was here). And then pass it along to everyone you know.
(My, my, now isn't that interesting?? VN8)