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The Big Flaws in Dodd-Frank
Barron's ^ | April 14, 2012 | Gene Epstein interviewing Charles Calomiris

Posted on 04/14/2012 10:44:32 AM PDT by reaganaut1

You mention toxic mortgages. How does Dodd-Frank address that problem?

Not at all. There is no attempt in Dodd-Frank to address the key problem of government subsidization of mortgage risk, and the exposures of Fannie Mae [FNMA], Freddie Mac [FMCC], and the Federal Housing Administration are still growing.

How do you explain the omission?

There is a powerful political interest that wants real-estate lending to be sponsored by the government. Starting about 1830, an important influence on the politics of banking came from farming interests, which increasingly promoted bank exposure to farm real-estate risk. What has changed since World War II is the huge demographic shift toward the cities. And so the power of the agrarian populist movement has been replaced by the power of the urban populist movement, which has to do with subsidizing lending to housing in cities.

Organizations like Acorn [the Association of Community Organizations for Reform Now] and other urban community activists led the fight to subsidize risky mortgage lending. Christopher Dodd and Barney Frank of Dodd-Frank, our supposed reformers, have been poster-politicians for this movement. Dodd was driven from the Senate in a mortgage scandal involving Countrywide Financial, the former mortgage giant that was long a favored client of Fannie Mae. And Frank has been a major Fannie and Freddie supporter, as well as one of the great deal makers in one of the most important waves of bank mergers in U.S. history. Housing and banking are Frank's mutually supporting interests. But Democrats were not the only ones; President George W. Bush and Speaker Newt Gingrich were also prominent proponents of subsidizing mortgage risk and facilitating the political deals that made so many risky mortgages possible.

Could you give an example of what you mean?

Remember Washington Mutual, the bank that collapsed in 2008?

(Excerpt) Read more at ...

TOPICS: Business/Economy; Government
KEYWORDS: calomiris; cra; doddfrank; subprime
Democrats say deregulation caused the financial crisis, but it was actually caused by politicized lending, supported by both Democrats and some Republicans, like George W. Bush.
1 posted on 04/14/2012 10:44:47 AM PDT by reaganaut1
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To: reaganaut1

I pronounce this article goofy. He claims that FDIC insurance was the core issue of Glass-Steagall. It may have been, but the exitence of FDIC insurance is not independent of the danger of confalting commercial with investment banking within the same institution. He cites “studies”. I don’t give a crap what the studies say. As Corzine and MF Global showed, when the CEO thinks he is getting the margin call from hell, he may well endanger client funds. The banksters can move much faster then the legislators, especially when the legislators are being paid off.

2 posted on 04/14/2012 10:57:45 AM PDT by Attention Surplus Disorder (A conservative, a liberal and a moderate walk into a bar. Bartender says "what'll it be, Mitt?")
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To: reaganaut1

Before government “backing” of mortgages, banks, and bank accounts, private sector banks had to survive on their own. They also were able to choose who they would lend to without government interference.

Pre-WWII, going back... well.. forever, lenders required enough of a downpayment to discourage the borrower from not paying the mortgage. And the lender would be very selective as to the borrower’s creditworthiness.

As the credit card and mortgage industry developed post-WWII, business loved the idea of people borrowing out in front of their earnings; there was plenty of consumer purchasing enabled by consumer borrowing. The consumer banking industry grew tremendously and became a powerful political lobby. Trouble is, the consumer purchasing was out in front of consumer earnings, and consumer’s have been used to that type of spending now for generations. It’s preposterous to most people to wait and save up for most anything, let alone a house.

Many people are now accustomed to NOT saving for their own old age. They spend money like water when they get their hands on it.

Consequently, when the economy is in a downturn, the wonderful consumer “spenders” that “drive the economy” are quickly tapped out. The economy has little resilience, especially in terms of consumer spending, since so many live hand-to-mouth.

If most families had hundreds of thousands of dollars in cash and investments and net worths in the millions, when wage-earners lost their job in a downturn there would not be such an emergency to find a new job, and reasonable household spending could continue on, thereby muting the effects of a downturn.

But Mr. big business likes to see employees in debt and addicted to spending; that makes them easy customers to entice and workers who NEED their job because they are debt slaves. It’s like the old company store, just on a grand scale. That’s why I have to chuckle at all the women who believe the feminist line; they think the Democrat party line is all about their “freedom”, when they’ve actually been enslaved to vanity, immorality, consumerism and debt.


3 posted on 04/14/2012 11:35:21 AM PDT by PieterCasparzen (We have to fix things ourselves.)
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To: reaganaut1


1 - Dodd
2 - Frank

sheesh! 3 posts in and nobody mentioned this.....

4 posted on 04/14/2012 12:42:45 PM PDT by G Larry (We are NOT obliged to carry the snake in our pocket and then dismiss the bites as natural behavior.)
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