The Observation Deck

It is popular to say that we shouldn't play the blame game during any "crisis". However, sometimes by assigning the blame to the proper organization or individuals you uncover the policies that led to the "crisis"

These two articles explain why this "crisis" was the creation of the United States Government. The "crisis" was was caused first by government demands that banks loan money to people who could not pay it back:

http://www.city-journal.org/html/10_1_t ... ollar.html

And second by the use of Fannie Mae and Freddie Mac as clearing houses for worthlesss mortgage securities:


http://www.bloomberg.com/apps/news?pid= ... KSoiNbnQY0

Did you every wonder why banks and mortgage companies made loans to people without a down payment, credit history or verification of employment? Because with the help of the federal government they were able to sell those loans to investors.

Over the last five years individuals and institutions tried to reign in the excess but were held at bay by the Democratic Party's congressional leadership.

The Wall Street Journal has been particularly active in its efforts to stop the stupidity:

http://online.wsj.com/article/SB1215997 ... outset-box

the brokerage firms and investment banks that made billions on peddling this crap don't strike me as being heavily democrat. I get the impression that the lobbyists they employ or commission don't spend so much time catching the ears of democrats. You come off as the type of person that sues bars for getting them drunk in this instance.

It was Bill Clinton and Jimmy Carter's fault!!! Oh and the black folk's fault too! LOL!!!

The cowardly Republicans and the entire mortgage loan industry are merely the pathetic victims of the muscular left wing do-gooders. Those poor billionaire suckers.

You could give the far right wing the keys to heaven and they'd still whine 'poor me' about the red towels in the restrooms. Cry babies.

Here's what I don't get, Bill. You could just give us the data on the demographic breakdown of subprime borrowers and the purposes of their loans. It's been studied to death. But, instead you trot out freakish, unsourced, unintentionally knee-slappin' propaganda.

As I noted elsewhere, the dots aren't connected in this article and its argument. That's a game best left to social scientists not freakish right wing propagandists; you know the one's who blame everything on bill Clinton.

mortgage back securities were described as "innovative" investments to "grow the economy". a "sound investment". the "fundamentals are strong". You've got to take risks to "gain market share". "trade" is "up".

I vote we blame really stupid people in general.

This sums it up

Bill Call,

I often disagree with what you post, but I think you are substantially correct in this posting. Certainly the machinations to get more people into the ranks of homeowners began when the Democrats controlled both the legislative and executive branches, but it has continued to escalate over the years and neither party has had the courage to rein it in. On those occasions when the regulators have tried to limit the Fannie/Freddy excesses, those companies have been very generous with contributions to the congress, which has invariably complied with their wishes. When my grandparents and parents bought homes, they had to demonstrate enough economic responsibility to amass a substantial down payment (30 or 40 %) just to qualify for a mortgage for the balance. In order to get more homeowners, the requirement for a downpayment was gradually eased, and I'm not sure any is required now. In fact, I recall reading of mortgages for more than the value of the property.

I think this has caused more than just a financial crisis; I think it has also contributed to the decline in our housing stock. If you are living in a rental for $850 a month, the costs of maintaining the home are born by the landlord (yes, I am ignoring the problem of slumlords, as that can be remedied by aggressive municipal action), but if that same person buys a home with a mortgage payment of $850, they are faced with substantial additional costs, for which they are likely unprepared, so when the home needs paint or a new furnace, they are thrown into the sub-prime second mortgage trap, with consequences that we are all now forced to face. Either that, or the home goes unpainted and unheated (see the City of Cleveland).

I know there are some people who have gotten themselves into trouble, but I think the bulk of the problem is people who were mislead by a well-intentioned but misconceived government plan that put people into home ownership before they were prepared for it.

I don't know what the best solution is. We have a congress that is beyond our control, and that is unwilling to take the heat that would come with ending the subsidies. But I can't help thinking that the very congress that has caused this problem is now setting out, with executive approval, to manage another part of our economy. Its as though, seeing that the patient is allergic to bee stings, they propose a higher dosage of bee stings.

Bill, now Will.

I think it has also contributed to the decline in our housing stock.

I think the bulk of the problem is people who were mislead by a well-intentioned but misconceived government plan that put people into home ownership before they were prepared for it.

Borrowers would have to be aware of said plan first for the claim that they were mislead to be credible.

Will, your assertions are researchable. So, with a little bit of digging around, perhaps you could deliver credible research to back your intuitive points up.

Stephen Calhoun wrote:As I noted elsewhere, the dots aren't connected in this article and its argument. That's a game best left to social scientists not freakish right wing propagandists; you know the one's who blame everything on bill Clinton.

