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The underlying causes of the financial meltdown - a serious discussion

Original post made by Gary, Downtown North, on Sep 28, 2008

In the spirit of an objective debate, without inflammatory rhetoric, I would like to ask posters, from various perspectives, to peel back the skins of the onion, and suggest how they think this thing got started. Not so much who is at fault, although fault could be ascribed in a non-inflmmatory way, but mechanisms that went wrong.

I have already suggested that it started with Fannie/Freddie attempts to loosen standards (with CRA), and push low-cost housing. F/F were among the first major packagers of securitized bundles of loans. Wall Street could smell profit potential in such packages, and it went to town with various derivitizations. All of the above only works in a bubble.

What are other people's ideas/analysis?

Please keep it respectful. We can all flame out each other on other threads.

Comments (50)

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Posted by Jane
a resident of Professorville
on Sep 28, 2008 at 12:00 pm


This video is not as famous as "Burning Down the House", but is very funny an provides a concise history of the subprime mortgage crisis.

How the markets really work----Web Link

Whole swaths of the political, financial and journalistic systems simply didn't work as expected.
My guess is that when a big enough carrot is dangled in front society the incentives to "get along" simply become too great to resist. Some of my friends in the management consultant business say the the "global warming" bandwagon is too tempting to avoid.
"Green compliance" and there is a cynical attitude that one should make money off the fad while it lasts.
Less than a decade ago it was fashionable to argue that the Y2K bug (remember that?) would cause a global catastrophe. Fortunes were made on it.
I wonder how much of the subprime bubble was created by the need to simply get with the program.


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Posted by From Barrons
a resident of Another Palo Alto neighborhood
on Sep 28, 2008 at 12:23 pm

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.


Web Link



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Posted by Gamblers
a resident of another community
on Sep 28, 2008 at 1:20 pm

Whatever the government does the future of the stock markets around the world is precarious.

It is now possible to manipulate the markets with short selling. In other words there are enough institutions and people capable of gambling on whether the markets will go down - short selling, to actually manipulate worldwide stock markets.


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Posted by OhlonePar
a resident of Duveneck/St. Francis
on Sep 28, 2008 at 2:00 pm

Hi Gary,

You know what I think--basically, the decision-making on mortgages was separated from the risk. The incentive then became to make as many loans as possible, including high-risk ones. This meant that real-estate values became massively over-inflated in areas as the availability of money created a larger pool of buyers.

At the same time, all sorts of new instruments were created--what had been pretty simple for years--20 percent down/30-year fixed, mortgage held by the original lender--went all over the place.

And the regulation didn't begin to keep up. There was little attempt to reign it in--the opposite, in fact, because the housing market was balancing out a possible recession in other sectors--i.e. the dot-com bust. A huge amount of investment money went into real-estate--further driving up prices.

By the time anyone really became aware of the extent of the problem, we were already at the precipice. The 2004 SEC waiving of leverage rules was just about the worst action the SEC could have taken.

Basically, skepticism about the big Wall Street firms being able to get credit and the whole village of cards started falling--first Bear Stearns and then now who knows how many--Lehmann, AIG, WaMu, Merrill Lynch.

It's not popular to say it right now, but I don't think all of it was bad--there was room for more creative financing--but not without better (intelligent, risk-limiting) regulation.


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Posted by Gary
a resident of Downtown North
on Sep 28, 2008 at 2:16 pm

OhllonePar,

I actually agree with much of what you just said. However, I don't think you peeled off enough onion skins. Please address the Fannie/Freddie/CRA issue, which, I believe, led the charge.

Let me throw out one more concept: Regulation. Europe is highly regulated, yet those countries, in some cases, were the canaries in the ooal mine that should have been a real caution to us Americans. For example, Spain. I suspect that regulation, per se, is not the answer, becasue it is always too conservative or too liberal, and cannot predict the market. Additionally, Fannie and Freddie WERE highly regulated...just too liberally so. Your views, OP?


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Posted by Econ 101
a resident of Duveneck/St. Francis
on Sep 28, 2008 at 2:23 pm

I love it when "free market" cultists like Gary are forced to let go of their beliefs. Markets never have been, and never will be "free". Any Economics 101 course will tell you that.

