Bloomberg Hides Government Causes of Financial Crisis

On December 21, Bloomberg News breathlessly reported, "The leading Republican candidates for president have embraced an explanation of the financial crisis that has been rejected by the chairman of the Federal Reserve, many economists and even three of the four Republicans on the government commission that investigated the meltdown."

Reporter David J. Lynch further explained, "Both former House Speaker Newt Gingrich and former Massachusetts Governor Mitt Romney lay much of the blame on U.S. government housing policies, saying they led to the real estate crash that almost brought down the banking system and has cost homeowners $6.6 trillion since 2006."

But it's not just Gingrich and Romney. Virtually every Republican and conservative across America recognizes what is by now well established in the literature -- the government caused the financial crisis.

Among the leading expositions of that government malfeasance are Paul Sperry, The Great American Bank Robbery: The Unauthorized Report About What Really Caused the Financial Crisis (Thomas Nelson, 2011), Gretchen Morgenson and Joshua Rosner, Reckless Endangerment (Times Books, 2011), John B. Taylor, Getting Off Track (Hoover Institution Press, 2009), and many contributions by Peter Wallison, including in particular his Dissenting Statement in Final Report of the National Commission on the Causes of the Financial and Economic Crisis in the United States (December 24, 2010). My own book, America's Ticking Bankruptcy Bomb (HarperCollins, 2011), explains in great detail how the government caused the financial crisis.

This is not just a matter of historical interest. It will be central to the debate throughout the 2012 election cycle. For if the liberal/left propagandists are right, and private sector greed and malfeasance caused the crisis, then President Obama's regulatory government takeover of the financial industry is the answer. But if the government caused the crisis, then the further extension of Reagan's free market policies are the answer.

The fallacies of the last three Presidents, Clinton, Bush, and Obama, came together to cause the devastating financial crisis, costing the American people trillions in lost value of their basic financial assets, from their homes to their retirement accounts. Though these policies had earlier roots, they really sprouted under Clinton, who announced his new National Home Ownership Strategy to great fanfare in a splashy White House ceremony in June 1995. As Stanley Kurtz reported the event for National Review Online:

Under this new Clinton vision, it became federal regulatory policy to force the nation's financial institutions to abandon traditional lending standards for home mortgages, on the grounds that those standards were racially discriminatory, as African Americans and other minorities could not qualify for mortgages to nearly the same degree as whites and Asians. This overregulation reached the point of forcing lenders to discount bad credit history, no credit history, no savings, lack of steady employment, a high ratio of mortgage obligations to income, undocumented income, and inability to finance down payment and closing costs, while counting unemployment benefits and even welfare as income in qualifying for a mortgage. As Sperry documents so thoroughly, this turned into government-sanctioned looting of the banks.

The Community Reinvestment Act of 1977 (CRA) was only one part of that federal regulatory policy. The CRA required banks to lend throughout the entire geographic area in which they operate, including the poorest neighborhoods, where qualification for credit under traditional standards was quite limited. Based on intense lobbying by the far left activist group ACORN, Clinton expanded this originally toothless regulatory ornament into a great lever to break open bank vaults.

The freedom of banks to operate their businesses in opening new branches, mergers, and lending was held hostage to each bank's CRA rating, which had to reach mandated goals to earn necessary government regulatory approvals. Clinton issued new CRA regulations requiring banks and savings and loan associations to meet quotas for mortgages to borrowers at or below 80 percent of median income in their service areas. He also doubled CRA examinations of banks by adding several hundred bank examiners to enforce tougher CRA rules.

Clinton's HUD contributed with new regulations greatly strengthening CRA requirements, as Wallison explained in The American Spectator in February, 2009:

But this was just the beginning. Even more powerful were so-called "anti-redlining" regulations, based on liberal mythology that financial institutions just arbitrarily redlined low income and minority neighborhoods for denial of home mortgages, which was considered racial discrimination in violation of the law. Under Clinton's innovations, pursued by his Attorney General zombie Janet Reno, any difference in lending to minorities or low income Americans was racially discriminatory "disparate impact," even if it resulted from mere adherence to traditional lending standards.

Any troglodyte financial institutions failing to get hip with the New Age lending "standards" soon found themselves subject to discrimination suits brought by Justice or HUD, and pilloried as racist in the media. Kurtz quoted a colorful Chicago newspaper report explaining the effect of these new standards, "You've only got a couple of thousand bucks in the bank. Your job pays you dog food wages. Your credit history has been bent, stapled, and mutilated. You declared bankruptcy in 1989. Don't despair. You can still buy a house."

