Posted on 09/18/2013 10:17:31 AM PDT by SeekAndFind
Larry Summers won’t be the next chairman of the Federal Reserve. On Sunday, he informed President Barack Obama that he was withdrawing his name from consideration.
There were plenty of substantive reasons to oppose Summers’ possible selection, not the least of which was his role in creating our current Keynesian policy-driven economic malaise. Of course, the left complains that if only the 2009 “stimulus” had been much larger, something Summers opposed, we’d now be better off. Sure, guys. More Keynesian “stimulus” would only mean we’d now be reeling from even more than the $5.3 trillion in budget deficits and $6.1 trillion in national debt increases accumulated since Barack Obama took office in January 2009.
As I noted last week, key output and employment statistics during the current alleged economic “recovery” more closely resemble what the nation experienced during the 1930s than any of the recoveries seen since World War II. The common factor in both eras? Reliance on large-scale Keynesian stimulus, which in each case stimulated nothing but prolonged misery.
The real reason that Summers, who started out as President Obama’s favorite for the post, didn’t even get to the starting line has nothing to do with merit and everything to do with the left’s determination to preserve its fundamentally false narrative about what caused the financial crisis of 2008. You see, Larry Summers’ biggest sin was that he had a “past role in financial deregulation.” In Leftyland, interstate banking deregulation, with accompanying “Wall Street greed,” is entirely to blame.
The truth is that deregulation is a far distant third on the list of contributors, and would never have been a relevant factor without government regulators’ aggressive handling of the Community Reinvestment Act (CRA) and the conduct of “government-sponsored enterprises” Fannie Mae and Freddie Mac.
In June 2009, John Carney at Business Insider posted the definitive essay on how federal officials’ and regulators’ zealous use of CRA eventually ruined the entire mortgage lending market by forcing the industry to make loans to unqualified buyers. Here are his key points:
… (CRA) evolved over the years from a relatively hands-off law focused on process into one that focused on outcomes. Regulators, beginning in the mid-nineties, began to hold banks accountable in serious ways. Banks responded to this new accountability by increasing the CRA loans they made, a move that entailed relaxing their lending standards.
… the lax lending standards created in response to the CRA … dug a pit that was waiting to get filled when the circumstances were right.
… The regulators charged with enforcing the CRA praised the lowering of down payments and even their elimination. They told banks that lending standards that exceeded that of regulators would be considered evidence of unfair lending. This effectively meant that no money down mortgages were required.
… banks were expected by regulators to relax income requirements. Day labors and others often lack reportable income. Stated-income was a way of resolving the gap between actual income of borrowers and reported income.
… (Ultimately) the CRA required lax lending standards that spread to the rest of the mortgage market.
It is no coincidence that the number of subprime loans, which barely existed before 1995, exploded. Regulators also enthusiastically embraced especially risky “low doc” and “no doc” loans, which came to be known as “liar loans.”
Fannie Mae and Freddie Mac did their part by lowering borrowers’ credit score approval thresholds in their automated underwriting systems for loans they would purchase from originating lenders. The key changes, according to a mortgage brokerage executive with whom I spoke in 2006, involved reducing the conventional loan threshold from a FICO credit score of about 670 to 630 and the subprime threshold from about 630 to 590 (other online sources I’ve found indicate that each threshold may have actually been an additional ten points lower).
As seen in the following 2008 chart, which shows the likelihood of consumers going 90 days delinquent on debt for various score ranges, these changes radically increased the likelihood of making bad loans:
But Fan and Fred, whose combined loan portfoliios grew to over $5 trillion by they time they collapsed into government-supervised insolvency on September 7, 2008 — the real point at which the housing bubble turned into a financial crisis — took matters even further by deceiving the bond ratings agencies and financial markets about the quality of their securitized offerings. Specifically, in 2009 research later confirmed as fundamentally accurate: blockquote>
… Edward Pinto, a former chief credit officer for Fannie Mae and a housing expert, has found that from the time Fannie and Freddie began buying risky loans as early as 1993, they routinely misrepresented the mortgages they were acquiring, reporting them as prime when they had characteristics that made them clearly subprime or Alt-A.
In a September 17 column, normally astute economist Robert J. Samuelson, while acknowledging that they were “the exception, not the rule,” noted that in the latter stages of the home-lending bubble, “banks and investment banks (‘Wall Street’) knowingly packaged bad home mortgages in securities that were then sold to unsuspecting investors.” But he failed to recognize that the dollar volume of Fan’s and Fred’s known 15-year deception dwarfed any latter-stage fraud in which “Wall Street” may have engaged.
The bottom line, as Peter Wallison observed in the Wall Street Journal in October 2011 as the Occupy movement was playing “pin the blame for everything” on “Wall Street,” is that “reckless government policies, not private greed, brought about the housing bubble and resulting financial crisis.”
