How We Got Here

George Rebane

A current poll shows that 71% of Americans believe Obama’s economic policies will serve the country better than McCain’s policies.  Now I’m not even sure that 71% of Americans know what an economic policy is, let alone differentiate between those of the two senators.  But that really doesn’t matter does it?  The main thing here is that the poll confirms the Peter-Paul Principle and Bryan Caplan’s The Myth of the Rational Voter, and for our country there seems to be no turning back.

For those history buffs who are interested in reviewing the milestones on the road to our current financial crisis and its seemingly inevitable impact on the election, I am printing below a summary that I received through a correspondent.  I was particularly amused by the YouTube videos at the end of famous Democrats lambasting appeals for regulating Fannie and Freddie, the fragile behemoths that built up and then precipitated the whole mess.

The following is a condensation of a series from the Investor's Business Daily explaining 'What Caused the Loan Crisis':

1977:  Pres. Jimmy Carter signs the Community Reinvestment Act into Law.  The law pressured financial institutions to extend home loans to those who would otherwise not qualify.   The Premise:  Home ownership would improve poor and crime-ridden communities and neighborhoods in terms of crime, investment, jobs, etc.
Results:  Statistics bear out that it did not help.
How did the government get so deeply involved in the housing market?             Answer:  Bill Clinton wanted it that way.
1992:  Republican representative Jim Leach (IO) warned of the danger that Fannie and Freddie were changing from being agencies of the public at large to money machines for the principals and the stockholding few.
1993:  Clinton extensively rewrote Fannie Mae and Freddie Mac's rules turning the quasi-private mortgage-funding firms into semi-nationalized monopolies dispensing cash and loans to large Democratic voting blocks and handing favors, jobs and contributions to political allies.  This potent mix led inevitably to corruption and now the collapse of Freddie and Fannie.
1994:  Despite warnings, Clinton unveiled his National Home-Ownership Strategy which broadened  the CRA in ways congress never intended.
1995:  Congress, about to change from a Democrat majority to Republican, Clinton orders Robert Rubin's Treasury Dept to rewrite the rules.  Robt. Rubin's Treasury reworked rules, forcing banks to satisfy quotas for sub-prime and minority loans to get a satisfactory CRA rating.  The rating was key to expansion or mergers for banks.  Loans began to be made on the basis of race and little else.
1997 - 1999:  Clinton , bypassing Republicans, enlisted Andrew Cuomo, then Secretary of Housing and Urban Development, allowing Freddie and Fannie to get into the sub-prime market in a BIG way.  Led by Rep. Barney Frank and Sen. Chris Dodd, congress doubled down on the risk by easing capital limits and allowing them to hold just 2.5% of capital to back their investments vs. 10% for banks.  Since they could borrow at lower rates than banks their enterprises boomed.
With incentives in place, banks poured billions in loans into poor communities, often 'no doc', 'no income', requiring no money down and no verification of income.   Worse still was the cronyism:  Fannie and Freddie became home to out-of work-politicians, mostly Clinton Democrats.  384 politicians got big campaign donations from Fannie and Freddie.  Over $200 million had been spent on lobbying and political activities.  During the 1990's Fannie and Freddie enjoyed a subsidy of as much as $182 Billion, most of it going to principals and shareholders, not poor borrowers as claimed.
Did it work?  Minorities made up 49% of the 12.5 million new homeowners but many of those loans have gone bad and the minority homeownership rates are shrinking fast.
1999: New Treasury Secretary, Lawrence Summers, became alarmed at Fannie and Freddie's excesses.  Congress held hearings the ensuing year but nothing was done because Fannie and Freddie had donated millions to key congressmen and radical groups, ensuring no meaningful changes would take place.  'We manage our political risk with the same intensity that we manage our credit and interest rate risks,' Fannie CEO Franklin Raines, a former Clinton official and current Barack Obama advisor, bragged to investors in 1999.
2000:   Secretary Summers sent Undersecretary Gary Gensler to Congress seeking an end to the 'special status'.  Democrats raised a ruckus as did Fannie and Freddie, headed by politically connected CEO's who knew how to reward and punish.  'We think that the statements evidence a contempt for the nation's housing and mortgage markets' Freddie spokesperson Sharon McHale said.  It was the last chance during the Clinton era for reform.
2001:   Republicans try repeatedly to bring fiscal sanity to Fannie and Freddie but Democrats blocked any attempt at reform; especially Rep. Barney Frank and Sen.Chris Dodd who now run key banking committees and were huge beneficiaries of campaign contributions from the mortgage giants.
2003:  Bush proposes what the NY Times called 'the most significant regulatory overhaul in the housing finance industry since the savings and loan crisis a decade ago'.  Even after discovering a scheme by Fannie and Freddie to overstate earnings by $10.6 billion to boost their bonuses, the Democrats killed reform.
2005:  Then Fed chairman Alan Greenspan warns Congress:  'We are placing the total financial system at substantial risk'.  Sen. McCain, with two others, sponsored a Fannie/Freddie reform bill and said, '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'.  Sen. Harry Reid accused the GOP ;of trying to 'cripple the ability of Fannie and Freddie to carry out their mission of expanding homeownership'  The bill went nowhere.
2007:  By now Fannie and Freddie own or guarantee over HALF of the $12 trillion US mortgage market.  The mortgage giants, whose executive suites were top-heavy with former Democratic officials, had been working with Wall St. to repackage the bad loans and sell them to investors.  As the housing market fell in '07, subprime mortgage portfolios suffered major losses.  The crisis was on,  though it was 15 years in the making.
2008:  McCain has repeatedly called for reforming the behemoths, Bush urged reform 17 times.  Still the media have repeated Democrats' talking points about this being a 'Republican' disaster.  A few Republicans are complicit but Fannie and Freddie were created by Democrats, regulated by Democrats, largely run by Democrats and protected by Democrats.  That's why taxpayers are now being asked for $700 billion!!