The big problem wasn't caused just by loans to low income borrowers. Once lending standards were trashed for these borrowers, they couldn't be maintained for more creditworthy borrowers. This let more well-heeled speculators in on the scam, now able to qualify for highly speculative mortgages they could not have qualified for previously. That vastly expanded the resulting credit risk vulnerabilities for the financial system.

HUD then broadened the developing disaster to the entire financial community, across the nation and even around the world, through mandatory regulatory quotas on Fannie Mae and Freddie Mac forcing them to drop their traditional lending standards as well for eligibility for securitization. That securitization pooled these vulnerable mortgages and sold shares in them, known as "mortgage backed securities" (MBSs), to other financial institutions. By the time the housing market collapsed, Fannie and Freddie faced three regulatory quota mandates. The first was to devote 56 percent of their mortgage funding to individuals with below-average income. The second required 27 percent of their mortgage funding to be granted to families with incomes at or below 60 percent of area median income. The third required 35 percent of their mortgage funding go to geographic areas deemed to be underserved.

The debasement of mortgage lending standards and massively increased mortgage funding through securitization of the new subprime and other non-prime loans greatly increased demand for housing, which spawned the rise of the housing bubble. Because the capital markets believed, rightly as it turned out, that the bonds issued by Fannie and Freddie to raise money for their mortgage financing were effectively government guaranteed, the two organizations were able to raise huge sums at low interest rates to pump into these mortgages and their securitization. That pumped housing prices beyond sustainability, and exploded the pollution of U.S. and world financial markets to toxic levels.

Going back to his ACORN days, and through his many years as an ultraleft politician, Obama was a supporter and cheerleader for these very Clinton housing policies. As President, he has been busily reinvigorating them, setting the stage for another housing crisis.

The Bush Treasury supported a cheap dollar policy, falling for the Keynesian fallacy that a low dollar helps the economy by promoting exports. The central role of the resulting Fed policies in causing the financial crisis was most authoritatively explained by Stanford Economics Professor and monetary policy guru John Taylor in his timely book, Getting Off Track. Taylor begins:

Economics Professor Lawrence H. White, now of George Mason University, elaborates:

From early 2001 until late 2006, as White further explains, "the Fed pushed the actual federal funds rate below the estimated rate that would have been consistent with targeting 2 percent inflation," which had been the enormously successful, long term, Reagan Fed policy. Steve Forbes adds, "In 2004, the Federal Reserve made a fateful miscalculation. It thought the U.S. economy was much weaker than it was and therefore pumped out excess liquidity and kept interest rates artificially low."

But low interest rates by themselves do not mean monetary policy is excessively loose. That depends on what market prices are saying, as reflected by the dollar, gold and inflation. The Fed's loose monetary policies during the Bush Administration generated sharp declines in the dollar. The dollar was worth 1.15 Euros near the start of 2002, but declined by close to 50 percent near to 0.6 Euros by the start of 2008. The price of gold soared from $350 near the end of 2002 to almost $1,000 by the start of 2008. Even inflation, defeated 25 years previously, started to come back, increasing from 1.55 percent at the end of 2001, to as high as 5.6 percent in July 2008.

That cheap dollar monetary policy further inflated the housing bubble because it generated flight into real assets to escape the depreciating greenback. Because real estate is an especially long-lived asset, its market value is especially boosted by low interest rates.

When the Fed finally realized it had to rein in its loose monetary policy, or risk soaring inflation, skyrocketing housing prices slowed, flattened out, and then tipped into decline. The steep decline in housing prices produced chaos throughout the financial industry in the U.S., and ultimately the world, as widespread financial assets based on housing collapsed in value. As Taylor concluded, "[The] extra-easy [Fed monetary] policy accelerated the housing boom and thereby ultimately led to the housing bust."

Lynch argues in his Bloomberg article, "The Community Reinvestment Act can't explain why house prices in the U.K., Ireland, Spain and France doubled earlier this decade and almost doubled in Australia. All have suffered steep losses since then, with Ireland's home prices dropping 38 percent by December 2010 from the 2006 peak."

But this fails to recognize that the Fed managing the world's reserve currency effectively exported its weak currency policy globally. Other countries loosen their monetary policies to avoid the negative short term trade implications of appreciating currencies relative to the dollar. Moreover, the dollar's weakness masks the looseness of their monetary policies, misleading them into even looser policies. Their loose policies pumped up their own real estate bubbles.

Lynch argues further that federal housing policies can't explain the bubble in commercial real estate, which also contributed to the housing crisis. But the Fed's low interest rate, loose monetary policies would have the same effect in creating a bubble in commercial real estate that it had in housing.