The term "Free market" has always been a euphemism for "the way we wish things were" by intellectually lazy people who fail to get out and look around. It's a lot easier to believe in an abstract theory than it is to get down in the trenches and deal with the every-dynamic goings-on in the real world of imperfect markets.


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Posted by Gary
a resident of Downtown North
on Sep 28, 2008 at 2:41 pm

Econ 101,

That is a nice rant, and I love rants, becasue I like to meke them, myself, but in this thread I am asking us all to put aside rants (even me!).

Please provide a serious answer to the serious question asked.


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Posted by OhlonePar
a resident of Duveneck/St. Francis
on Sep 28, 2008 at 3:17 pm

Gary,

Doesn't look like it led the charge to me, more like it became part of the problem. I think the issue of moral hazard is paramount. We had a system, or lack of, that outran the regulations.

Its worth keeping in mind that we had very little regulation in the financial markets prior to the Great Depression. Financial regulations weren't invented for the fun of it, but because they were needed to stabilize our credit markets.

I don't know how much it's worth in this case to compare Europe to the U.S. on this one. I think looking at our own history of our own specific economy is more useful. What has worked for us--with pharma and the credit markets it's educated regulation, in my opinion.

I don't think it's one-action thing, but something was allowed to grow because there was a fear of reining it in and slowing the economy.

McCain, in my view, just has really the wrong set of chops to handle this particular issue. Not a finance guy and inclined to deregulation as default. Just a mismatch.


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Posted by Patriot
a resident of Duveneck/St. Francis
on Sep 28, 2008 at 5:13 pm

For the last few decades, it's been apparent to anyone who has been willing to look deeper than their favorite pundit's analysis - non matter how clever - that the Democrats and Republicans have been performing their power dances for a hapless American populace that has been all too unwilling to come to terms with its own outsized desires.

This is a larger problem than greed-and-power-encrusted politicians can - or are willing to - define (this includes the current crop of losers), or that the pathetic paper rags that call themselves "the media" - including this one - have been capable of pointing out.

The fact is that the structural nature of American desire, relative to the rest of the world, rests on an increasingly rickety latticework of assumptions that have not squarely adapted to a world that's changing around us. In short, America has become maladaptive in its ability to change fast enough to deal with change. Remember the dinosaurs?

This isn't at all about the financial sector, it's about *us*.

So far, the best thing I've seen written about this general sense of maladaption - something that I have had for a long time - is here - - Web Link -

Here's an excerpt Web Link from his interview with Bill Moyers. Moyers is a reflexive liberal, often too fat left for this centrist, but here he brings someone in who has a grip.

Bacevich insights hold the key to most of the ills we face, including the current financial crisis. Nothing will change, fundamentally, until our politicians stop plying us with promises (one of the reasons that I think Obama is no different than any of the others) and find ways to urge Americans to be their best, and learn what "enough" is.

One way or another, America is going to learn that lesson. We're well past the time when nearly inlimited advantage has been bestowed upon us, as it was in the post WWII era, when only America stood tall.


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Posted by Walter's alter ego
a resident of Adobe-Meadows
on Sep 28, 2008 at 5:16 pm

Regulations usually benefit those that make them. -


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Posted by Patriot
a resident of Duveneck/St. Francis
on Sep 28, 2008 at 5:24 pm

here's the Moyers interview
Web Link


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Posted by Gerry
a resident of Midtown
on Sep 28, 2008 at 6:32 pm

Patriot, I agree with you. One major piece of evidence is our behavior during war time. I have seen zero sacrifices being made at home while spending on the war went through the roof an out into the galaxy. It's been eerie watching people bringing home flat screen tvs and wearing Abercrombie t-shirts and getting implants while our debt as a nation has grown to amounts few of us can begin to fathom. When I think about WWII and the daily privations people lived with it is so different. This seems to me a form of denial. I heard part of a discussion on the radio the other day about greed. It was fascinating. People were calling in to admit things like how they'd refinanced over and over again to buy things their neighbors had and when the house lost its value they were stuck with debts they did not expect to have to earn the money to pay for. It was a great discussion, calm, kind of sheepish, but sober and without finger pointing. It seemed to me the kind of grounding communication we're due for after the long orgy of spending and borrowing. I don't expect Obama to have a magic solution to everything, but I do believe he has the best hope of steering our country away from the abyss. If the only way he can get elected is to promise good things to people, then he's going to have to do that if the alternative is to continue down the path we've been on.


