Wednesday, October 01, 2008

What Caused the Current Financial Crisis?

I don’t want to oversimplify the causes of the current financial mess. There is more than one cause and a lot of blame to spread around. For one thing, mandated mark-to-market accounting certainly has – and is – contributing. And allowing bond insurance to be separated from the underlying bonds (enabling people to do the financial equivalent of buying life insurance on their enemies) certainly has thrown fuel on the fire.

But probably the biggest problem is the great push, practically mandated by the federal government and Fannie Mae and Freddie Mac, to make massive amounts of sub-prime mortgages. These were an accident waiting to happen – waiting for the next housing downturn. And, sure enough, the first significant housing downturn caused many of these sub-prime mortgages to fail.

Democrats are trying to blame Bush for this (Doesn’t he get the blame for everything?) and to blame McCain, too. But the facts are Bush tried to reform mortgage lending back in 2003 as reported by the New York Times(!). And in 2005, McCain co-sponsored housing finance reform with this prescient warning:

If Congress does not act, American taxpayers will continue to be exposed to the enormous risk that Fannie Mae and Freddie Mac pose to the housing market, the overall financial system, and the economy as a whole.

If you want to go further back – and you should – here is one of the better explanations of the sources of the sub-prime mess I’ve come across. Pay particular attention to the following excerpt (I haven’t formatted the links. Those can be found at the above source.).
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.”

And guess who else made big contributions to this mess? Among the villains are Barney Frank, Christopher Dodd, and – Surprise! Surprise! – Obama and his favorite community organizing group, ACORN.

Are there Republicans to blame for the current troubles? Oh yes. Did eeeevil Wall Street people contribute? Well, yes. What about predatory lenders? Well, I’d personally like to see some in prison.

But facts are facts. The big push behind the policies that led to the sub-prime mortgage mess came primarily from Democrats . . . though Democrats try to demagogue and distract from that and though the “Mainstream” News Media ignores it.

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