Thursday, April 22, 2010

Revisiting The Domino That Toppled The Economy

A relative of mine asked me a while back what it was that caused the economic downturn in 2008, and due to unfortunate circumstances we weren't able to get into the real history of it at the time. However, I recently saw this great article at Hot Air by Cassy Fiano that prompted me to come back to the subject. You know what they say about history - those who forget it are doomed to repeat it, so I think it's wise for us to examine just what led us to the Crash of 2008. Let's start with the latest on the flashpoint of it all...with Fannie and Freddie:

With President Obama, it’s always pointing the finger at someone else, making threats, and playing the blame game. Recently, he campaigned for tougher financial regulations, threatening that if he didn’t get them the taxpayers would be forced to pay for more bailouts. Opponents, he said, will only lead this country back into a crisis.

President Obama on Saturday challenged opponents of tougher financial regulations, saying the U.S. is doomed to repeat the economic crisis without new rules and that taxpayers would again be stuck with the bill.

The overhaul is the next major piece of legislation that Obama wants to sign into law this year.

“Every day we don’t act, the same system that led to bailouts remains in place, with the exact same loopholes and the exact same liabilities,” Obama said in his weekly radio and Internet address. “And if we don’t change what led to the crisis, we’ll doom ourselves to repeat it.

“Opposing reform will leave taxpayers on the hook if a crisis like this ever happens again,” the president said.

It’s interesting that he would lobby for tougher regulations now. Apparently, Obama would like us all to forget just who was responsible for the Fannie Mae-Freddie Mac meltdown. Democrats would have you believe it was Republicans who stood in their way as they tried to enact harsher regulations. They’ve repeated it over and over again for the past several years.

Presumably, this is because they don’t want anyone to remember the truth: that it was Democrats who blocked legislation that would force reforms upon Fannie and Freddie. The Wall Street Journal walks down Memory Lane:

The story is all too familiar. Politicians in positions of authority today had an opportunity to prevent this fiasco but did nothing. Now—in the name of the taxpayers—they want more power, but they have never been called to account for their earlier failings.

One chapter in this story took place in July 2005, when the Senate Banking Committee, then controlled by the Republicans, adopted tough regulatory legislation for the GSEs on a party-line vote—all Republicans in favor, all Democrats opposed. The bill would have established a new regulator for Fannie and Freddie and given it authority to ensure that they maintained adequate capital, properly managed their interest rate risk, had adequate liquidity and reserves, and controlled their asset and investment portfolio growth.

These authorities were necessary to control the GSEs’ risk-taking, but opposition by Fannie and Freddie—then the most politically powerful firms in the country—had consistently prevented reform.

The date of the Senate Banking Committee’s action is important. It was in 2005 that the GSEs—which had been acquiring increasing numbers of subprime and Alt-A loans for many years in order to meet their HUD-imposed affordable housing requirements—accelerated the purchases that led to their 2008 insolvency. If legislation along the lines of the Senate committee’s bill had been enacted in that year, many if not all the losses that Fannie and Freddie have suffered, and will suffer in the future, might have been avoided.

Why was there no action in the full Senate? As most Americans know today, it takes 60 votes to cut off debate in the Senate, and the Republicans had only 55. To close debate and proceed to the enactment of the committee-passed bill, the Republicans needed five Democrats to vote with them. But in a 45 member Democratic caucus that included Barack Obama and the current Senate Banking Chairman Christopher Dodd (D., Conn.), these votes could not be found.

Recently, President Obama has taken to accusing others of representing “special interests.” In an April radio address he stated that his financial regulatory proposals were struggling in the Senate because “the financial industry and its powerful lobby have opposed modest safeguards against the kinds of reckless risks and bad practices that led to this very crisis.”

Sometimes I wonder about Obama. I think that we must now have the most hypocritical president in American history. While he points the finger at everyone else for having special interests and catering to lobbyists in exchange for money, he ignores his own past. Does he think that if he doesn’t mention it, or attacks someone else, that no one else will remember?

As a senator, he was the third largest recipient of campaign contributions from Fannie Mae and Freddie Mac, behind only Sens. Chris Dodd and John Kerry.

Obama himself is no stranger to special interests or corruption or cronyism. Republicans warned that this crisis was coming, but senators like Obama did nothing to stop it. Heck, they actively blocked legislation to prevent the meltdown. And now, they’re pointing the finger at the GOP.

Unfortunately, there’s video proof against them.

At this point, I'd like to refer you to my previous posts on this exact subject:

Explaining the Fannie Mae and Freddie Mac Madness (Sept. 19, 2008)
How it all began (April 29, 2009)

Here's the nutshell of it, pulled in pieces from those two posts. It began with the Community Reinvestment Act, signed into law by Jimmy Carter in 1977 and expanded by Bill Clinton in the 1990s, which encouraged banks to provide loans to more low-income folks in low-income neighborhoods through relaxed loan standards.
Congress, in an effort to allow more low-income people (many of whom were minorities) to get into nicer homes, essentially created conditions years ago where loans were granted to people who didn't qualify. This was primarily driven by Democrats, but Republicans were somewhat complicit, as well.

