A thoughtful expression of a libertarian ideal

Published on 14 October 2012 Hits: 4537

Before the first debate (the Presidential debate) I had predicted that the Obama administration would somehow try to pin the economic collapse of 2007-2008 solely on their immediate predecessors. The administration certainly didn't disappoint. Right on cue, Obama himself blamed Bush's economic policies for the meltdown, followed by Joe Biden, then Stephanie Cutter for good measure (Cutter is Obama's campaign manager). The problem is that each is predictably trying to pass off a disingenuous narrative as truth and expecting you to be stupid enough to buy it. Let's refresh, shall we?

 In Thursday's VP debate Biden charged: "They talk about this Great Recession if it fell out of the sky, like, 'Oh, my goodness, where did it come from?' It came from this man voting to put two wars on a credit card, to at the same time put a prescription drug benefit on the credit card, a trillion-dollar tax cut for the very wealthy. I was there. I voted against them. I said, no, we can't afford that." Stephanie Cutter virtually parroted his words in the spin room after the debate.

This followed along with Obama's narrative in the October 3rd Presidential debate when he said, "Are we going to double down on the top-down economic policies that helped to get us into this mess, or do we embrace a new economic patriotism that says, America does best when the middle class does best?"

Or is that his narrative at all? Obama later changed his explanation of the cause of the collapse, blaming a host of others: "The reason we have been in such a enormous economic crisis was prompted by reckless behavior across the board. Now, it wasn't just on Wall Street. You had — loan officers were — they were giving loans and mortgages that really shouldn't have been given, because they're — the folks didn't qualify. You had people who were borrowing money to buy a house that they couldn't afford. You had credit agencies that were stamping these as A-1 (ph) great investments when they weren't. But you also had banks making money hand-over-fist, churning out products that the bankers themselves didn't even understand in order to make big profits, but knowing that it made the entire system vulnerable."

At least he was a bit closer with that one.

What's needed by this administration -- other than a bit (OK a lot) more truthfulness -- is a refresher course on what started the ball rolling and what was the core cause of the collapse -- a reminder of who were the primary drivers and motivators behind what happened. After all, without being honest with themselves and the public about this, we are likely to promote and advance policies that set the stage for other similar collapses in the future.

First, I must be clear...I'm no fan of Bush's and the Republicans' "Big Government Conservatism" of the early '00s. At best the Republican establishment in Washington during this period was the better of two poor choices. However, the idea advanced by the Obama administration that the free falling economy of 2007-2008 was caused by the Bush era deficits is ridiculous. For one to take that as true, one would in turn have to ask "If the Bush deficit of $2 trillion over 7 budget years caused an economic collapse, what is Obama's deficit of $5 trillion in 4 budget years going to do to the economy???" You can't say Bush's deficit caused the collapse without also saying Obama's deficit has put us in extreme peril of a collapse that would make the last meltdown look like sunny days! Like I said the idea that Bush's deficits caused the economic collapse is laughable.

Obama's second comment is more on target. At least it acknowledges the cause of this severe recession was the collapse of the housing market. However, he somehow failed to mention the entities that, by far, had the largest influence in directing the economy off the cliff. Not mentioned was the fact that the federal government was in the driver's seat from the beginning. It was the government that put in place policies whose intent it was to influence behavior by private banks to take just the actions that they did.

So, Mr. Obama how about telling the whole truth about this, because your standard liberal claim of Bush/deregulation/derivatives being the cause of the financial collapse is nothing more than a partisan lie. The worst you can blame Bush for is for continuing policies that Clinton had already established under the guise of "affordable housing". It was Clinton's HUD that started this mess with the expressed hope and intent that private banks would follow suit. Guess what...HUD's plan worked! Of course it caused the meltdown but hey, its proof that at least ONE government program did what was planned, right?

Now, this is admittedly a lengthy and detailed journey into the cause of the housing market collapse, but please note that my documentation all comes from pre-meltdown sources, before everybody started covering their butts.

Instead of blindly passing rhetoric as truth, Mr. President, you should be honest for once and be blaming Fannie Mae and Freddie Mac or more realistically HUD for their huge role in this, starting back with the Clinton Department of Housing and Urban Development in the mid-'90s. It's hard to believe that any intelligent person would still be following the false trail of deregulation, derivatives, and intentionally underhanded banks, continually blindly pointing back at Bush, but you are a liberal so I guess that explains it.

