Democrats Pointing Finger in Wrong Direction - Part 1
While Democrats bluster about the nation’s financial meltdown and the President’s proposed bailout, remember that all their finger pointing is a desperate attempt to divert attention from their own responsibility at this crucial point in the election campaign. Where did all these sub-prime loans come from, anyway? Whose bright idea was that?
Frequent contributor Mike points to a September 30, 1999, New York Times article (Fannie Mae Eases Credit To Aid Mortgage Lending) that pinpoints the genesis of the current financial crisis and exposes why current Democratic finger pointing is aimed in the wrong direction:
In a move that could help increase home ownership rates among minorities and low-income consumers, the Fannie Mae Corporation is easing the credit requirements on loans that it will purchase from banks and other lenders.
The action, which will begin as a pilot program involving 24 banks in 15 markets — including the New York metropolitan region — will encourage those banks to extend home mortgages to individuals whose credit is generally not good enough to qualify for conventional loans. Fannie Mae officials say they hope to make it a nationwide program by next spring.
Fannie Mae, the nation’s biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration [emphasis added] to expand mortgage loans among low and moderate income people and felt pressure from stock holders to maintain its phenomenal growth in profits.
In addition, banks, thrift institutions and mortgage companies have been pressing Fannie Mae to help them make more loans to so-called sub-prime borrowers. These borrowers whose incomes, credit ratings and savings are not good enough to qualify for conventional loans, can only get loans from finance companies that charge much higher interest rates — anywhere from three to four percentage points higher than conventional loans.
”Fannie Mae has expanded home ownership for millions of families in the 1990’s by reducing down payment requirements,” said Franklin D. Raines [emphasis added*], Fannie Mae’s chairman and chief executive officer. ”Yet there remain too many borrowers whose credit is just a notch below what our underwriting has required who have been relegated to paying significantly higher mortgage rates in the so-called subprime market.”…
*As recently as August 2008, Raines was identified as an economic adviser to the Obama campaign. He’s apparently now been pushed into the shadows. Good decision, but not soon enough to go unnoticed.
To be continued…
Doug
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Many of us remember that it was the Clinton administration's heavy pressure on Fannie Mae to increase loans to unqualified borrowers so they could enjoy their "entitlement" to home ownership that started the whole Fannie Mae debacle. The resulting sub-prime lending spree, with ever increasing audacity, created a gigantic risk bubble destined to explode.
The Bush administration inherited so many such irrational spending programs from the Clintons it is a wonder the bubble didn't burst sooner. Now Democrats are pointing fingers at Republicans and claiming the problem was "lack of oversight". That takes balls!
Once again the dims are caught with their hand in the cookie jar. But this time they may finally have broken the bank.
Unfortunately, we all have to rally now to try to save the country from a serious recession or worse, a depression.
Even if there hadn’t been a push to expand credit to some less-than-desirable borrowers, we’d still have this mess on our hands. Put another way, had only credit standards been relaxed, the bailout would be a whole lot less costly.
We’d still be having to deal with the fact that financial institutions were buying debt instruments they didn't understanding (it’s the lack of understanding about the underlying value of these debt instruments that has led to the write-offs and liquidity problems). And we would still be dealing with the aftermath of the pop of the housing bubble that was created more by low interest rates than by relaxed lending standards.
Interesting spin Stephen. Ignore the undeniable link between Clinton's pressure on Fannie Mae to expand loans to risky borrowers; Fannie Mae's doing it (and packaging and selling the loans as debt instruments to financial institutions - that's their business); the resulting boom in real estate sales to unqualified buyers/borrowers; the resulting increase in real estate prices from so many new borrowers in the market; all of which set up a foreclosure crises when these unqualified borrowers couldn't make their payments; which caused the real estate crash; which rendered the investment portfolios held by the financial institutions severely devalued or worthless; which required the financial institutions to increase their cash reserves; which they couldn't do because the portfolios they would use as collateral to borrow such huge amounts had been rendered essentially worthless; which made the financial institutions insolvent; which caused bankruptcy filings; which will cause a depression if there is no bailout.
Ignore all that and assert that the REAL culprits are the financial institutions that bought the portfolios from Fannie Mae (which had the blessing of the Clinton administration and implied financial backing of Congress) but should have known better.
It sounds like you are trying to divert blame from Clinton by saying even if he didn't do what he did, there still would have been problems. Sorry, no sale.
What flavor KoolAid are you drinking, Stephen? Wait....I already know.
Stephen, Fannie an Freddie lowered their qualification threshold under pressure from Clinton and then repackaged and resold to third parties who resold them to 4th, 5th and 6th parties.
4,5 and 6 used them as "equity" to leverage even more borrowing.
It’s about leverage - rotten leverage - and its collapse. It started with Clinton and the two institutions we’re talking about.
And screw Greenspan’s doom and gloom prediction of this crisis back in 2005.
Good post Doug and a GREAT reply to Stephen's comment. I haven't seen it spelled out so well anywhere else! Even I understand it now!
Just a fine point Doug. You didn't mention the real genesis of our current financial woes: the CRA passed under Jimmy Carter in 1977. That set up Clinton's move to force lenders to "conform" to the Act and to lend more money to people who couldn't qualify for conventional loans.
I take from your comment, Doug, that you believe the massive bailout being cajoled in Congress is necessary?
Ben, I'll try to touch on the CRA (Community Reinvestment Act) in tomorrow's post. For those unfamiliar, Ben's right. The Act, passed under Carter, was aimed at forcing government to become more involved in socialism by subsidizing residential and business loans to "the poor". It enabled Clinton to push for an even greater position in sub-prime lending (and more Democratic votes).
Ian, I'm a believer in a free market. That includes allowing bad businesses to fail to be replaced by better ones and expecting people to be responsible for their own decisions and actions, good and bad. That doesn't include bailouts for those that behave or choose poorly. So no, I don't think the U.S taxpayers should be forced to bear the financial burden created by incompetent elected officials. We didn't cause the problem. Let the chips fall. Only then can a better system emerge from the ashes and bad officials be shown the door.
Doug
Damn Doug, you're hard core. I don't disagree, I just worry that we would suffer another Great Depression. That would suck. But having the taxpayers take on a trillion dollar liability so the asshats that created the catastrophe can remain in power doesn't seem palatable either. And we have no guarantee that the bailout would even work for long since every lender with bad loans on its books would be shoveling them into the bailout fund. Maybe it's time to cut our losses and suffer the consequences before Congress compounds the problem.
The choices are 1) bite the bullet, or 2) bail out Congress.
Yes, I said bail out Congress. They are pushing for a bailout because they don't want to be held responsible for this horrific mess. They caused it. Fire all the Congressional @#%holes responsible. If you owned a business and the people you hired to manage it for you put you on the brink of bankruptcy, you would fire them on the spot! These crooks have stolen our money and put our country near bankruptcy, and they want us to go borrow more money (nearly a trillion dollars and probably more) to fix THEIR mess but KEEP THEM ON THE JOB WITHOUT ANY REPERCUSSIONS!
Idiocy! It's INSANE!
BTW Doug, I don't get the cartoon. McCain has been a staunch advocate of regulating the "cookie jar".