Politicians and other talking heads (and thus the general public) seem to agree that the current credit crunch was caused by a lack of government oversight of the big bad bankers. Actually, it was the opposite. The cause of the crisis was government pressure (mainly, but not entirely, from Democrats in the White House and Congress) imposed on the mortgage lending industry since the beginning of the Clinton era. The quasi-government institutions, Freddie Mac and Fannie Mae, buckled under pressure and, by easily buying up an increasing number of unstable loans, made it very profitable for loan originators (primarily local brokers and bankers) and “packagers” of loans. loans (Wall Street) to accept voluntarily.
Starting in 1992, a Democratic-majority Congress mandated that Fannie and Freddie increase their purchases of mortgages for low- and middle-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, it’s a fact.
In 1999, the Liberals boasted of extending affirmative action to the financial sector. A Los Angeles Times reporter hailed the Clinton administration’s affirmative action lending policies as one of the Clinton administration’s “hidden success stories,” saying “Black and Latino homeownership has risen to the highest level ever.” registered”. After 2001, an important new market for these loans was found: illegal immigrants.
Meanwhile, some economists (but no politicians) were screaming that the Democrats were forcing mortgage lenders to issue loans that would fail as soon as the housing market slowed and overly-pressed borrowers couldn’t get out of their loans by refinancing or selling their homes. In 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 loans to unqualified borrowers, was creating a huge risk for the entire financial system. . Rep. Barney Frank denounced Mankiw and said that he had “no housing concern.” The New York Times reported that Fannie Mae and Freddie Mac were “under heavy attack from the 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 higher 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 even harder; he asked lawmakers to eliminate the down payment normally required for FHA loans. So the Republicans also have dirty hands.
However, in 2005, after Fannie and Freddie were investigated and severely 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 loan support for distressed borrowers. At the time, those who worked in the mortgage industry called these loans “liar loans.”
At the end of 2006, 30% of new mortgages in the US were subprime mortgages, up from 2% in 2002. Most of these mortgages were sold by the banks that originated the loans and turned into CDOs, securities backed by mortgage packages. 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, reputation for being backed by the US government, and slightly higher interest rate than “comparable” securities. Many banks didn’t buy them at all, and some hedge funds entered into swaps where they made money if these securities fell in value.
Lax standards for borrowers and low interest rates after 09/11/2001 expanded demand for housing which, in turn, inflated prices. Seemingly reliable 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-increasing home 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 coupled with second mortgages amassed on many properties caused the rate of home loan defaults to skyrocket. This caused the market for mortgage-backed securities to crash soon. Those who bet against these stocks collectively made billions, but others like Merrill Lynch and AIG were 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 owned these securities had to write these assets off against their capital, causing large declines in capital for some of the largest banks. These banks no longer had enough capital to meet the loan/equity 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, that is, the investment arms of the Chinese and Arab governments, but these countries soon lost confidence in the system and got more support. . Finally, the main financial institutions began to fail. As some economists predicted, the time bomb of affirmative action loans has exploded.
Now, at a cost of millions upon billions of dollars, taxpayers will have to bail out one of the Democrats’ most important constituencies: wealthy Wall Street bankers. It’s likely that soon after that deal is done, billions more will be spent to bail out a larger group of Democratic supporters: welfare recipients, illegal immigrants, and other unqualified borrowers, who were given loans that ago. twenty years would have been considered ridiculous. .
The mainstream media has no heart to criticize the liberal Democrats, 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 nearly all of them back the most affordable mortgages and want people to believe that 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 voters didn’t 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.