Let me state this unequivocally, derivatives aren't what caused the meltdown. While I do agree that that market needs more transparency, the derivatives themselves were not the problem. A vast majority of the derivatives market was innocuous and still is. The only tiny, miniscule segment that wasn't, was the segment tied to loose lending standards advanced by HUD/Fannie/Freddie in their all-out push for "affordable housing". That segment of the derivatives market would have also been innocuous had it not been for HUD/Fannie/Freddie pushing irresponsible underwriting standards and pushing toxic mortgage-backed securities into the market. No BS underwriting standards, no derivatives market collapse. It's as simple as that. Don't believe me? Ask MSNBC.

"When homeowners defaulted, the agencies downgraded billions of dollars of investments at once. That helped spark the financial crisis."


And the first to default were the riskiest mortgage holders before finally extending up to the wealthy. From the New York Times:

"The housing bust that began among the working class in remote subdivisions and quickly progressed to the suburban middle class is striking the upper class in privileged enclaves like this one in Silicon Valley."


Homeowners started defaulting because people who had no business buying houses were in fact buying houses, the market being fed by Fannie Mae and Freddie Mac in their attempt to meet HUD mandates from the '90s. Fannie and Freddie were at the core of every aspect of the whole thing from day one (pre-Bush), forced there by HUD. You see, Fannie and Freddie (the GSEs) were given a mandate to drastically raise the number of loans to groups known to be high and very high risk (low and very low income) by Clinton's HUD in the mid-90s. See the page 3 introduction and the bottom of page 5 which explains how Fannie and Freddie did this. Note phrases like "enhanced their product offerings" and "featured underwriting criteria that depart from industry norms and allow for higher risks". This goes back to 1995-1996. http://www.usc.edu/schools/sppd/lusk/research/pdf/wp_2006-1005.pdf

"In addition, Listokin and Wyly (2000) and Temkin, et al.
(2001) show that the GSEs enhanced their product offerings so as to facilitate more
purchases of loans from targeted communities. These new products often featured
underwriting criteria that depart from industry norms and allow for higher risks."

Table 8 of this next Fannie Mae report (Listokin and Wyly) from 2000 shows what kind of underwriting Fannie and Freddie were promoting. It is virtually a point by point list of the most egregious underwriting "standards" that have been documented and they were in full use and actively advanced by Fannie/Freddie by - at latest - 1998. What you won't see is the names of investment houses and major banks except for B of A. http://foundingbloggers.com/img/grabs/rep_newmortmkts_background.pdf

You see, Fannie and Freddie, until a few years ago, were not allowed to buy non-conforming loans. To get around this, they worked with non-bank lenders - many of them "mom and pop" shops - to make virtually all loans conform and it was the non-bank lenders (not Wall Street) who originated almost all of the sub-prime loans. If you didn't have a good enough debt-to-income ratio for your loan to conform, a company like Countrywide was allowed to let you claim income that you could not document (liars loan). They would then give you a "conforming" loan with that information (wink-wink) and Fannie/Freddie would gladly buy those loans from Countrywide, package them up, and resell them as mortgage backed securities (MBS) infecting the capital markets, with an implicit guarantee by the government as a government sponsored enterprise (GSE). The new home owner was happy because they could purchase a house that in reality they couldn't afford. Countrywide was happy because they could make boatloads of cash knowing that Fannie/Freddie would always gladly buy their continuous river of junk loans. Fannie/Freddie were happy because they were meeting their HUD mandate, besides almost all the risk was born by the suckers who bought their MBS. In fact Fannie/Freddie kept the lower risk MBS in-house and made sure it was the higher risk ones that were put out to the open market. They were all happy until it collapsed like a house of cards.

Blaming the Countrywides of the world is off base too. If Fannie/Freddie -- driven by Clinton's HUD -- had not created a huge market for those bad loans by buying them all, then Countrywide et al would not have produced them, or would have produced very few of them. Without the GSEs capitalizing the lenders by purchasing the loans, they would have run out of money to loan very quickly.

Now, if you were not a huge entity like Wells Fargo or Chase and the industry titans that are Fannie/Freddie encouraged you to do something, you had better damn well do it or risk non-existance. Did the Countrywides and Norwests make money with it? Yes they did...lots. Would they have been put at a huge competitive disadvantage if they hadn't? Yes they would have. Would it have caused them to ultimately go under or be taken over if they hadn't? Most probably. So yes, when Fannie and Freddie encouraged them to make those loans, the GSEs put a figurative gun to those lenders'/originators' heads.

