Posted on 01/25/2009 8:47:56 AM PST by wartman
We’ve all heard it. In the last couple months, the refrain of “deregulation and lack of government intervention” caused the financial crisis we’re currently working through. However, a quick look back shows that this wasn’t the case. In fact, it’s pretty clear that the real cause is the exact opposite: the crisis was caused by too much government intervention.
The fairy tale usually goes like this: greedy financial companies gave unfair subprime loans to borrowers who couldn’t qualify for standard mortgages and hid in the fine print the real terms of the mortgage in an attempt to fraudulently enrich themselves.
There are so many logical fallacies and outright laughable stupidity in that above fairy tale it’s almost hard to take seriously anyone who actually believes that. But, I’ll try.
1) The first fallacy that needs to get out of the way is that the mortgage companies handed out the subprime loans because they didn’t care whether the person would be able to stay in the home or not. That idea shows a strong ignorance of the way credit institutions work. No one wanted the borrowers to stay in their homes more than the lending companies. If the mortgage goes into default, the lending company stands to lose a lot of money. Foreclosure is a losing proposition for the lending company.
2) The subprime loans we’re given out in the first place because the Democrats demanded it. This is a historical fact. It shouldn’t be hard to follow the logic:
* Democrats demand that poor borrowers be given access to mortgages. * Because they have poor credit, these borrowers cannot qualify for standard mortgages. Hence subprime interest rates. * The banks then bundle these mortgages into securities which are purchased by a government sponsored entities nicknamed Fannie Mae and...
(Excerpt) Read more at jeffwartman.com ...
The banks were “forced” to make these loans only because of the loss of potential profit in not making them. The CDO market along with swaps to insure them enabled banks to offer more credit by freeing up reserves. The Dems got their sub prime loans through deregulation wanted by the Repubs, they both got campaign contributions for re-election, the bankers made great a great bonus on every new transaction and we got screwed.
Thanks for posting some common sense on this issue.
Subprime mortgages were the root cause, and their creation was indeed encouraged by government, especially liberals.
The market then took these mortgages and played games with them, creating monetary instruments that nobody really understood. In the process they inflated the actual risk by somewhere between one and two orders of magnitude. Unfortunately, we cannot blame this mess entirely or even largely on the government. The primary perps are the people the market rewarded most extravagantly over the last couple decades.
The theory that markets do not do stupid things does not hold up historically. The difference between markets and governments is that markets always self-correct in the long run. Governments can keep tossing money down a hole almost indefinitely, as long as they have a semi-functioning economy to plunder.
As the Soviet Union did. They only collapsed when their economy went from 50% efficient to 25% efficient.
I guess we part company after economics.
I think Bush's foreign policy has been brilliant. He is the first leader of the modern world to confront the systemic problems of the middle east that make it such a cess pool.
Don’t forget this link of Bush pushing these crap, liar loans to millions of unqualified minorities.
http://www.youtube.com/watch?v=eW9viaJatpo
Oh yeah. Nation building and having our men fight house to house is brilliant all right. Central Asia IS a cesspool and the closest we should ever get to it is 30,000 ft overhead. When the cesspool belched in our direction we should have struck back from the air ten times as hard and promised to do so again every time the sewer flowed in our direction. But then we couldn’t really do that as we are held hostage by Saudi Arabia.
Democratizing the islamic world is not a plan. Its insanity.
CRA and the “community Organizer” race pimps!
Bingo!!!!
Agreed!!!
Short summary:
1. Fannie Mae is created during the Carter Administration (1976-1980).
2. Fannie Mae is expanded during the Clinton Administration. B. Clinton claims he tried to rein it in, but Democrats blocked it.
3. GW Bush calls repeatedly for regulation, but Democrats block it. They did hold hearings in 2004, which are rather startling to watch. At one point a Democrat is even cussing the regulator and questioning the competency of his agency.
4. Fannie Mae continues to be expanded and defended by Barney Frank, Maxine Waters, Christopher Dodd (and other Democrats) and given teeth. Banks are required to hold larger and larger percentages of these bad loans, or must pay high penalties. The penalties finally reach a point the banks can no longer ignore them.
5. Lending institutions begin to advertise "No Money Down!" The lines form, people who can't afford a house are given a loan as required by law (Fannie Mae). Dumb.
6. One unfortunate result is that more and more houses are taken off the market. The loans are bad, but that doesn't matter. As housing availability drops, the prices soar to unreasonable levels.
7. Somebody or some group tinkers with the oil futures market, gas prices soar to around $4 a gallon. Who did this is still not clear. The economy begins to slow down, bad loans go... bad, people fall behind on mortgage payments. Housing values start going back down.
8. Regulation regarding how lenders compute value had been changed from "future value" to "current value." So the current value was declining rapidly at a time the lenders had filled up their portfolio's with bad loans. Computing their new values, banks came up with next to nothing, or worse. They could no longer apply to Fed for money to lend. No money to lend meant no more housing loans, no houses sold leads to more dramatic reduction on housing values.. driving the lenders value to negative values of millions or billions of dollars in a few weeks.
The Fannie Mae ponzi scheme had finally burst, costing us more than a trillion dollars to fix, so far, and we haven't seen the last of it yet.
It does beg the question: Why not reinstitute the measure that allowed lenders to compute on "future value"? Wouldn't this help solve the problem?
Anyway, thats the best I can do to explain it. Hope this helps.
Indeed, pick up any big-city newspaper circa the late 1990's or early 2000's and you'll see that most large cities were using every tool available to push banks into loaning to people who didn't have the financial means and history necessary. I remember when I moved from northern Ohio, Cleveland was in a legal struggle trying to force Third Federal Savings and Loan to lower their lending standards, accusing the outfit of "redlining" neighborhoods. ACORN was in on this debacle as well. Freddie and fannie provided cover to protect the institutions.
But the problem grew, and it wasn't just low-income borrowers riding the train of easy credit. Interest rates that were too low for too long compounded the situation - Greenspan dropped the prime rate after 9/11 but kept it down way too long, encouraging more leveraging (borrowing). There's many other factors involved, but suffice to say that the housing bubble rode on the credit bubble and when credit ran out, housing was bound to fall. Unfortunately, the fall has taken many responsible people with it.
Good post, and spot on!
And, George Bush. Please, get it right.
For those that might have missed this Bush speech of him pushing subprime, liar loans for millions of unqualified minorities.
http://www.youtube.com/watch?v=eW9viaJatpo
Hmmmmmm.... That wasn't there before.
Well, there should a lot of points here on this thread that you can use to put the blame on Bush and his admin as well.
BTW, this should be posted in “Bloggers and Personal”.
You've got it backwards.
The government didn't force the banks to do this.
The banks wanted to do this and saw to it that people were elected who would do their bidding, like Clinton and Bush.
The banks didn't care whether the loans got paid back because they sold them to Fannie Mae and Freddie Mac who them bundled these financial time-bombs together with good loans into mortgage-backed securities and spread the risk out among the entire US population.
The knew all along that the government would ultimately bail them out because they'd already seen to it, way back in 2001, that their man was in office.
If you want more details about what Bush did during his first term to cause this, see my FR homepage.
Fannie and Freddie don't give loans. They buy them from banks.
Which loans were the banks selling?
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