Who is Responsible for the Current Economic Crisis?
First let’s get something straight. The current economic crisis is not an overnight phenomenon. It is a dangerous and destructive poison which has been brewing for years in Freddie Mac and Fannie Mae’s kitchens. While Fannie/Freddie are more directly responsible for the current financial catastrophe, they have enjoyed the support of powerful enablers who must be exposed and made to answer for their harmful actions against America’s economic system.
Starting in the 1980’s Fannie/Freddie began intentionally loosening underwriting standards under pressure from “progressive” politicians and groups like ACORN (a criminal organization proven to be involved in voter fraud) who were ostensibly pushing for ending discrimination. What they termed “discrimination” was the inclusion of what these groups called “arbitrary” or “outdated” criteria that tend to disqualify urban or lower-income minority home loan applicants.
Some of these “outdated” criteria included the size of the mortgage payment relative to income, credit history, savings history and income verification. Those “outdated” standards existed for the sole purpose of limiting defaults! But this did not deter bank regulators who demanded the loosening of underwriting standards, with approval by “progressive” politicians. This was despite warnings by experts such as Alan Greenspan that loosening lending standards could lead to wide-scale defaults.
Given that the government created Fannie/Freddie to keep money flowing to mortgage lenders by guaranteeing payment to investors if the borrowers default, how responsible was it for these institutions to increase their financial risk by ignoring legitimate borrowing criteria?
That’s not all the Fannie/Freddie and their “progressive” supporters did to put our nation into this crisis. They disdained holding greater capital to insulate themselves against defaults. Instead they blindly maintained that housing was too safe of an investment to need any additional capital. They refused to admit that having all their eggs in one basket would leave them more vulnerable to a downturn in the housing sector.
Even worse, corruption set in at both institutions under chairmen like Franklin Raines and Jim Johnson and Congress failed to act to put a stop to it and to the risky behavior.
When a federal regulator charged that Fannie Mae had cooked its books to increase executive bonuses, lawmakers lined up to criticize the regulator. Rep. William L. Clay Jr. (D-Mo.) said a House panel had no business holding a hearing on the matter — “unless this is truly a witch hunt.” Fannie Mae was later discovered to have overstated profits by $6.3 billion.
Congress was deadlocked over passing legislation to create a stronger regulator even after Freddie Mac was shown to have manipulated earnings. Opposing one such bill in 2004, Sen. Charles E. Schumer (D-N.Y.) argued that a hostile regulator could use the proposed powers to disable Fannie/Freddie.
Former representative Richard H. Baker (R-La.), who chaired a subcommittee that oversaw Fannie/Freddie, fought for years to rein them in and attempted to show they were being managed for the enrichment of their executives. When Baker obtained data on Fannie Mae pay, an attorney for Fannie threatened him with personal liability if he made the information public.
Even Senator McCain who tried to reform Fannie/Freddie by cosponsoring the Federal Housing Enterprise Regulatory Reform Act of 2005, failed to generate enough support for its passage because Democrats used business-as-usual stalling tactics to stop the bill’s progress. McCain’s words at the time of cosponsoring the bill now ring prophetic: “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”.
While it is not certain whether success in imposing the new tougher regulations on Fannie/Freddie, which Senator McCain and his cosponsors proposed, would have saved us from the present predicament, it is quite clear which side of the isle actively worked to protect Fannie/Freddie’s corrupt practices and which side actively worked to stop them!
1Bobster
wrote on 28 September 2008 at 21:06
I follow all of the above points. On the other hand, it’s a big marketing item for the U.S.A. model, the high-level of home “ownership”. If the change you describe as happening in the 1980s would not have occurred, the home ownership level would obviously be not have been so significantly higher than in most other nations.
It has always been one of the “competitive advantages” that the in the United States a somewhat “free wheeling” culture dominated the economy. Other economies have been comparatively more restrained and accordingly had less excessive cycle peak/troughs.
Point being, you can’t have your lunch and eat it too. What is better, long term stability with modest standards, or musical-chair parties that open up opportunities, with only the ones smart enough to quit the party early enough walkin away with gain? That’s a philosophical question.
For the most part, it’s a zero-sum game. For everyone getting richer, someone will get poorer. There’s more redistribution than organic growth going on.
While all of the points in the article ring as common-sense, hindsight is always 20-20.
Cheers!
-Bob
2The Queen
wrote on 30 September 2008 at 10:34
That would be true if everyone played by the rules. There was serious fraud being perpetrated by the Democrats in this instance despite the Republicans trying hard to institute some oversight and regulation. Entire economies stand to collapse because of this fraud, so I for one can’t dismiss it so easily as a zero sum game. Right now it’s a $700 billion game and growing!
3Bobster
wrote on 30 September 2008 at 21:38
The collapse is partly just a deflation of something that was overinflated in the first place. Tulip Mania redux.
It’s not that this was some big secret just now coming out. People who feel they have been dragged into something without having played an “active role” in it have just been too lazy to stay educated about what’s going on and what the underlying mechanics supporting this economy are.
I’m sure we can find someone to blame for the lack of education of the average citizen.
I is always a zero sum game. Money does not get destroyed. Some people walk away with the difference that is missing on the other side. The same argument about the 2000 crash about “wealth being destroyed” is just propaganda. It’s redistribution. Complaining about it after the fact is deferring responsibiity in the act, and whining about it later. Not quite what I consider the value of a free society.
4The Queen
wrote on 2 October 2008 at 10:03
Some of us politicos have actually been watching the bubble grow for some time (years) and been dreading its bursting, but were truly powerless to stop it.
I am not arguing that wealth has been destroyed, only that it has unfairly moved to one side of the equation by self-serving interests connected within the US government, namely Democrats like Barney Frank, Chris Dodd and Barrack Obama. They were supposed to be protecting the interests of the American people; instead they lined their own pockets while protecting the corrupt CEO’s of Fannie/Freddie.