Skip to comments.‘The Financial Crisis Was the Result of Government Housing Policy’
Posted on 05/18/2012 9:01:25 PM PDT by neverdem
The American Enterprise Institutes Peter Wallison on how government, not greed, was the essential ingredient in the 2008 meltdown.
In January 2011, a bipartisan, 10-member, government-created body called the Financial Crisis Inquiry Commission (FCIC) issued a comprehensive report assigning blame for the 2008 financial meltdown. The main culprits: widespread failures in financial regulation and supervision, dramatic failures of corporate governance and risk management at many systemically important financial institutions, a combination of excessive borrowing, risky investments, and lack of transparency, a government that was ill prepared for the crisis, and a systemic breakdown in accountability and ethics.
The four Republicans on the FCIC issued two dissents from the commissions findings, the splashiest of which was a 93-page solo response from American Enterprise Institute (AEI) scholar Peter Wallison. The crisis, Wallison said, was caused mainly by the systemic failures of government housing policy.
Some of the public response to Wallisons dissent was withering. Stanford University political scientist Francis Fukuyama, in a January interview with the online-only publication The Browser, charged that it takes what is a very complex crisis that has multiple roots and lays it all at the door of Fannie and Freddie and government intervention. It seems to me transparently designed to exonerate free markets. But this crisis has proved that financial markets are not self-regulating. To draw from this complex analysis that particular conclusion I just find astonishing.
Fukuyama was not alone. New York Times columnist Joe Nocera had previously called Wallisons work loony and accused him of helping to concoct what has since become a Republican meme. Even the free market George Mason University economist Russ Roberts took Wallison to task for downplaying the role of investment banks.
Wallison, who co-directs AEIs financial policy studies program, is unrepentant...
(Excerpt) Read more at reason.com ...
THANK YOU FOR THIS THREAD!!!!!!!!!!!!!!!!!!!!!!!!!!!!
Finally, somebody is ignoring the “Bash the Banks” smokescreen and follows the money!
Government essentially forced banks to make loans based on demographics instead of the ability to pay it back. They threatened banks that did not have the right spread on their portfolio. When the banks balked at making bad loans they told them not to worry and grew Freddie and Fannie to back up the banks. Sound banking rules went out the window and the real estate frenzy was created. The increased demand led to an increase in prices and the bubble was born. The banks had little to lose. They made the money for originating the loan and then dumped all the risk on the taxpayers. They packaged the risky loans into investment instruments, gave them a great rating, and everyone bought them.
Government increased their involvement in student loans and college instantly got more expensive as more people accessed the market inflating everything and creating a college bubble as well as a new debt bubble that will be owned by... yep, the taxpayers. That one has not blown up yet, but it will.
Has there ever been a financial effort led by government that did not end in disaster? The money spent on green technology is a pittance compared to mortgages and student loans, but again, it’s complete failure.
Everytime the government gets involved in the economy they gamble with our children’s money. Their track record if horrible. We would all be better off if our fellow citizens understood this.
The four Republicans on the FCIC issued two dissents from the commissions findings, the splashiest of which was a 93-page solo response from American Enterprise Institute (AEI) scholar Peter Wallison. The crisis, Wallison said, was caused mainly by the systemic failures of government housing policy. >>>>>>>>>>>>>>>>>>>>
And every one with more thna two clues to rub together, working in either banking or the stock market knows this truth. They have to know to do their work, and advize clients properly.
And the left wants it covered up, when in fact the whole world of banking and investing knows it to be true. WHAT A LAUGH!
You just made the case for Banks playing a major role.
-I agree that Gov't played the major role, but that was because of cheap credit.
-Gov't didn't force banks to use leverage.
-Commericial real estate bubble and crash. Gov't policy?
-Worldwide real estate boom from easy credit.
-Private Debt. Companies run higher amounts of debt than before
-The Economy wasn't healthy to start with. We've been using debt and cheap credit for decades. It had to end eventually, and eventually it will.
-Trade policy- Jobs aren't coming back.
-Private sector rating agencies failed.
-The Banks failed to actually do their job of checking the financial history and credit potential of the consumer. Gov't did't force them to do a that.
They forced Banks to not check the loan requirements?
They might have said to lower the requirements. But, its the job of the Bank to calculate the risks of the loan and the actual qualifications of said loan.
Look, I said Gov't is the major player. But, the fact that Housing was the main 'producer' is only a symptom of a weak economy.
my only problem is this is soooo obvious.
I mean, who would give a 700k loan to someone who makes 24k-without government backing??
Janet Reno under Bill Clinton's maladministration started Waco and she also started this super SNAFU!!!
Actually, Jimmy Carter started it with his stupid Communutty Reinvestment Act (CRA).
Why does everyone uncritically accept the premise that the government and the banks are discrete, unrelated entities?