Lynch adds that, "Losses on subprime mortgage-backed securities didn't start shaking financial institutions until 2007, three decades after the CRA was introduced and 15 years after affordable housing goals were established for Fannie Mae and Freddie Mac." But this fails to recognize that the CRA was not expanded into a real problem until the Clinton years, and even then it was only one factor in creating the crisis. The regulation carrying out Clinton's undeniable federal policy of trashing traditional mortgage standards was much broader, greatly exacerbated by the Fed's cheap dollar policies as well. This is why the problem extended well beyond CRA regulated institutions, which Lynch also fails to understand.

The crisis in American media now goes well beyond media bias. The real problem is now outright ideological partisanship and activism. Far too much of America's self-professed media are not journalistic enterprises at all. They are political activist organizations posing as journalistic enterprises. In this crisis, Bloomberg News is just another part of the problem.

Good find. But somebody forgot to tell Christopher Jared Warren to blame all of his actions on the government forcing him to make subprime loans, which has become Received Wisdom around here from people who never even knew there was a housing bubble until months after it blew up.

Warren’s confession is the sort of story I heard many times during the bubble. One of my clients had learned his craft at Ameriquest and had left to start his own subprime brokerage. My neighbor owned another subprime shop, as did my friend’s daughter. At the peak of the madness they were living in million dollar houses and driving Maseratis. The problem is they believed that the easy money would never end and they ended up broke, which I suppose is some kind of poetic justice.

>>some kind of poetic justice.

Unfortunately it's short of the kind of Legal justice [aka going to JAIL] that will discourage folks from such gaming in the future. They'll just move on to a new con game -- playing the percentages that, unlike Mr. Warren, they won't end up incarcerated.

Some of the folks who Empower(tm)ed Argent/Ameriquest with technology learned about Empower whilst building the technology that ENRON used to perpetrate its fraudulent manipulation of the energy market. My observation was that all they evidently learned from the debacle at ENRON was that it's bad to get caught and "gosh, giggle, we sure hope that doesn't happen here [at Argent]".

It's a mystery to me how manufacturing a false FICO score, securitizing the mortgage, and then flushing the resulting "AAA" derivative a$$paper/poison into the global economic infrastructure... hasn't been prosecuted as the obvious and deliberate FRAUD that it is.

But then, it was also a flabbergasting mystery to the Professor of Physics from UCI who I served on a jury with in 2004; who related how discouraging it was for him to see the widespread acceptance of dishonesty, and technologically adept cheating, among his students -- who rationalized their behavior because well "everybody does it" and "that's what you have to do to survive".

It is the manifestation of demoralization:

"According to my opinion, and the opinions of many defectors of my caliber, only about 15% of time, money, and manpower is spent on espionage as such. The other 85% is a slow process which we call either ideological subversion, active measures, or psychological warfare. What it basically means is: to change the perception of reality of every American that despite of the abundance of information no one is able to come to sensible conclusions in the interest of defending themselves, their families, their community, and their country.

It's a great brainwashing process which goes very slow and is divided into four basic stages.

The first stage being "demoralization". It takes from 15 to 20 years to demoralize a nation. Why that many years? Because this is the minimum number of years required to educate one generation of students in the country of your enemy exposed to the ideology of [their] enemy. In other words, Marxism-Leninism ideology is being pumped into the soft heads of at least 3 generation of American students without being challenged or counterbalanced by the basic values of Americanism; American patriotism..."

--KGB Defector Yuri Bezmenov

--Soviet Subversion of the Free Press (Ideological subversion, Destabilization, CRISIS - and the KGB)

http://www.freerepublic.com/focus/news/2095202/posts

As Liz has noted, not only do these amoral/demoralized Useful Idiots feel entitled to cheat, but they also feel entitled to the rewards of the system when their cheating results in its catastrophic failure. Hence the fiscally "conservative" bailout this generation of amoral interior decorators appropriated for themselves.

When this kind of behavior becomes "normalized" and, evidently tolerated, then it's symptomatic of a Republic, a System of Government characterized by the Rule of Law -- that isn't.

Somewhere in Hell, Nikita Khrushchev Brezhnev is caressing his shoe and softly chortling... "see, told you so, vee bury you".

“It’s a mystery to me how manufacturing a false FICO score, securitizing the mortgage, and then flushing the resulting “AAA” derivative a$$paper/poison into the global economic infrastructure... hasn’t been prosecuted as the obvious and deliberate FRAUD that it is.”

I suspect that it takes a lot of time and money to pinpoint where the fraud occurred in each mortgage. The borrower could have lied, the broker could have phonied up the numbers, the rating agency could have knowingly bestowed a false rating. Prosecutors may not want to devote the resources.

“Somewhere in Hell, Nikita Khrushchev is caressing his shoe and softly chortling... “see, told you so, vee bury you”

I remember watching Khrushchev pound his shoe at the UN. It was great theater courtesy of the Evil Empire.

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