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Posted by My 2 cents - if you really promise not to flame it, Gary
a resident of Another Palo Alto neighborhood
on Sep 28, 2008 at 7:11 pm

Gary,
If you really, truly, are interested in a discussion and aren't going to flame or diss an opinion that runs counter to your own, I'll give it this one try.

I think the issue of decoupling risk from incentives deserves more exploration. Banks had years of pushing people into the highest mortgages they thought they could get away with, PLUS (and no one seems to ever deal with this very large elephant in the room) all the incentives in the banking industry have been towards pushing people into that death spiral of punitive hidden fees. Banks have been processing loans as if borrowers had ideal lives, because it served the banks' interests. But consumers in the US economy especially have a lot of unbudgetable expenses, such as health care and hidden fees in a variety of industries, especially banking. Consumer Reports estimated that in 2004, hidden fees cost Americans over $216 billion dollars, something like $4,000 to an average family. (See MSNBC reporter Bob Sullivan's book Gotcha Capitalism for an in-depth discussion of this issue, I can't do that to your satisfaction here.)

On paper, I think most people thought they could afford their mortgages. I don't think it makes any sense to believe a lot of people were getting mortgages they KNEW they couldn't afford. The trouble is that we have this whole Deception Economy where people are hit with hidden fees, and banks are at the top of the list of practitioners. I have read in more than one credible place that major banks are now making something like half of their profits from fees, many of them cooked up in back rooms as profit that basically comes from tricking or tripping up customers. When you have an environment like that, where banks have no responsibility for the long-term health of mortgages because they aren't holding the mortgages, but they are making significant profits from selling the mortgages (thus in their interest to push the most expensive mortgage possible) AND they benefit big time from getting people into these hidden-fee death spirals, it was all a train wreck waiting to happen.

The thing that worries me is that this climate hasn't changed. None of these predatory conditions have changed. When joe customer walks into a bank to get a mortgage, even though the banks are pickier about who they'll give a loan to, from my perspective as a customer it's all still about fending off unreasonable products and trying to get the bank to focus on what you can really afford, all the while keeping your guard up for the latest hidden fee tactics.

If the foundation of all of this is the default crisis, I think a better approach would be to create more stable conditions for middle class homeowners.

Free markets work best for everyone when corrections take place at the level of each interaction. When lots of people can be cheated, and the only disincentive is the possibility of (maybe) a large law suit, lots of people are going to be cheated, and maybe there will be a lawsuit that doesn't really fix anything. Intelligent regulation improves commerce - is essential to a healthy free market economy - because it allows corrections to take place in each interaction. Unfortunately, these kinds of reforms seem to have been uniformly rejected by neocons in recent years as "consumer friendly"; no one remembers how essential that balance is to the whole concept of marketplace benefits.

I think Carly Fiorina was quoted in Newsweek with her suggestion for fixing this along the lines of: when the tech sector makes a faulty product, they take it back and fix it. That's what she was suggesting for the mortgages -- only the banks can't do that because they didn't keep the mortgages.

Frankly, for the money here, I'd rather see the government, through the FHA, make lower cost mortgages available directly to the public. Not just people in foreclosure - because there's a lot of overhead involved in waiting until people are in foreclosure, both to the public and the economy - but to anyone who can qualify. People in foreclosure should be able to apply under special dispensation, especially if they can show that hidden fees and unreasonable mortgage products or clauses put them in financial crisis, and that they would be solvent with a certain amount of forgiveness of those debts and lower mortgage rates. The government would make a decent rate of interest now, and it can sell those mortgages at a profit later. A high percentage of previously deemed risky mortgages could simply be paid off this way and the securities arena stabilized. I don't think banks want this, because there's nothing in it for them, especially in this new set up where they don't see any good in holding mortgages and making interest. (And because then they would really have to pay for their bad decisions instead of getting bailed out.)

Going this route (offering low-interest mortgages directly) would ultimately be more stabilizing for the economy, and could even provide a stimulus as broad swaths of middle class families have their finances stabilized and predictable. Of course, this would have to go along with thoughtful regulation, so that those families aren't simply destabilized by other predatory practices.