It wasn't just a few loans either. In the 90s Fannie/Freddie securitized roughly 2/3 of all mortgages, HUD mandates forced Fannie/Freddie to buy the risky loans at a 50% pace by 2000. This means that Fannie/Freddie created a market that demanded that 33% of all loans originated in the whole US mortgage market were necessarily high risk. Not only that but HUD mandates forced Fannie/Freddie to buy "special affordable" loans at a 20% pace by 2000. "Special affordable" loans are very high risk loans made to borrowers with income less than 60% of their area's median income. This means that Fannie/Freddie created a market that demanded that nearly one in seven of all loans originated in the entire mortgage market were necessarily these VERY high risk loans. I'll restate, because of the HUD mandate, 1 in 7 of all home loans made were very high risk by 2000. To be sure the new originations that had to meet this criteria were initially only a tiny segment of the mortgage market as a whole. However, from 1995 on, year after year those high-risk loans became a larger and larger portion of the market until they were a significant portion by 2005. And everything was just fine until interest rates started to go up in 2006 and all of the exotic mortgages used to get these people into homes re-adjusted...then...BOOM!

Hell, Fannie/Freddie didn't just lead the game either, they practically designed the game. They were the ones who created the giant bundling market and they were the ones actively promoting ridiculously lax underwriting standards to meet HUD's mandates. Had Fannie/Freddie clamped down on those standards instead of promoting them, Countrywide would not have pushed them to their consumers. And Fannie/Freddie pretty much controlled it all. As stated, in the late 90s Fannie/Freddie accounted for nearly two-thirds of the capitalization in the MBS market not the banks or investment houses, and they were making gobs of cash doing it. http://www.referenceforbusiness.com/encyclopedia/Mor-Off/Mortgages-Mortgage-Backed-Securities.html

This continued on through at least the Fall of 2006 at which time their MBS issuance line of business still were issuing "residential mortgage backed securities (mbs) in amounts that historically have exceeded half of all mbs issued in the United States."


In total, Fannie and Freddie were tied to over 70% of all mortgage backed securities (toxic assets) in one way or another. They held ~20% of the MBS in their own portfolio and sold (infecting our markets and banking system) over 50% of the rest of them...the most risky, I'll add.

This kind of leads us to the whole "Bush deregulation", "Republican deregulation" fallacy that liberals try to assert, which again is a gross misrepresentation.

To attempt to solely blame the Republicans for the deregulation surrounding the meltdown is completely ridiculous. Clinton's Secretary of Treasury Robert Rubin was pushing Congress to repeal of Glass-Steagall as early as 1995, testifying before the House Committee on Banking and Financial Services. http://www.allbusiness.com/government/business-regulations/500983-1.html

"Among Rubin's recommendations for financial modernization were

* Permitting a depository institution insured by the Federal Deposit Insurance Corporation to affiliate with a securities firm, insurance company or other financial company.

* Repealing section 20 of the Glass-Steagall Act. Section 20 prohibits a bank that is a federal reserve system member from affiliating with a company principally engaged in underwriting or dealing in securities that a national bank cannot underwrite or deal in directly.

* Allowing insured depository institutions to affiliate only with firms that were well capitalized and well managed and had internal controls that adequately managed financial and operational risk, and only if the institutions' safety and soundness were unimpaired.

* Maintaining the Federal Reserve Board's authority to impose consolidated capital standards as a safeguard on bank holding companies whose subsidiary insured depository institutions constitute their principal business."

The Clinton administration's push for deregulation didn't stop there either. In fact in late 1997 and early 1998, Clinton's administration approved the 3-headed merger of Travelers (insurance), Salomon-Smith-Barney (investments), and Citicorp (banking) a full 2 years before it was even legal. http://www.independent.co.uk/news/business/citicorp-and-travelers-in-155bn-merger-1155012.html That's right, they signed off on the merger over a year and a half before the legislation making it legal even hit the floor for debate!

I can't restate this enough so I'll state it again...the derivatives themselves were not the problem. A vast majority of the derivatives market was innocuous and still is. The only small segment that wasn't was the segment tied to the loose lending standards I documented above. Those derivatives would have also been innocuous had it not been for HUD/Fannie/Freddie pushing irresponsible underwriting standards and pushing toxic MBS into the market. No BS underwriting standards, no derivatives market collapse. Again, it's as simple as that. We don't have high unemployment right now because of the derivatives market, we have high unemployment right now because of the HOUSING MARKET.