They're not mutually exclusive. Not by a long shot.
A lot of people are missing the fact that Americans by nature are risk takers. These people got into mortgages that they could just afford with no leeway if things went wrong. When gas prices went up, people started to use their credit cards to absorb the increase. Soon they ran out of cards and faced with buying food (which went up in price), gas (you need it to get to work), or mortgage they made the natural choice. The Democrats were responsible for both the relaxed credit and the increase in gas prices. My $.02 worth...
Government essentially forced banks to make loans based on demographics instead of the ability to pay it back. They threatened banks that did not have the right spread on their portfolio”””
Within the last month, both Los Angeles & New York City councils have passed NEW LAWS in their jurisdictions REQUIRING banks to make more loans on a ‘social engineering basis’ instead of on a credit history and the ability to repay. More ‘blacks & Hispanics’ and people who ‘want to start small businesses’ MUST be in their loan portfolio. Commissions will oversee their loan documents. More stupidity.
Obviously, they are still in denial about how the CRA house of cards was created & fell.
I think investment in U-Haul would be a better financial bet than Facebook at this point, especially in California.
The Banks failed to actually do their job of checking the financial history and credit potential of the consumer. Gov’t did’t force them to do a that.”””
Sorry-—but Janer Reno did exactly that.
I still remember her press conference where she stood up and told the banks that she would use the Justice Department to sue them if they didn’t “ give people a chance to own their own homes”. Carter created the CRA and demanded that even welfare and food stamps were to be considered as income. Loans were given to people who didn’t have the credit history & work history & ethics to even buy a T-shirt on payments.
I can remember real estate people that cringed with all such activity. One said “IF you could fog a mirror, you had to get a loan,” Some people coming into title companies could only sign an “X” !!!!!! They could not read nor write!!!
A loan was given on a $650,000 house in Fresno, Calif., to an illegal immigrant who was a strawberry picker!!!
He & his family got irate & yelled loudly when the place was foreclosed on!!!
Every single bit of this whole mess can be traced back to Jimmah Carter and the CRA. Banks & depositors were victims.
The banks had little to lose. They made the money for originating the loan and then dumped all the risk on the taxpayers. They packaged the risky loans into investment instruments, gave them a great rating, and everyone bought them.
No way do the banks, insurance companies, and derivatives traders get a total pass in that debacle. They may have been tempted by Gov’t policies, but it was old fashioned greed that cost them (and us) in the end.
Excellent post. My question is why did the banks and the Bush administration allow rhemselves to take the fall?
Do you have any links on those laws? Otherwise bfl so I can go search when I’m on a computer?
The foundation of the financial crisis was government policies that obliged banks to lower lending standards for “affirmative action” reasons, but the superstructure built on that foundation of sand was built by the banksters: some found that they seemed to be doing well with the lowered standards and lowered standards across the board, some realized the risk, bundled the risky loans into mortgage-backed securities and sold them to get the risk off their balance sheets (perfectly sensible given their fiduciary responsibility to their shareholders and depositors), some did both. The real problems came from the fact the banksters (and this is the reason the contemptuous name is merited) managed to pass the risky MBSs off as AAA-rated, rather than a more realistic just-above-junk rating and reaped personal gains in the collapse by fleecing investors by shorting what they knew to be bad investments but were hawking as gilt-edged.
There is plenty of blame to go around and neither government policy nor the top management at a great many banks and investment-houses should be let off the hook.
As a matter of fact, government did.
If you read the article, you'll recognize that the banks were forced to take on poor credit risks and were threatened with regulatory consequences if they did not.
Indeed, banks were pushed to have a quota of what were referred to as NINA loans -- no income, no assets.
When the banks still resisted, Fannie Mae and Freddie Mac agreed to buy the loans -- transferring the banks' liability for bad loans to the taxpayer...en masse.
Then, in order to get more money -- to buy more bad loans -- it was Fannie Mae and Freddie Mac who packaged the loans and re-sold them, creating the mortgage derivative market.
It is because the banks were, in fact, doing their job -- trying to restrict loanss to buyers who were creditworthy that the government started distorting the market.
As did a young community organizer in Chicago who sued Citibank to force them to loan money to people who had no chance, short of winning the lottery, of ever paying it back.
I have been dealing with banks for many years. Providing financial information for clients both business and personal in order for banks to lend money. Not in all cases, but generally, the larger ones (local) had suggested that they were under a great deal of pressure from congressional leaders, to lower requirements and in some cases ignore them. If you don’t want to believe that, you must be associated with the tooth fairy.
Even if CRA was a factor, it merely helped out people who were already in low-income 'residences'. There was no bubble in the hood.
Look at the areas, Las Vegas, Florida, Arizona, California, that is nothing but speculation. They gambled, and tried flipping houses, and lost.
