Politicians and other talking heads (and therefore the general public) seem to agree that the current credit crunch was caused by a lack of government oversight of big bad bankers. Actually, it was quite the opposite. The cause of the crisis was government pressure (mainly, but not entirely, from Democrats in the White House and Congress) placed on the home loan industry since the beginning of the Clinton era. The quasi-government institutions, Freddie Mac and Fannie Mae, caved in to the pressure and, by easily buying up an increasing number of shaky loans, made it very profitable for loan originators (mainly local brokers and bankers) and loan “packers.” (Wall Street) to voluntarily accept.
Beginning in 1992, a Democratic-majority Congress mandated that Fannie and Freddie increase their purchases of mortgages for low- and moderate-income borrowers. Operating under that requirement, Fannie Mae, in particular, became aggressive and creative in stimulating “minority profits.” The Clinton administration investigated Fannie Mae for racial profiling and proposed that 50 percent of Fannie Mae and Freddie Mac’s portfolio be made up of loans to low- and moderate-income borrowers by 2001. and the ability to make a payment initial. Threatening lawsuits, the Clinton Fed required banks to treat welfare payments and unemployment benefits as valid sources of income to qualify for a mortgage. That’s not a joke, that’s a fact.
In 1999, the liberals bragged about extending affirmative action to the financial sector. A Los Angeles Times reporter praised the Clinton administration’s affirmative action lending policies as one of the Clinton administration’s “hidden success stories,” saying that “Black and Latino homeownership has risen to the highest level ever registered”. After 2001, a major new market was found for these loans: illegal immigrants.
Meanwhile, some economists (but not politicians) were shouting that the Democrats were forcing mortgage lenders to issue loans that would fail as soon as the housing market slowed and over-pressured borrowers couldn’t get out of their loans by refinancing or selling their homes. Bush’s first year in office, White House chief economist N. Gregory Mankiw warned that the government’s “implicit subsidy” to Fannie Mae and Freddie Mac, combined with lending to unqualified borrowers, was creating a risk huge for the entire financial system. . Rep. Barney Frank denounced Mankiw, saying he had “no housing concern.” The New York Times reported that Fannie Mae and Freddie Mac were “under heavy attack from Republicans,” but these entities still had “important political allies” in the Democrats.
During the 2004 presidential campaign, George Bush bragged about the fact that a greater percentage of Americans owned their own homes than ever before, but (except to praise low interest rates) he did not explain how or why this happened. President Bush pushed further; he called on lawmakers to eliminate the down payment normally required for FHA loans. So the Republicans have dirty hands too.
However, in 2005, after Fannie and Freddie were investigated and heavily fined for accounting fraud, Republicans in Congress wanted to strip Fannie and Freddie of privileged status, but along a strict party line, the Democrats won and Fannie and Freddie They were able to continue their business. Virtually unchanged, but on one condition…they had to increase their lending support for distressed borrowers. At the time, those who worked in the mortgage industry called these loans “liar’s loans.”
At the end of 2006, 30% of new mortgages in the US were subprime, up from 2% in 2002. Most of these mortgages were sold by the originating banks and converted into CDOs, mortgage-backed securities. Despite the junk loans in these packages, these securities continued to be rated AAA by bond rating agencies. Many financial institutions around the world continued to invest in them, due to their AAA rating, their reputation for being backed by the US government, and a slightly higher interest rate than “comparable” securities. Many banks did not buy them at all, and some hedge funds entered into swaps whereby they made money if these securities lost value.
Lax standards for borrowers and low interest rates after 09/11/2001 expanded demand for homes, which in turn inflated prices. The seemingly credible price increases attracted flippers and people who thought owning a second or third home would be a good investment, further increasing demand. Total demand pushed housing well beyond any sustainable price level. Confidence in ever-rising house prices tempted many to cash in on their “earnings” by taking out home equity loans.
When the housing bubble finally burst in 2005, the huge inventory of bad first mortgages along with second mortgages piling up on many properties caused the home loan default rate to skyrocket. This caused the mortgage-backed securities market to crash early. Those who bet against these stocks collectively won billions, but others like Merrill Lynch and AIG got stuck. Because no one would buy them, these securities had to be recognized on the books as essentially worthless, under one of the new “mark to market” regulations adopted after the Enron debacle. Under accounting rules, the financial institutions that held these securities had to write these assets down against their capital, causing large decreases in the capital of some of the largest banks. These banks no longer had enough capital to meet the loan/capital ratios required by banking regulations, so they had to virtually stop lending of any kind, triggering the current credit crunch. Some big banks like Citigroup tried to cope by selling 10 or 20% of themselves to sovereign wealth funds, i.e. the investment arms of the Chinese and Arab governments, but these countries soon lost confidence in the system and gained more support. . Finally, the major financial institutions began to fail. As some economists predicted, the affirmative action lending time bomb has gone off.
Now, at a cost of trillions of dollars, taxpayers will have to bail out one of the Democrats’ most important constituent groups: wealthy Wall Street bankers. It is likely that soon after that deal is made, billions more will be spent to bail out a larger group of Democratic supporters: welfare recipients, illegal immigrants and other unqualified borrowers, who have been given loans that make twenty years would have been considered ridiculous. .
The mainstream media does not have the nerve to criticize the Lib Dems, who, more than anyone else, caused all of this. While government intervention caused the problem, the solution, ironically, is supposedly more government involvement (regulation) in the future. Politicians are participating in this cover-up, because almost all of them back the easiest mortgages to obtain and want people to believe they had little to do with causing the problem. Both Obama and McCain say it’s a shame there aren’t better regulations, as if it were possible to regulate against big companies that make bad investments. Both candidates likely had focus group data indicating that voters did not want to hear what the real cause of the credit crunch was.
The country has apparently learned nothing from this costly mistake, so it will only be a matter of time before the government wrecks the economy again.