The following video explains better than any economist could, how we got into this mess. Our financial future is about to go down the drain and now we know who caused it. These people should be put in jail. Screw the trial!
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Did Liberals Cause the Sub-Prime Crisis?
http://tinyurl.com/3sjcfj
Conservatives blame the housing crisis on a 1977 law that helps-low income people get mortgages. It’s a useful story for them, but it isn’t true.
Robert Gordon
“..But CRA has always had critics, and they now suggest that the law went too far in encouraging banks to lend in struggling communities. Rhetoric aside, the argument turns on a simple question: In the current mortgage meltdown, did lenders approve bad loans to comply with CRA, or to make money?
The evidence strongly suggests the latter. First, consider timing. CRA was enacted in 1977. The sub-prime lending at the heart of the current crisis exploded a full quarter century later. In the mid-1990s, new CRA regulations and a wave of mergers led to a flurry of CRA activity, but, as noted by the New America Foundation’s Ellen Seidman (and by Harvard’s Joint Center), that activity “largely came to an end by 2001.” In late 2004, the Bush administration announced plans to sharply weaken CRA regulations, pulling small and mid-sized banks out from under the law’s toughest standards. Yet sub-prime lending continued, and even intensified — at the very time when activity under CRA had slowed and the law had weakened.
Second, it is hard to blame CRA for the mortgage meltdown when CRA doesn’t even apply to most of the loans that are behind it. As the University of Michigan’s Michael Barr points out, half of sub-prime loans came from those mortgage companies beyond the reach of CRA. A further 25 to 30 percent came from bank subsidiaries and affiliates, which come under CRA to varying degrees but not as fully as banks themselves. (With affiliates, banks can choose whether to count the loans.) Perhaps one in four sub-prime loans were made by the institutions fully governed by CRA.
Most important, the lenders subject to CRA have engaged in less, not more, of the most dangerous lending. Janet Yellen, president of the San Francisco Federal Reserve, offers the killer statistic: Independent mortgage companies, which are not covered by CRA, made high-priced loans at more than twice the rate of the banks and thrifts. With this in mind, Yellen specifically rejects the “tendency to conflate the current problems in the sub-prime market with CRA-motivated lending.? CRA, Yellen says, “has increased the volume of responsible lending to low- and moderate-income households.”
Yellen is hardly alone in concluding that the real problems came from the institutions beyond the reach of CRA. One of the only regulators who long ago saw the current crisis coming was the late Ned Gramlich, a former Fed governor. While Alan Greenspan was cheering the sub-prime boom, Gramlich warned of its risks and unsuccessfully pushed for greater supervision of bank affiliates. But Gramlich praised CRA, saying last year, “banks have made many low- and moderate-income mortgages to fulfill their CRA obligations, they have found default rates pleasantly low, and they generally charge low mortgages rates. Thirty years later, CRA has become very good business.”
snip…
Bush promotes national minority home ownership plan
Jet, July 1, 2002
President Bush set a new goal of helping 5.5 million minority families buy their own homes before the end of the decade, hoping to end what he called a “home ownership gap.”
“The difference in home ownership between Anglo America and Black and Hispanic America is too big,” Bush said at St. Paul AME Church in Atlanta.
The president recently was in the city to promote his home ownership program, which calls for the building of 5.5 million new homes for minorities before 2012.
Citing high down payments a major obstacle to home ownership for low-income families, Bush wants a $200 million expansion to the American Dream Down Payment Fund, first outlined in January and awaiting action by Congress. Grants from the fund would help about 40,000 families a year make down payments or pay closing costs on houses.
The president challenged the private sector to join the effort to create more lower-cost homes. He proposes giving developers nearly $2.4 billion in tax credits over five years to build affordable single-family homes. The White House estimates the tax incentive could result in construction of 200,000 lower-cost homes in the period.
Bush also said that he will convene a White House conference this fall that will help address the home ownership gap, a situation in which more than three-quarters of White American families own their homes, while less than half of Black and Hispanic families do, he said.
During his Atlanta visit Bush toured the Villages at Carver, a transformed community of mixed-income housing on the city’s south side that replaced Carver Homes, an older, crime-plagued 990-unit complex, as part of a national program to eliminate mammoth public housing projects.
“Part of economic security is owning your own home,” Bush said. “We have to set a big goal for America and we must focus our resources and attention on the goal.”
Cory. During the 2003, the REPUBLICIANS controlled both the Senate and the House. How did Democrats throttle this legislation when they were in the minority? Sounds like the R-Congress went against Der Leaders wishes on this one. Better do a bit more research, rather than cut and paste from another blog.
The D-party has been in control of Congress for 20 months. Sure, Sen. Dodd got plenty of $$, but he had been the minority leader for the years you site and as such, would not have been responsible for setting the agenda in the Banking committee.
People like Senator Libby Dole have been trying to pass a bill to address this problem since 2002! Since then, she and some of her colleagues have tried on 4 other occasions to address this, especially Fannie and Freddie.
Stonewalled each and every time!
Both sides share some blame, but it is without a doubt primarily a problem brought on by the Democrats!!!
giovanniworld: Please stop the nonsense. Republicans controlled Congress from 1994 until only 20 months ago. They have held the WH since 2000. R’s set the legislative agenda, control what and when things get voted on and set up appointments for heads of agencies (SEC anyone?).
I agree that BOTH sides share the blame here. To still claim the D’s are primarily at fault is letting your rose glasses cloud your vision on this. To wit, how are the D’s responsible for this list while in minority?
A Memo Found in the Street
By BARRY L. RITHOLTZ
Barrons Online [http://online.barrons.com/article/SB122246742997580395.html?mod=article-outset-box]
MONDAY, SEPTEMBER 29, 2008
OTHER VOICES
Uncle Sam the enabler.