I'll say again, it was the Gov't fault, and that was through cheap credit.
There was no Freddie Fannie or CRA in the commercial real estate market. Boom Bust.
People used their Mortgages as ATM's and bought shiny stuff. That helped drive the business cycle. They couldn't pay it back.
why did the banks and the Bush administration allow themselves to take the fall?
In my opinion there were several reasons the Bush administration reacted the way it did -
First and foremost - our President’s have increasingly turned over management of the economy to the Fed and central bankers. As the wonks make the economy appear to be more complex they increase their control (and profits). The “experts” were telling Bush that the economy would collapse during the crisis if the “too big to fail” institutions became insolvent. Most “experts” were saying Bush/congress had to do something and he did. Our allies were also pressuring us to do something too.
Bush learned (with congress) that the massive response post-9/11 from the Federal government “worked”. Government spared no expense domestically to restore faith and confidence in our national security at home and abroad in the face of terrorists attacks. In hindsight, we spend alot of money and expanded government permanently with a new cabinet level agency that is very expensive - Homeland Security. However, it worked in that moment and restored confidence in the short term. We also started two expensive wars for the same reason. In the heat of the moment we failed to see the long term consequences.
Fast forward to Katrina. The unity in our nation was gone and the opposition was in full blown attack mode on the Bush administration. Despite the complete lack of precedence and capability to respond to a natural disaster like Katrina, Bush was blamed for not doing enough and the federal government was viewed as a failure in it’s response. In fact, somewhat like the pressure for home ownership, there was a racial component to the criticism. I believe this incident deeply affected the Bush administration as well as the public perception of the role of government.
After 9/11, the Federal government made things right. After Katrina, it failed to make things right despite the fact that FEMA had previously just been a checkbook designed to help states and local governments deal with natural disaster. Bush was viewed as a failure even though Katrina was first and foremost a failure of the welfare state and the democrat led state and local government in Louisiana. See the state government next door for the difference.
Fast forward to the housing crisis and the stage was set for a massive government response to crisis. The banksters and big financials already had a government that accepted responsibility for every big crisis. The central bankers and experts told the President and Congress behind closed doors that a failure to act would result in a catastrophic collapse of not only our economy, but possibly the large central banks of our allies and other Western nations that had heavily invested in the mortgage backed securities on which our government and banks had assigned the highest ratings. The bursting bubble threated to take down other nations banks due to their heavy investment in mortgage backed securities.
The big banksters used the opportunity to privatize the losses and used free money from the Fed to invest for years afterwards preserving their profits. It makes me angry too. However, politicians and central bankers are more responsible than the banksters because they gave them the money and were manipulated like fools. The little banks that failed were picked up at pennies on the dollar using no cost loans from the Federal Reserve. Crony capitalism gone wild.
Like 9/11 and Katrina - our political leaders fell all over themselves to react with little thought to the consequences and they were certainly used like the whores and fools we know them to be. When the taxpayers invest billions into the market to cover losses and the same CEO’s get six or seven figure bonuses something is wrong.
I don’t excuse the bankers or Bush one bit. To a certain extent, I see Bush as a victim of circumstances. I think Republicans in congress jumped into the same trap that government had to act decisively. The Progressives, as usual, used the crisis to grow government and change the culture of America from the “pick yourself up from the bootstraps” to “demand help from Uncle Sam”.
The genie is out of the bottle now and sadly, it will be a long time before we get it back in the bottle if that is even possible. There are certainly many factors - constant media coverage etc. - that influence our central response and we see it over and over even in localized issues - i.e. the Virginia Tech shooter, Congresswoman Giffords, Trayvon Martin, steroids in baseball, college football playoffs etc etc. Many of our fellow citizens now believe the answers lie in Washington D.C. and the media tells us that over and over. It’s why congress has passed legislation for everything under the sun with their one size fits all solutions in violation of the 10th Amendment.
Greed on the part of banks, politicians, and yes, even most of us all played a part in the banking crisis. Hopefully this post has explained why I believe that progressives first opened the door with “fairness” and the same thing happens over and over within our government. We are being conditioned to look to D.C. for solutions and that is dangerous.
In many markets, there will be certain portions which can be very sensitive to government interference which changes various risky actions from having a slight negative expectation to having a slight positive expectation. If risky and unwise actions are sufficiently subsidized that they will turn a net profit for the people taking them, the extent to which people engage in such actions may increase by many orders of magnitude versus what it would otherwise be. This is entirely predictable, and should surprise nobody.
Unfortunately, once such behavior "takes off", it may be impossible for people to participate in the "real" market without joining in, since prices in the real market can be totally thrown out of whack by the government-assisted speculators. Those who simply want to buy a home they can live in are stuck competing with those buying homes they can flip.