If you doubt any of this, just click the links below and listen to your lawmakers own words.  They are condemning!
http://www.youtube.com/watch?v=68D9XrqyrWo&feature=related
http://www.youtube.com/watch?v=pIgqfM5C8lY
http://www.youtube.com/watch?v=H9juJr8CSY4&feature=related

Postscript:  ACORN is one of the principle beneficiaries of Fannie/ Freddie's slush funds.  They are currently under indictment or investigation in many states.  Barack Obama served as their legal counsel, defending their activities for several years.

Comments

[Wade]

Wow. There is quite a lot here to take on. I'm going to have to do this in bite-size pieces.

1) Fannie & Freddie are solely responsible for and are the sole target of the $700 billion bailout? What of all 5 American broker-dealers (Bear Sterns, Lehman Bros, Merrill Lynch, Goldman Sachs, Morgan Stanley), AIG, Washington Mutual, etc. etc. etc. ????? Really? A bunch of deadbeat minority mortgage applicants brought down the entire global finance system? Who knew it was so easy...

2) The 1999 repeal of Glass-Steagall was signed by President Clinton. It was stuffed into a much larger, veto-proof spending bill. It was called the Gramm-Leach-Bliley Act and Dodd and Schumer were involved in reconciling it with Clinton's insistence that banks that failed CRA certification not be allowed to expand into insurance. The whole thing was bi-partisan with universal Republican support, not a solo Dodd enterprise.

3) The relaxation of the net capital rules governing leverage ratios occurred in 2004 at the behest of Bush. Exemptions were handed out to all of the big 5 broker-dealers with immediately disastrous consequences. Venerable 150 year old firms promptly leveraged themselves out of existence, finally free of the onerous regulations preventing them from having done so sooner.

Much like the Constitution, just because I have not explicitly enumerated a flaw in this post does not mean that it isn't there... More to come!

[Wade]

From the Times. The money line from Greenspan: 'Global demand for the securities was so high, he said, that Wall Street companies pressured lenders to lower their standards and produce more “paper.”'

"Many Republican lawmakers on the oversight committee tried to blame the mortgage meltdown on the unchecked growth of Fannie Mae and Freddie Mac, the giant government-sponsored mortgage-finance companies that were placed in a government conservatorship last month. Republicans have argued that Democratic lawmakers blocked measures to reform the companies.

But Mr. Greenspan, who was first appointed by President Ronald Reagan, placed far more blame on the Wall Street companies that bundled subprime mortgages into pools and sold them as mortgage-backed securities. Global demand for the securities was so high, he said, that Wall Street companies pressured lenders to lower their standards and produce more “paper.”

“The evidence strongly suggests that without the excess demand from securitizers, subprime mortgage originations (undeniably the original source of the crisis) would have been far smaller and defaults accordingly far lower,” he said.

Despite his chagrin over the mortgage mess, the former Fed chairman proposed only one specific regulation: that companies selling mortgage-backed securities be required to hold a significant number themselves.