Obama himself played along with the “deregulation did it” fiction by identifying September 14, the fifth anniversary of the failure of Lehman Brothers, as when the financial crisis officially began. When he did that, it was a foregone conclusion that Summers would have to walk the plank. Alinsky-trained progressives know that preserving the narrative is far more important than any one person’s qualifications or career.
Summers apparently knew that his duty to the cause was to fall on his sword. And he did.
You’re positing a false either/or between CRA versus harebrained deregulation as the causes of the crisis, when in fact the two are not mutually exclusive, and there is no reason not to admit that both were partially responsible, ALONG WITH a lot of other very stupid behavior on the parts of a lot of other parties.
These include homebuilders, homebuyers, condo speculators, government mortgage insurers, foreign MBS investors, rating agencies, terrible Fed policy that intentionally steered money into the housing market after the stock market crashed, corrupt congressmen on and on and on. You don’t get a crisis that big without a lot of people doing a lot of really dumb things.
What was the harebrained deregulation?
You don’t get a crisis that big without a lot of people doing a lot of really dumb things.
That's true. Look at the stupid things people did during the Internet bubble.
At least someone up there is smart enough to know that you can’t fill up a bucket with no bottom in it.
Well, if we’re going to guarantee the liabilities of financial institutions like banks, then we need to regulate their investment activities so they are not issuing swap lines to every bucket shop investment bank and infinitely levered insurance company in the world.
The deregulators like Gramm and Greenspan (and Summers) looked at “financial innovation” like interest rate swaps as somehow automatically REDUCING the investment risks of big financial institutions, and all they did was slightly change the way they took that risk, and in fact because of the capital rules, they were able to take much more of it.
Throw in the mergers of all the largest investment banks with the largest brokerage firms and insurance companies, and you have too big to fail gone completely out of control.
It gets back to Glass-Steagall. If you want bank deposits to be riskless to the depositor, then you need limits on what the banks can do with their money. It’s not a free market if the liabilities are guaranteed.
Who is this "we" guaranteeing liabilities? Do you think something was deregulated in this area? When?
It gets back to Glass-Steagall. If you want bank deposits to be riskless to the depositor, then you need limits on what the banks can do with their money.
Please tell me what year you imagine banking was riskless. Why do you think Glass-Steagall made things risky?
What would Glass-Steagall have done in 2008 to make things better?
We, the taxpayers, guarantee liabilities, via the FDIC which in a crisis becomes infinite.
We FORMERLY used this guarantee to impose some controls on the business and investing activities of the guaranteed institutions, and we gradually eliminated that, culminating late in the the Clinton administration.
It’s not that banking was riskless, but did you notice every time we deregulated practices, first in the early 80s with the S&Ls and later in the ‘00s with allowing banks into the full range of investment activities, that a few good years with bankers paying themselves handsomely were promptly followed by a massive crisis with the taxpayers paying off the depositors?
Also, why such a nasty tone? Citigroup employee?
The FDIC is funded by the banks. Are you saying something about the FDIC was deregulated?
We FORMERLY used this guarantee to impose some controls on the business and investing activities of the guaranteed institutions, and we gradually eliminated that, culminating late in the the Clinton administration.
Banks are one of the most highly regulated things out there. You think they stopped regulating them late in the Clinton era?
It’s not that banking was riskless, but did you notice every time we deregulated practices, first in the early 80s with the S&Ls
What deregulation do you blame for the S&L crisis?
and later in the ‘00s with allowing banks into the full range of investment activities
What investment activities caused the crisis?
Also, why such a nasty tone?
You think that was a nasty tone? LOL!
Are you new here? Did you hack a long time Freeper account?
You never said, what would Glass-Steagall have done in 2008 to make things better?
I am saying the ASSETS that are held against the LIABILITIES that are guaranteed by the FEDERAL GOVERNMENT’S FULL FAITH AND CREDIT via the FDIC which is INFINITELY EXPANDED IN ANY CRISIS were deregulated.
You are literally too stupid to talk to, can you not read?
Yes, there was a massive degree of bank deregulation, supported by Republicans and the Fed and the Clinton Treasury. Again, you are too stupid for words. The fact that some regulation continued to exist does not mean an enormous amount was not elimintated. Again, you are an idiot.
The deregulation that led to the S&L crisis was the elimination of regulations on deposit interest, and the elimination of the stipulations on commercial real estate investment by S&Ls. You moron.
For someone who acts like he knows ANYTHING about financial markets you do seem to have a lot more questions than answers.
Yeah, you keep saying it, you still haven't shown anything.
Yes, there was a massive degree of bank deregulation, supported by Republicans and the Fed and the Clinton Treasury.
Massive? Show me what you feel they deregulated. And then, show how that fed the crisis. Or you could show how Glass-Steagall would have prevented the crisis.
For someone who acts like he knows ANYTHING about financial markets you do seem to have a lot more questions than answers.
I'm trying to determine the depth of your confusion.
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