Even if you want to blame the derivatives market, again the lack of derivative regulation can be traced back to Clinton's administration. In fact just in April 2010 Clinton was lamenting this decision, pointing the finger at Robert Rubin and Larry Summers (both served as his Secretary of Treasury) and saying he was misinformed by them. The following is a great read from Lawrence H. Summers (Clinton Treasury Secretary), Alan Greenspan (Clinton Fed Appointee), Arthur Levitt (Clinton Chairman SEC), and William J. Rainer (Clinton Chairman CFTC):

"Specifically, with respect to OTC derivatives, the Working Group is unanimously
· An exclusion from the CEA for bilateral transactions between sophisticated
counterparties (other than transactions that involve non-financial commodities
with finite supplies);
· An exclusion from the CEA for electronic trading systems for derivatives,
provided that the systems limit participation to sophisticated counterparties
trading for their own accounts and are not used to trade contracts that involve
non-financial commodities with finite supplies;
· The elimination of impediments in current law to the clearing of OTC derivatives,
together with a requirement that any clearing system for OTC derivatives be
regulated by the CFTC, another federal regulator, or a foreign financial regulator
that satisfies appropriate standards;
· A clarification of the Treasury Amendment that clears the way for the CFTC to
address the problems associated with foreign currency "bucket shops" and
excludes all other transactions in Treasury Amendment products from the CEA,
unless they are conducted on an organized exchange;
· A modification of the exclusive jurisdiction clause of the CEA to provide greater
legal certainty to hybrid instruments; and
· A statutory clarification of the inapplicability of the Shad-Johnson Accord to
hybrid instruments that reference securities."


Clinton didn't just accept these parameters of derivative deregulation as you can see from the above, Clinton PUSHED for these parameters and these Clinton adminstration parameters were integrated into the Commodity Futures Modernization Act of 2000 (CMFA) which was included as an amendment to the Consolidated Appropriations Act, 2001. Please note the "Signed by President" date of Dec. 21st, 2000, when a guy named William Clinton was President (http://www.govtrack.us/congress/bills/106/hr4577) One should also note that 74% of Congressional Republicans supported it compared to a whopping 83% of Congressional Democrats.

So, the idea that the Republicans somehow pushed bank deregulation and the lack of oversight for the derivatives market on Democrats and the Clinton administration is, again, a blatant fallacy...so they should drop that talking point too.

One other point you guys can drop, that sub-prime lending started it's expansion during the Bush years.

"The debt load of sub-prime loans was 9% for F&F up until Bush's deregulation of banking and loans. Then pushed F&F to take on more sub-prime bad loans, during that time the debt load went from 9% in 2000 to 26% in 2006 went it all went bust."

A) As noted above, it was the Clinton administration that deregulated banking and loans.

B) As noted above, it was the Clinton administration HUD that started the push for bad loans.

C) The sub-prime market was virtually non-existent before the HUD mandate in 1995. Sub-prime debt load went from 0% to 9% in the 4 years after that mandate. That it increased at basically the same yearly rate under Bush as it did under Clinton should be no surprise.

Actually sub-primes were quite profitable even back in the '80s, yet financial institutions primarily only used them as bridge loans to tie people over during the process of buying one home and selling another. Outside that construct, they understood that it was high risk/high reward and stayed out of that business. That is until Fannie/Freddie started buying them up as fast as they could. Sub-prime originations were only $35 billion as late as 1994. In 1995 when HUD gave it's mandate and Fannie/Freddie started gobbling up bad loans, that number almost doubled to $65 billion and by 1998, that number was $125 billion. That's not a coincidence.

Plain and simple, Fannie and Freddie were at the core of this meltdown, forced there by Clinton's -- and then Bush's -- HUD "affordable housing" mandates (home loans to low and very low income consumers who could not afford them). Did the big banks participate? Yes, eventually , but they were merely trying to keep up in the game created by HUD/Fannie/Freddie. This is evidenced by their late entry into the game. Of course this is just as HUD had hoped they would do though. Congressional testimony shows this was exactly what HUD had desired and intended...that eventually private banks would have to join in. However, going back to the original argument, it was over-regulation of the housing market by HUD and the "progressive" agenda of affordable housing for all, regardless of credit history - not deregulation, or derivatives, or Bush - that caused the collapse.

Actually it's hard to believe that -- with the volume of documentation to the contrary -- anybody could still ascribe to your theory that it was Bush's fault. Even Barny Frank eventually had to admit that it was a partisan lie, fabricated merely for its finger-pointing potential...which is, I guess, why the Obama administration is now pushing the ridiculous idea that it was Bush's deficits that pushed us over the edge.

So Mr. President, you're right about one thing, lots of people were to blame: homeowners were to blame for taking loans they couldn't afford, community organizations like ACORN were to blame for pushing their "ACORN Approved" mortgage packages onto a trusting and unsuspecting public in their effort to get in on the deal, "Prosperity Gospel" ministers were to blame for telling their congregations that God wanted them to have the home that they couldn't afford, banks were to blame for being sucked in to the game by HUD against what should have been their better judgement. However Mr. President, how about for once you put the bulk of the blame squarely where the bulk of the blame is due for the collapse...the federal government and it's overreaching desire to regulate and manipulate the private mortgage market in the name of "affordable housing".

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