This article provides a short version explaining why we have a credit crisis:


http://online.wsj.com/article/SB1222129 ... lenews_wsj

The gist is that Fannie Mae and Freddie Mac created a demand for sub prime mortgages.

Mortgage brokers and banks met the demand for sub prime mortgages with the understanding that F & F would buy the mortgages. Without the demand there would have been no supply.

F&F sold many of the mortgages to investors. The investors knew that those mortgage backed securities would be backed by the US Government.

Would be homeowners were enticed by low interest (thanks to Republican Alan Greenspan) rates and entrapped by a government propaganda campaign that simply said: "Everyone should own a home".

Wall Street bankers are big supporters of the Democratic party because the Democratic party (through F & F) supplied the hundreds of billions of dollars that paid their bonuses. It's all about the money.

http://articles.latimes.com/2008/mar/21 ... llstdems21

Bill

Great post and thread.

Not correct, but nice.

the slide started with Regan, was maintained by 4, accelerated by Slick Willy Clinton (best Republican president in my life" and then taken to light speed by George W. Bush's "Ownership Society"

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Some ask who belongs in 'ownership society'
By Jill Lawrence, USA TODAY March 1, 2005
WASHINGTON — In President Bush's vision of an "ownership society," people would have more choices and assume more risk in nearly every part of their lives. The result, in theory: They would save more, own more and rely less on the government — even if they're elderly, low-income or both. 'I think every citizen — every citizen — has got the capacity to manage his or her own money,' Bush said.

"I think all public policy, or as much public policy as possible, ought to encourage people to own something," Bush says. The more people own, he adds, "the more they'll have a stake in the future of this country." (Related item: Some decisions easier to 'own', poll finds)

In practice, skeptics say, Bush's version of an "ownership society" would mean "you're on your own" — unless you are well-heeled, well-informed and already an owner. "It's a wonderful phrase," says former Clinton Labor secretary Robert Reich, a professor of social and economic policy at Brandeis University in Massachusetts. "But in fact, it's going to further concentrate ownership in fewer and fewer hands."

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This was created as the feeling was so much was linked to home sales and ownership. That when someone buys a home, preferably new, there was need to buy lumber, roofing, concrete, gas, carpet, furniture, etc. Growth and sprawl could lead us out of the recession.

We can all take ownership of this nightmare.

Now let's work on getting out of it, in our lifetime.

Something that will prove to be very, very, very hard.

.

This article provides a short version explaining why we have a credit crisis

Are you sure Bill Call?

In other words, against all the other explanations I have access to, this short piece on the editorial page of the Wall Street Journal is the one I should favor?

***

You assume that I might be vulnerable to lazy propaganda.

I'm not. I much prefer scholarly research in the field of real estate finance. Of which there is a ton.

Propaganda isn't explanatory in my world.

The liquidity, mortage, credit, crisis is very complicated. There's lots of blame to be spread around. However, the WSJ piece was more editorial malarkey. After all it doesn't mention SECURITIZATION at all; akin to explaining Christianity without mention Jesus Christ.

Also, in the article, "Subprime and Alt-A originations in the U.S. rose from less than 8% of all mortgages in 2003 to over 20% in 2006." begs the question of where this claim is sourced.

Fannie Mae managed to exist for about 50 years without needing a 700 billion dollar bail out or threatening to shut down the banking industry.

What changed?

http://www.shortpacked.com/d/20080923.html

http://en.wikipedia.org/wiki/Liar%27s_P ... _the_1980s

in the past a savings and loan or local bank would loan folks money to buy homes. the bank would hold the mortgage and earn interest revenue. maybe the government would insure it, but the local bank or regional bank would hold the mortgage. usually they would have to deal with loan applicants personally, and have some incentive to only make loans they could reasonably expect to be repaid.

The Reaganistas deregulated stuff just enough to cause the savings and loan crisis. eventually fannie and freddie were pimped out enough to cause the present crisis. Spring-loaded mortgages seemed like a good investment. they hold the risk while the big banks and traders make the commissions and profits.

Bull Markets ultimately run on the lessor fool theory. In this game the way to not be the lessor fool is to find a greater fool. It costs a lot of money for the best brains in banking and finance to not be the lessor fool. It will cost at least 700 billion dollars. Don't try to take away their high paychecks: they earned that money. we don't need big government looting the most productive people of their earnings.