... the Democrats were hell-bent on preserving that status quo. In an effort to be politically correct, Fannie Mae and Freddie Mac (and our elected leaders) engaged in irresponsible lending policies and practices. For more information on how Democrats and the Clinton administration, in particular, rammed these reckless policies into the financial system through the Community Reinvestment Act, check out this report on The Trillion-Dollar Bank Shakedown.

In addition to setting up some dangerous precedents and ignoring basic economic warnings, a number of politicians (and their friends) got filthy rich off the backs of these low-income people through various corrupt means, which helped perpetuate the problem.
By allowing low-income folks to get loans, these politicians were reaping a lot of good will, especially in poor and minority-heavy neighborhoods. After all, they were starting to taste the American Dream, right? It was only natural that they would love and support any politician who could show they had a hand in providing that slice of the Dream. Thus, the system perpetuated itself.

It should be noted that one organization, in particular, had a very heavy hand in bludgeoning banks into submission: ACORN.
ACORN recognized very early the opportunity presented by the Community Reinvestment Act (CRA) of 1977. As Stanley Kurtz has reported, ACORN proudly touted "affirmative action" lending and pressured banks to make subprime loans. Madeline Talbott, a Chicago ACORN leader, boasted of "dragging banks kicking and screaming" into dubious loans.
And guess who got his start in ACORN? Our current President, Barack Obama.
ACORN attracted Barack Obama in his youthful community organizing days. Madeline Talbott hired him to train her staff -- the very people who would later descend on Chicago's banks as CRA shakedown artists. The Democratic nominee later funneled money to the group through the Woods Fund, on whose board he sat, and through the Chicago Annenberg Challenge, ditto. Obama was not just sympathetic -- he was an ACORN fellow traveler.

Obama not only trained at ACORN, he worked with ACORN in the 1992 election, he was an ACORN lawyer and he was endorsed by ACORN.

As Barack Obama says-- "The ACORN does not fall far from the tree."

Almost unbelievably, the ties between Obama and ACORN appear to go even deeper, as it has now been reported that Obama proposed legislation to shield ACORN from prosecution for harassing banks to approve loans for individuals who could not afford them.

ACORN also contributed almost $1 million to Obama's 2008 presidential run. So the two are inextricably linked, and have been throughout Obama's career, and both had a direct hand in the housing bubble.

Now back to the history...

Starting around 2003, some economists and government types were honest enough to start making some noise about the dangerous housing bubble that was forming because of these relaxed lending policies. Turns out that people who were given loans they couldn't afford often defaulted, costing the banks money and prompting higher foreclosure rates. Go figure. At this point, most of the benefit from Freddie/Fannie went to Democrats.
...when Bush tried to correct the Fannie/Freddie situation in 2003 before it became an actual crisis, the Democrats in Congress killed his efforts because it was mostly Democrats who were the primary beneficiaries (both the leaders getting rich, and the poor people getting the sweetheart loans).
While Republicans had a hand in the start of the Fannie/Freddie situation -- and one could certainly argue that years of inaction made them just as guilty as the Dems up to that point -- when the storm clouds gathered on the horizon, to their credit it was the GOP who was actively forecasting a tsunami and trying to prevent it:
Another reminder: President Bush called for reform on Fannie Mae and Freddie Mac 17 times in 2008 alone! That doesn't include the dozen or more times he mentioned it from 2001-2007, either. Oh, and it also doesn't include the calls from other Republicans (like McCain) in 2005, either. Too bad the Democrats stonewalled, especially right there at the end...
In fact, the Democrats seemed to draw a line in the sand, doing everything they possibly could to prevent Republicans from staving off the rapidly expanding bubble. If you find that hard to believe, just watch a few minutes of these and see for yourself the level of denial they were in shortly before the crash:

And so the struggle went, until the crash that Republicans had been warning about for several years became reality.

Unfortunately, the Dems in Congress still haven't learned their lesson, and are still trying to prop up Fannie Mae and Freddie Mac. First it was through bailouts of homeowners who have Fannie or Freddie loans on their mortgages, and then a much more direct takeover of Fannie and Freddie -- thus securing around 90% of all home mortgages in the country -- with an announcement that bailouts of these two entities would continue indefinitely.

So, not only have they not learned from the housing bubble that dropped the hammer on the economy two years ago, but they're perpetuating EXACTLY the same thing today on an even bigger scale.

So that's how it happened. Mystery solved. The next question is: when is the American public going to hold accountable those most responsible for creating and perpetuating the conditions that caused it? I suspect it will be about seven months from now.

There's my two cents.

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