$700 Billion Bad Bet

I agree with you.
I think that government should get
out of controlling so many financial institutions and corporate world companies and start
looking after the little men and women who have very little money already! We seek honesty and true
concern and compassion for more people who aren’t high enough income to be considered middle class and above. Enough bargaining and enough selling out to the big business controls!

I am still trying to find that section in the US Constitution that gave a politician the right to drag me and my family into the mortgage business by using my tax dollars. Did they sneak a new amendment in when I wasn’t looking?

Seriously,I can tell you from having spent over half my life in the mortgage business that you are correct. I saw Fannie Mae buying junk in more recent years (including bankrupt applicants)that they wouldn’t have touched back in the early 70’s when I started. The Socialist/​Marxist democrats thought they had a gold mine with which to buy votes while we,on the other hand, got the shaft.

Good analysis. The sad fact is neither the politicians nor the general public are willing to endure the consequences of letting this mess correct without intervention. Instead we continue to borrow and spend without restraint which merely delays the ultimate reckoning and worsens the final outcome.

Liquidity is a problem right now. Why wasn’t this huge amount made available for loan to the financial area at 2% interest with the requirement for those who wrote the bad of questionable loans to by them back and give the home owners a new loan at the house market value and a lean on the sale of the house, at no interest, due on sale of the
house?

Hopefully this is not too long. It is an email I wrote last nite to my adult children, particularly one who supports Democrats right down the line.

I think we would all agree that the most severe challenge the US is facing at this time is the current financial panic and the ramifications this crisis has for the average American and our standard of living.

I personally believe the Democrats and their leftist ideology is almost entirely responsible for this debacle and I’d like to go through why I think this and see where you disagree.

My points are as follows.

The basis of the current crisis is the fall in housing prices and the lack of any equity it reveals on the part of many mortgages.

This fall in equity has put many home owners underwater and this along with other financial stress has caused many to default and put an even greater number in grave danger of default.

This has revealed these formerly triple A rated mortgages to be much less valuable, although due to their complexity no one knows precisely how much less valuable.

This loss in value and the accompanying uncertainty has severely undermined confidence in formerly sound financial companies and led directly to the panic we now see.

Do we agree so far? If not where did I go wrong?

Now if we agree, then we need to see if there is any common factor underlying the fall in housing prices and the increasing defaults in what was once a very secure lending market.

My belief is that these two are directly related in this way.

Starting in the mid to late 90’s and continuing to this day the US government started to intervene into the mortgage markets in a way it never had before by first putting regulations on commercial banks to lower their lending standards in order to increase lending to favored groups that were supposedly “underserved” by traditional lending standards and then pressuring Fannie and Freddie to buy these loans.

The traditional standards emphasized the ability to make a significant down payment and to demonstrate a strong credit history as well as the continuing capacity to repay the loan and maintain the house. As we all know these credit standards were formerly the toughest for any consumer loan available and people went to considerable lengths to save an adequate down payment and to make sure their credit record was strong so they could buy a house. 

This pressure on the banks took several forms. Banks were required to include low income lending as a measure of their “service” to the community and this information became an increasingly important measure of whether a bank was allowed to expand or merge with another bank or even open new branches. Banks that financed a lot of what we now call “bad loans” were actually given the ability to be weaker by having credits for good behavior instead of actual capital. These were powerful weapons in the hands of the regulators and community activists and they were wielded with increasing vigor through the 80s and 90s. 

This need for down payment and good credit has now been abandoned. It was not abandoned willingly by the bankers that originated most loans at that time and there is ample evidence to show that they resisted this change at the time. Many bankers repeatedly said that they could not keep these loans on their balance sheets as they were weak loans and they pushed for Fannie and Freddie to change THEIR lending standards so they could buy these subprime loans and relieve the banks from the pressure they were under to increase this type of loan while still maintaining high credit standards demanded by bank regulators.

The answer was to get Fred and Fan to buy and then securitize these loans which they were originally UNABLE to do. This changed dramatically in 1999 or so when congress and the Clinton administration promulgated new rules for F and F not only allowing them to buy sub prime but REQUIRING them to purchase an increasing amount of these loans with inherently lower credit worthiness. It actually got so bad that the government by 2004 was requiring F and F to buy more than half of ALL their loans from this sub prime pool. ( 52% to be exact)

This opening up of a large pool of new buyers led to the dramatic increase in demand for housing and kicked off the speculative frenzy that has led to the housing bubble we are now seeing deflate with such disastrous effect.