Our policies are usually justified as benefitting "the consumer". all the free trade policies are to benefit "the consumer". Americans are trained to be consumers from an early age. Disney princesses, McDonalds happy meals, Barbie accessories, Action figures, and constant television. I was still getting several solicitations from lenders a week in the junk mail until recently inviting me to take out a mortgage loan or new credit card. I don't get any mail telling me to be freugal or invest in treasury notes to pay for the next round of federal deficits. while many americans signed up for mortgages preprogrammed with jumping interest rates, it has to be understood that is what they've been trained to do from an early age.

Here's the chronology from the FDIC.

They might be a credibile source - ya think?

Anyway I found it very englightening.

http://www.fdic.gov/bank/historical/s&l/index.html

The real problem is not the mortgage issue, it's the unsecured credit given to hedge funds which are on the verge of collapse. The end to the cash and carry trade in Japan and the 2000:1 credit to capital ratio have created a nearly $750 trillion dollar hole that this economy will never dig its way out of. Keep blaming the "democrats" or the "republicans". The real blame lies with those whores in both parties that voted to create the corrupt PRIVATE institution in 1913 called the federal reserve. Fiat currency with no actual value and the feds policy of constricting the money supply are the root cause to economic fluctuations. Throw in the move away from the gold backed currency and inflation and you have the biggest transfer of physical assets from the middle class into the hands of those who manipulate the value and supply of the currency.

Steve Hoffert wrote:1 credit to capital ratio have created a nearly $750 trillion dollar hole that this economy will never dig its way out of...

The real blame lies with those whores in both parties that voted to create the corrupt PRIVATE institution in 1913 called the federal reserve...

Steve

Thanks for coming to the end of the world party.

Nice number for people to think of as they are about to give thieves, losers, con-men, and friends $700 billion on the way out the door.

After all with the war ending, in 2010, oh wait 2011 GWB needed one more year of war profits, how else can you transfer our wealth and future to a select few individual groups, many if not all connected to this administration or group of politicians on both sides.

Remember when those silly democrats argue with silly republicans and say things like "The money spent on the war could give everyone free heatlh care," "better schools," "fix roads" etc. Well that is borrowed money, so not really. However we have just borrowed more than we have spent on the war in one week, This will certainly make T. Boone Pickins change his ad to "The third largest transfer of funds..."

My only real question in this fiasco, is will GWB have the same awakening that Woodrow Wilson had? After starting the Federal Reserve, and their Shylock the IRS, Wilson on his death bed, looked up and said, "I have sold my country out to a few men."

Always nice to be a part of history. Baby Boomers, the group that broke the world, forever, but at least we did it "for the kids."


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Stephen Calhoun wrote:I'm not. I much prefer scholarly research in the field of real estate finance. Of which there is a ton.......

Also, in the article, "Subprime and Alt-A originations in the U.S. rose from less than 8% of all mortgages in 2003 to over 20% in 2006." begs the question of where this claim is sourced.

If you have scholarly research provide the link.

Here is a "scholarly" paper on the decline of Argentina:

http://cedar.barnard.columbia.edu/~econ ... entina.pdf

Let me know what you think. In the early 1900's Agentina was one of the most prosperous countries in the world, now it's a basket case. It can happen here.

The increase in subprime mortgages would not have occurred unless the originators of the mortgage could unload it. Fannie Mae gave them that option.

The liquidity "crisis" is a crisis of confidence. If everyone with shares in a money market demands their money on the same day the fund goes broke. It doesn't mean the fund managers did anything wrong or that money markets are not regulated enough. It means financial systems cannot survive without investor confidence. That confidence is built by knowledge and transparecy in transactions. Regulation can increase both but can guarantee neither.

I have a hunch that the $700 billion dollar bailout is as much a confidence builder as real solution.

Anyway, is all that money real? In the age of electronic fund transfer what's is to stop the Federal Reserve from simply "wiring" $10 billion to a bank. Where no money exits money is created. The financial term for this process is abracadabra!

I think a related point is the evolution of American business management.

There was never a point of perfection but at one time business managers saw themselves as stewards of a corporation. They judged their success on the success of the corporation. Management with prudence.

American managers have become obssessed with the concept of "enhancing shareholder value" which has come to mean pick the bones clean. Management by carpetbagger.

Some of the people who "managed" Fane Mae made $100 million over a period of four or five years based on fraudulent accounting. The people who "managed" Lehman Brothers are set to receive $2.5 billion in bonuses from the corporation they "managed" into bankrupty.

An audit can find bad accounting practices. Regulators and regulations can provide guidance in financial transactions. Neither can protect against a management team that is intent on looting the corporation.

And when those managers have allies in Washington that protect and encourage the looting one billion new regulations won't make a difference.