Of course, this will never go, because ultimately the banks have all the PR people working full-time to point the blame at homeowners. But, the foundation of the economy is the American public. I think we keep the house from collapsing by fixing the foundation, and save the ideological rhetoric for better times.


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Posted by angry
a resident of Esther Clark Park
on Sep 28, 2008 at 8:32 pm

In China, the Wall Street sharks would be jailed or shot, with the perp's family being charged for the bullet. Bring back capital punishment, just for these scum, and watch Wall Street straighten up, fast! We need to start moving in that direction. Or, maybe, publishing the names and addresses of the CEOs - out them, follow them, hound them, make them pay!


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Posted by OhlonePar
a resident of Duveneck/St. Francis
on Sep 29, 2008 at 1:18 am

Bravo My 2 Cents,

You say it well. Your idea of direct mortgages is an interesting one--if we're going to be this much in the hole, we might as well handle it ourselves.


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Posted by Sharon
a resident of Midtown
on Sep 29, 2008 at 8:55 am

At most, Paulson's plan will preserve the privileges of the financier caste that enabled the debt addiction of American households; at worst, it will give a few of the bankers an extra couple of months to unload stock in financial companies before they, too, go the way of Bear Stearns, Lehman Brothers and Washington Mutual.
It is very difficult to understand why Washington Mutual's share price fell to zero, and the shares of laggards such as Fortis and Wachovia Bank fell sharply, while other financial shares have risen.

The differences between the business models of these banks are trivial compared with their similarities.

The trouble is that no one knows where the process will end.

American households cannot be worth 10 years of income, but should they be worth seven years of income as in 1989, or just three years of income as in 1962?
Where should American home prices find a level?
If they return to the prices of 1998, they will fall by half, which is where homes offered in foreclosure are clearing the market today in California and Las Vegas.


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Posted by NPR ears
a resident of Another Palo Alto neighborhood
on Sep 29, 2008 at 11:23 am

I found the show, The Giant Pool of Money, from This American Life, very informative. owever it made my stomach churn to hear the broker describe how much money he was making during the boom. Greed prevails again.

Listen online at:
Web Link

Or read transcript: Web Link


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Posted by Jane
a resident of Professorville
on Sep 29, 2008 at 12:12 pm


Alexander Fraser Tytler,(October 15, 1747 - January 5, 1813) was a Scottish-born British lawyer and writer. Who said

"A democracy is always temporary in nature; it simply cannot exist as a permanent form of government.
A democracy will continue to exist up until the time that voters discover that they can vote themselves generous gifts from the public treasury.
From that moment on, the majority always votes for the candidates who promise the most benefits from the public treasury, with the result that every democracy will finally collapse due to loose fiscal policy, which is always followed by a dictatorship.

The average age of the world's greatest civilizations from the beginning of history has been about 200 years.
During those 200 years, these nations always progressed through the following sequence:

* From bondage to spiritual faith;
* From spiritual faith to great courage;
* From courage to liberty;
* From liberty to abundance;
* From abundance to complacency;
* From complacency to apathy;
* From apathy to dependence;
* From dependence back into bondage.


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Posted by chris
a resident of University South
on Sep 29, 2008 at 12:19 pm

You can't blame this on any one group of individuals or institutions.
All of the following are culpable:

Homebuyers
Real Estate Agents and Brokers
Mortgage Brokers
Banks
GSEs (Frannie)
Investment Banks
Government Regulators
Congress
People who voted for Representatives and Senators
President
People who voted for President
People who borrow on credit cards

This list includes most adult Americans. People who have a superior attitude should take the smirk of their face; you are part of the problem.

If you think rich people are too rich, vote to increase taxes on the rich, but that is another issue.




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Posted by tj
a resident of Old Palo Alto
on Sep 29, 2008 at 12:42 pm


McCain's Moment

No one wants to take ownership of the task of rescuing the economy right now.
The Bush-Paulson plan has failed.
The administration, House Democrats, and House Republicans (above all) have all proved unable to deliver.
But there is someone who might be able to save the economy--and incidentally the Republican party:
John McCain.