1997: Federal Reserve Chairman Alan Greenspan’s famous “irrational exuberance” speech in 1996 was somehow ignored by, um, Fed Chairman Greenspan. The Fed missed the opportunity to change margin requirements. Had the Fed acted, the bubble would not have inflated as much, and the subsequent crash would not have been as severe.
1998: Long Term Capital Management was undercapitalized, used enormous amounts of leverage to purchase all manner of thinly traded, hard-to-value paper. It failed, and under the authority of the Federal Reserve a “private-sector” rescue plan was cobbled together. Had these bankers suffered big losses from LTCM, they might have thought twice before jumping into the exact same business model of undercapitalized, overleveraged, thinly traded, hard-to-value paper. Instead, they reaffirmed Benjamin Disraeli’s famous aphorism: “What we learn from history is that we do not learn from history.”
1999: The Financial Services Modernization Act repealed Glass-Steagall, a law that had separated the commercial-banking industry from Wall Street, and the two industries, plus insurance, came together again. Banks became bigger, clumsier, and hard to manage. Apparently, risk-management became all but impossible, even as banks had greater access to larger pools of capital.
2000: The Commodities Futures Modernization Act defined financial commodities such as “interest rates, currency prices, and stock indexes” as “excluded commodities.” They could trade off the futures exchanges, with minimal oversight by the Commodity Futures Trading Commission. Neither the Securities and Exchange Commission, nor the Federal Reserve, nor any state insurance regulators had the ability to supervise or regulate the writing of credit-default swaps by hedge funds, investment banks or insurance companies.
2001-’03: Alan Greenspan’s Fed dropped federal-fund rates to 1%. Lulled into a false belief that inflation was not a problem, the Fed then kept rates at 1% for more than a year. This set off an inflationary spiral in housing, and a desperate hunt for yield by fixed-income managers.
2003-’07: The Federal Reserve failed to use its supervisory and regulatory authority over banks, mortgage underwriters and other lenders, who abandoned such standards as employment history, income, down payments, credit rating, assets, property loan-to-value ratio and debt-servicing ability. The borrower’s ability to repay these mortgages was replaced with the lender’s ability to securitize and repackage them.
2004: The SEC waived its leverage rules. Previously, broker/dealer net-capital rules limited firms to a maximum debt-to-net-capital ratio of 12 to 1. This 2004 exemption allowed them to exceed this leverage rule. Only five firms — Goldman Sachs, Merrill Lynch, Lehman Brothers, Bear Stearns and Morgan Stanley — were granted this exemption; they promptly levered up 20, 30 and even 40 to 1.
2005-’07: Unscrupulous home appraisers found that they could attract more business by inflating appraisals. Intrinsic value was ignored, so referrals kept coming in. This helped borrowers obtain financing at prices that were increasingly unsupportable. When honest appraisers petitioned both Congress and the bureaucracy to intervene in the widespread fraud, neither branch of government acted.
THERE’S ACTUALLY A LOT MORE we could add to these items.
snip…
one more…
Another and perhaps the least-mentioned political cause of the housing bubble was enacted by Republican tax-cutters in the Congress of 1997 and signed into law by President Clinton. They eliminated tax on the first $500,000 of capital gains on married couples’ owner-occupied [2 yr min] homes,[$250K for individuals]. Previous tax law gave tax-free status only to gains rolled over into new owner-occupied housing whose price was at least as high as the old one’s. [A bigger impact was the change from a once in a lifetime exemption, to a possibly every two year exemption] By making it possible to get tax-free gains in cash, the change went a long way to ignite [housing] speculation. Using low down-payment loans, speculators found leverage of 49 to 1 and tax-free profits were as irresistible as 10 to 1 leverage in the stock market of 1929.
Cox’s SEC Censors Report on Bear Stearns Collapse (Update2)
By Mark Pittman, Elliot Blair Smith and Jesse Westbrook
Oct. 7 (Bloomberg) — U.S. Securities and Exchange Commission Chairman Christopher Cox’s regulators stood by as shrinking capital ratios and growing subprime holdings led to the collapse of Bear Stearns Cos., according to an unedited version of a study by the agency’s inspector general.
The report, by Inspector General H. David Kotz, was requested by Senator Charles Grassley to examine the role of regulators prior to the firm’s collapse in March. Before it was released to the public on Sept. 26, Kotz deleted 136 references, many detailing SEC memos, meetings or comments, at the request of the agency’s Division of Trading and Markets that oversees investment banks.
“People can judge for themselves, but it sure looks like the SEC didn’t want the public to know about the red flags it apparently ignored in allowing Bear Stearns and other investment banks to engage in excessively risky behavior,” the Iowa Republican said in an e-mailed statement.
An unedited version of the 137-page study posted to Grassley’s Web site Sept. 26 showed that Bear Stearns traders used pricing models for mortgage securities that “rarely mentioned” default risk.
The firm lost one top modeler “precisely when the subprime crisis was beginning to hit” and writedowns were being taken, the full report said. “As a result, mortgage modeling by risk managers floundered for many months,” according to the unedited document, quoting internal SEC memos from April and December 2007. The comments were removed from the edited version publicly released by the SEC.
http://www.bloomberg.com/apps/news?pid=20601109&sid=av2fpp3blAgY
Jim,
This pisses me off even more. The company loses ONE top modeler and the whole thing goes down the shitter? McCain was right on this one, the head of the SEC should have been fired, and horse whipped, and tarred, and feathered, and had his fingernails pulled out, and then maybe he should be tortured.