Are you still with me or do you think I’ve gone wrong? I am not going into the offshoots of this problem like the growth in securitization, increasing leverage in the financial houses handling these securitizations and the failure of the rating agencies to foresee the risk as in my opinion, while important, these are natural outcomes given the underlying dynamic of government intervention into a market and the distortion that resulted. 

Now what caused the government to intervene to change a fundamental credit analysis that had been working very, very well for almost 75 years? Why in the nineties were banks pushed to lower their lending standards? Why were F and F required to lower theirs?

The impetuous for this came from the left wing of the Democratic party and the community activists such as Acorn.
They worked throughout the 70s and 80s to end what they then called “redlining” which was just another way of saying that banks wouldn’t lend to poor areas. Of course there was no proof that banks would not lend to credit worthy borrowers in these areas, and they this did all the time, but banks did discriminate against those with bad credit or no money. Shocking, I know!

I do not believe that ANYONE can make the case that it was the Republican party that called for lower credit standards and stood as the champion of the poor against the “greedy banks” and I would guess that even you, Even, would find this a bit too much of an ideological flip flop to make to try to pin on the GOP.

Now if the basis of our financial panic is the subprime mess, and the basis of the subprime mess is the push by the Democrats and groups like Acorn allied with Senator Obama to increase housing ownership by the poor then why should we not hold the Democrats and their leftist redistributionist ideology responsible for the biggest disaster to hit the US in more than 70 years?

There was partially a noble impetus for this lowering of standards as the goal was to allow more poor people to own homes and who doesn’t want this? The problem with this was that the Democrats and community activists that caused this had a faulty view of the world that persists to this day. They believed that the reason banks weren’t lending to poor people was that they just didn’t like poor people. They refused to accept that the banks were actually worried about not getting repaid. We now know that the banks were right not to want to lower their credit standards We also know that the very poor that those noble intentions were trying to assist will now suffer the most from the inevitable fallout of the market collapse. Thus it always is as the poor suffer most during market declines.

This brings me to my final point. We will now all live through the problems caused by this failure of government. Most of us will grow poorer. Some considerably poorer. This is a direct result of ideological intervention into a functioning market. Have we learned any lessons? Have the Democrats? Do we now see these people who got us into this mess saying they now realize the error of their ways and they will no longer try to force markets in the name of “compassion”? I do not see this, in fact I see the opposite. 

I see Mr. Obama and his fellow leftists like Chris Dodd and Barney Frank telling us it is all the result of Bush economics and TOO LITTLE intervention into the markets.
We saw this at the recent debate as Obama repeatedly tried to tar McCain with the supposed failures of the Republicans to “regulate” the financial industry which , in his world view, led to the problem.

While I did not find much truth in Biden during his debate with Palin, it turns out he did say one true thing when he said that “we can’t solve a problem if we don’t know what caused it”. He was referring to global warming, but perhaps he was more prescient than we know. 

Can we really expect Obama and the Democrats to solve the problem when they not only can’t admit what caused the problem but are actually calling for more of the same?

OK Evan, now your chance to tell me where I am wrong. With specificity, please. Did I make an unjustified leap in my logic at some point? Are my facts wrong? Am I missing something or are the Democrats really as blinded by ideology as I assert?

Now please don’t bore me with assertions that some Republicans also voted one way or another on some measure you think helped this along. I’ll readily admit that some Republicans did stupid things in the name of getting elected, but I do not believe a MAJORITY of republicans supported the basic push to change standards as the Democrats clearly did. I do not believe that a MAJORITY of Republicans continued to support not regulating F and F as things started to crash as almost ALL DEMOCRATS clearly did.

If I err, please show me where. If you can not, please explain how you can continue to support the party and the candidate most likely to continue and expand the disastrous policies that are killing our economy and likely to cause very real financial pain.

Come on, Steve W. Don’t keep us in suspense. What did Evan say?