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underlying causes of the financial crisis

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I did mention Sowell's race, not because it is relevant to the issues, but as an aside. There are african americans who are conservative on a lot of issues and the views of african americans are no more monolithic than of white americans.


Sowell does have opinions but his analysis is astute. He introduced one fact that I was aware of, but had not tied to the collapse of the housing market the way he does.


The federal government has long subsidized home ownership, at least since the 30s. Sowell points out that the claim that there was a lack of affordable housing was isolated to a few regional markets, particularly the coastal communities of California, which began restricting growth in the 70s. Real estate in California up until the late 70's used to be cheaper than in similar urban areas of the US. The local policies of restricting growth restricted supply and so drove up prices. Note that these anti growth restrictions were essentially local phenomena, not driven by either state or federal policies, except where environmental policies began to impact development.


The next big thing was the Commumnity Reinvestment Act (CRA) passed when Jimmy Carter was president. This was a federal law designed to encourage federally regulated depository institutions (banks and savings and loan at the time), to reinvest some of the funds deposited with them in the communities where they maintained branches. Among other things, this probably contributed to poorer neighborhoods being under served since banks that might have established branches in such neighborhoods would have been less eager to do so.


Keep in mind that one of the major functions of banks is to act as financial intermediaries between depositors and borrowers. The single most important role of banks is the key role in the payments system for the entire economy. All that said, the CRA was largely ineffectual and ignored until amendments were adopted when Clinton was president. That was when the banking industry was forced into beginning to lend to borrowers that would not otherwise qualify.


Fannie Mae and Freddie Mac were designed to provide liquidity to mortgage lenders of all kinds. They did this by purchasing mortgage contracts, and borrowing large amounts of money to do so. The obligations of these two institutions were collateralized by the mortgages they purchased. These two institutions enabled the current situation by lowering their standards for the kinds of debt they would purchase, motivated by political objectives to help marginal and low income borrowers. If these two institutions had not done what they did this crisis would not have been nearly as bad as it became.


Fannie Mae and Freddie Mac were also patronage posts for people coming out of the Clinton administration. Several of these people became rich as a result. Doing well by "doing good."


The risks posed by these two institutions became recognized even during Bush's first term. A weak regulatory watchdog was established in the Department of the Treasury, and kept deliberately weak by the congress. Members of both houses in both parties received a lot of money from Fannie Mae and Freddie Mac to allow the shift into sub prime loans. This was pointed out by a few critics, and they were beaten up by the congress, but mostly by liberal democrats, even when the democrats were in the minority.


Were lenders greedy? Some were, but the system and incentives created by the politicians drew in lenders who, if it really was their own money at risk, would not have behaved the way they did. We hear about "predatory lenders." What a joke. Would people really lend money to the sub prime borrowers encouraged to apply if it really was the lenders' own money at stake? Would you lend money knowing the risk of loss was great if the government were not relieving you of risk through Fannie Mae and Freddie Mac? What about predatory borrowers who lied on their loan applications?


There is more to write about this, but my real point is that this situation is the result of policies set in motion many years ago. The Bush administration deserves credit for trying to rein things in, but the congress steam rolled the executive branch on this one. The final collapse could have happened under any administration.


Read the book.


Trivia question for you: Can you name the two senators who received the largest and second largest amounts of political donations (think bribes) from Fannie Mae?

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Do you know the percentage of total loans ($) involved in the TARP bailout that were related to low-income mortgage programs? Under 1%. To think that those programs championed by the left toppled our financial markets is absurd. Fanny Mae and Freddie Mac were bit players.


The real culprit was deregulation of the markets, a conservative mantra, started by the Gramm-Leach-Bliley Act of 1999. The Act is most widely known for repealing portions of the Glass-Steagall Act, which had regulated the financial services industry. This led to the Commodity Futures Modernization Act of 2000, which kept derivatives transactions, including those involving credit default swaps, free of government regulation.


Everything was fueled by low interest rates, artificially rising property values and unregulated loan products like zero interest and option ARMs. As long as the housing prices increased, the scheme stayed afloat. But the bubble burst and the house of cards came falling down.


Who's to blame? Everyone. Wall Street, politicians (certainly Clinton and senators Gramm, Leach and Bliley), Paulson and Greenspan (for not seeing it coming), Realtors, appraisers, bankers, the public.


Here's a great show on it.




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Yah, Sowell's an interestin' fellow, but he's also a strongly partisan fellow, eh? He's writin' a partisan think-tank piece here. An apologetic, if yeh will.


Always good to read that stuff, eh? Learn the intellectual underpinning of one side of da conversation.


Never good to read that stuff uncritically, or to only read that stuff.


The crisis may have had a part of its origin in low income loans, eh? But yeh can't ignore da multiplying effect of the deregulation and insane leverage. Difference between ordinary foolishness and complete inanity and disaster.


Nothing at all conservative about da stuff that Gramm and the neo-conservatives pushed as fiscal policy.




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Dead on Tokala.


During the heydays in the mid 2000s, I wrote debt consolidation software for mortgage brokers. The software would calculate optimum savings from consolidating 2nd, 3rd, auto, boat, consumer, student loans, revolving debt into refinances of primary mortgages. The savings would then be used for investments.


Every month, I had to alter the software because some bank invented a new product for mortgage brokers. Crazy stuff like negative equity loans. 50 year mortgages. Interest only loans. Reverse mortgages.


And the brokers would sell them. Get inflated appraisals back and leverage the clients up to 120% of loan to value. Everyone was making tons of money. Even the end clients where flipping homes or using their equity like an ATM. The brokers didn't care, they just wanted the commissions. The bankers didn't care, they wanted the loans and hey, property values won't go down. The banks then bundled all this crap up and sold it to other banks with CDFs as insurance. Regular game of hot potato. And since everyone was making money, nobody called shenanigans on it.

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On this topic, I find agreement with Beavah (where have you been, you toothy furball?). I would only add that I try not to think in confusing terms like 'conservative' or 'liberal' but rather in meaningful terms like 'honest' or 'dishonest'. To me the fundamental basis of greed, and so many other human failings, is personal dishonesty or self-deception, which then cascades out to all those around us.

Just my view. I hope the current policies solve our problems but I'm still not optimistic.

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