First and foremost, thank you for your service. There is no title/rank that I have more respect for than yours.
I don’t excuse the banks, wall street, or the insurance companies anymore than I would a bunch of my soldiers who did something stupid. However, it is important to understand how we got into the situation in the first place and I tried to share some of my thoughts on that in the previous post. Leaders accept responsibility and I did not hear many in Congress step up and admit that they were wrong. I did not hear the media excoriate Frank/Dodd/Pelosi for their roles in this disaster. They protected Freddie/Fannie at every turn when the GOP expressed concern. In fact, it almost became another “racial” thing where they shamed the GOP into silence. The GOP failed as badly as the rats no matter who wanted to lead us down the path that seems so foolish now in hindsight.
Ultimately, government is supposed to preserve the rule of law for all and it failed badly. I do believe most of the blame belongs on the progressive policies that started the ball rolling. When I bought my first home the rules were strict about what I could qualify for. Progressives in government demanded relaxed rules to increase home ownership. The banks balked at this and the banksters were able to push Congress to back their play with the GSE’s Freddie/Fannie. The greed set in then and multiplied when mortgage backed derivatives became another way to make profits and minimize risks to banks.
Corruption is usually found under corrupt leadership. We must assign blame for the housing crisis going all the way back to the Community Reinvestment Act (CRA) because that is where the seeds were planted. I am sickened at the corruption that I see within our government and the relationship between the “too big to fail” corporations that seem to own our financial leadership as well as our politicians. Crony capitalism is alive and well, but ask yourself this.... if government were not involved in the market outside of enforcing the rule of law - would banks have made these loans knowing that they were going to eat the losses? The obvious answer is NO! When Uncle Sugar told them not to worry, their loans were backed by the full faith and credit of the U.S. Government the frenzy began. If Bank of America would not make the risky loan - Countrywide would. It was free money! Package the loans and sell them to investors or dump them on the GSE’s.
Congress and many Presidents deserve the most blame for the housing crisis in my opinion. These greedy banksters would not have existed or operated without the blessing of Uncle Sam.
Ask yourself: If you lived in Harlem, would you get a sub-prime loan to buy another dump in Harlem? Or would you be looking in Long Island?
Someone living in Harlem have their own problems, kinda part of the point of living there is they can't afford LI.
With a NINA, they could live anywhere they wanted.
Sure, until the money runs out.
And, eventually, it did.
At Fannie Mae and Freddie Mac.
And the rest is history.
I still believe if you remove the Community Reinvestment Act there would not have been a bubble.
If you remove Freddie/Fannie from the picture there would not have been a bubble or implosion.
If government had not interfered and participated in the market in the first place we would not be having this conversation.
The singular thing that makes me the most angry about the crash is that Raines, Johnson, Gorelick, and company cooked the books far beyond Bernie Madoff’s wildest dreams and not a single thing happened to them other than they all walked off with tens of millions in salary and bonus. Had they truthfully provided a real accounting of their books the crash would not have been nearly as bad. No prosecutions and they got enormous bonuses even while the taxpayers got stuck with the tab. Dodd, Frank, and the usual cast of idiots in congress all defended the fraud because of it’s progressive roots - taxpayers be damned.
The statute of limitations is almost up and nothing is being done to hold those responsible accountable. Nothing, zip, nada. It’s mind boggling is’nt it? We are correctly outraged that GSA blew 823,000 on a Vegas party. Where is the outrage that the aforementioned executives of Freddie and Fannie committed fraud that cost in excess of 823 billion dollars?
I share your ire.
It was, indeed, "the crime of the century" -- a looting of taxpayer funds beyond imagining. It was committed by Democrats...and the Republicans will do nothing to bring them to account.
I hold the GOP responsible, as well. In 2005, they heard testimony from a "whistleblower" at the watchdog agency -- and he claimed that the malfeasance would lead to exactly where it did. The GOP Senate then offered the Financial Reform Bill of 2005, which would've corrected the problem. McCain's floor speech almost perfectly anticipated the debacle.
But the Democrats blocked it with a threatened filibuster. Whereupon, the 'Pubbies threw up their hands and gave up -- never again referencing the impending problem. Some even jumped on the bandwagon of "affordable housing" (e.g., George W. Bush). If the consequences were going to be so dire, they owed it to their country to make a continuing issue out of the Democrats' intransigence...indeed, criminality. Their damn "go along to get along" attitude cost the country dearly.
They knew what was going to happen. And they let it happen anyway!
The Democrats are guilty as sin. But the Republicans are accessories -- both before and after the fact.
CRA continues to exist. So do CDS swaps. SSDD.
To put Obama in office. Its not a R and D thing, its a NWO thing.
Have you ever visited the WH and seen who is housed in the buildings that surround it?