“Whatever regulatory changes are made, they will pale in comparison to the change already evident in today’s markets,” he said. “Those markets for an indefinite future will be far more restrained than would any currently contemplated new regulatory regime.”

[Mike]

Wade, I agree with some of Alan's thoughts. Thanks for sharing. I do think the market is "regulating" now.

Because Wall St. "pressured" regulators... if a 4 year old "pressures" his mother into letting him eat candy for dinner who's to blame for the cavities?

Let's not leave Alan off the hook either. The "paper" was a byproduct of prolonged easy money under Alan's fed.

[Wade]

"Lenders," Mike, "lenders."

There's a pretty important difference there in how the monumental, near-universal, obscenely-leveraged exposure to mortgage-backed securities came to pass.

And, once again with feeling: The market in these debt instruments was not regulated in any fashion. This lack of regulation was in no small part A) the reason they were invented in the first place and B) why investment professionals / bankers considered them so desirable.

[ateeq ahmad]

Dr. Rebane,

You have to understand that I love you very much!!! I also want to gloat a bit. This "liberal mafia" that is taking over your world has me feeling rather good.

You see, there is no need for anyone to know Mr. Obama's tax plan per se. All we need to see is that he is making consensus building, liberal, and quite pleasing policy calls. The war-mongering has gone on too long for too many people. The economy is on the skids and a "mommy" party is needed in power today.

Again, love and respect as always!

[George Rebane]

At last, I hear from my friend and favorite Muslim. I am saddened by where I see our country heading. And I fear that we will look back on the Bush years longingly when the real bloodletting starts. Your Muslim brethren tell all that they have a horrendous, non-negotiable agenda. And when it comes to war, we must always remember that it takes only one to tango. Hugs to your family.

[Wade]

For the love of God someone please explain to me how (re)raising the top bracket from 35% to 39.5% is the harbinger of end times, communism, Marxism, terrorism, Nazi, fascist appeasement or whatever disjointed, hysterical narrative is getting gummed together by the sweaty palms brigade these days?

This is the nutshell version of the Obama tax plan. It is not a socialist mystery. Big government, supply side fundamentalism not only didn't work, it was a bit of a disaster. Face the music, guys. Or ask Sarah what her tax plan is...

o Ordinary Income: The top two income tax brackets would return to their 1990’s levels of 36% and 39.6%. All other tax brackets would remain as they are today. Obama would also restore the 1990’slevels for the personal exemption and itemized deduction phaseouts (known as PEP and Pease). Obama would work with the Treasury Department to adjust the thresholds of these rates slightly to ensure that no married couple making less than $250,000 (or single making less than $200,000) was affected by these changes.

o Capital Gains: Families with incomes below $250,000 will continue to pay the capital gains rates that they pay today. For those in the top two income tax brackets – likewise adjusted to affect only families over $250,000 – Obama will create a new top capital gains rate of 20 percent. Obama’s 20% rate is equal is the lowest rate that existed in the 1990s and the rate that President Bush proposed in 2001. It is almost a third lower than the rate that President Reagan signed into law in 1986.

o Dividends: The top dividends rate for people making over $250,000 would be set at 20 percent. Dividends will not return to being taxed at ordinary income tax rates. Obama’s 20 percent rate on dividends will be 39 percent lower than the rate President Bush proposed in 2001, and would be lower than all but 5 of the last 92 years we have been taxing dividends.

o Estate Tax: The estate tax would be effectively repealed for 99.7 percent of estates. For the remaining 0.3% of estates over $7 million per couple, Obama will retain a rate of 45%. This policy would cut the number of estates covered by the tax by 84 percent relative to 2000.

o Average Tax Rates Below the 1990s: Overall, the top 1 percent of households – people with an average income of $1.6 million per year – would see their average federal income and payroll tax rate increase from 21 percent today to 24 percent, less than the 25 percent these households would have paid under the tax laws of the late 1990s.

[Dagny Taggert]

Wade, I think the problem comes from "going after" the "rich" to GIVE more to the poor. Re-distribution of wealth occurs naturally in capitalism... it occurs at the end of a gun (in this case held by Obama) in socialism.

Also, BO said the capital gain rates/dividend rates would be 28% not 20%. George never brings up the other baggage (affiliations with multiple terrorists, affiliations with socialists, devilish stance on abortion, ZERO experience, unknown [never substanciated] place of birth... etc)