He should come back to D.C. But this time he needs to take charge--either by laying out the outlines of his own plan, or presiding over meetings at which a real plan that can pass is cobbled together.
He might also insist on the immediate passage of a couple of provisions (raising or removing FDIC insurance limits, for example) that could mitigate the damage that could be done over the next few days.

It's time for McCain to act decisively, and to lead, as he did with the surge.

No one else seems up to it.


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Posted by Reality Check
a resident of College Terrace
on Sep 29, 2008 at 12:53 pm

tj:
McCain has admitted he doesn't know much about economics - so how the heck do you expect him to come up with his own plan, especially when he's right in the middle of his campaign?
Plus he's been hitting back at Bush and the Republicans in general for awhile now, so what kind of support do you really expect he'd get from them?

You're living in fantasy land - McCain is "dead in the water" on this one, reduced to talking (pleading, more like it) on the phone with anyone who'll take his calls.


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Posted by Until tomorrow
a resident of Downtown North
on Sep 29, 2008 at 1:19 pm

SSevvvven - - HHHunnnnndreeed Billlionnn DDDolllaarssss.

Watch a woman in fear. Pelosi is an idiot. She blew it big time.
--- Pelosi you lost 94 Democrats you stupid idiot.----

What is sad about San Fran Hag is half the country believes this vomit and is more than willing to vote her and Hussein into office.

Just wait till Hussein is President! Too many morons in America and she is clear evidence of this!

Web Link

America wake up. We don't need anymore Pelosi's, Obama's or Reid's. Wipe the slate clean and start over.



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Posted by kate
a resident of College Terrace
on Sep 29, 2008 at 2:00 pm


That Inspires Confidence

The United States House of Representatives website appears to have crashed.


Web Link


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Posted by Sharon
a resident of Midtown
on Sep 29, 2008 at 2:15 pm


Pelosi's Excuses Are Garbage

Pelosi, moments ago: "The Democrats more than lived up to their side of the bargain."

Horsepuckey.

Pelosi has 235 members. She needed 218. She could spare 17 members and still pass the bill.

The GOP spotted her 65 members, for a bill that made most Republicans' skin crawl in both broad outline and in terms of detail.

That meant Pelosi could afford to lose 82 Democrats.

She lost 95.

Bush and Paulson were never going to pass this bill with House Republican votes. It had to be palatable to the Democrats, and Pelosi and Frank said that it was.Web Link=


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Posted by Gary
a resident of Downtown North
on Sep 29, 2008 at 2:24 pm

Folks,

Since I started this thread, and asked for a serious discussion of the CAUSES of the meltdown, this is not the place to start with emotional responses about today's vote. Please take it to another thread (as I have already done).

I would like to keep this thread focused on causal elements. In ohter words, I mean history, not today or the future.

I fully understand that I do not control any threads. However, I can make an attempt to keep this one focused, and hope for the best.


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Posted by tj
a resident of Old Palo Alto
on Sep 29, 2008 at 2:47 pm



Keeping on track, todays vote represents in microcosm how we got into this crisis.

Bill Clinton says today that a wing of the Democratic Party opposed his and Bushes attempts to put the financial house in order because they are as committed to affirmative credit as they are to affirmative action.

The bubble was artificially created and artificially inflated.

There simply aren't enough young people in America to borrow money from Europe's and Japan's aging savers.

The world kept shipping capital to the United States over the past 10 years, however, because it had nowhere else to go.
The financial markets, in turn, found ways to persuade Americans to borrow more and more money.
If there weren't enough young Americans to borrow money on a sound basis, the banks arranged for a smaller number of Americans to borrow more money on an unsound basis.
That is why subprime, interest-only, no-money-down and other mortgages waxed great in bank portfolios.

America's financial market could not produce enough pork chops, so the Europeans bought Spam and scrapple.
America's rating agencies assured them that derivatives created from subprime mortgages, second-lien mortgages and other dubious parts of the pig were the equivalent of pork chops, and foreign investors wolfed them down.
Regulators, bankers and investors all looked the other way, and now all point the finger at each other.


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Posted by Ernest
a resident of Stanford
on Sep 29, 2008 at 5:22 pm

America's rating agencies assured them that derivatives created from subprime mortgages, second-lien mortgages and other dubious parts of the pig were the equivalent of pork chops, and foreign investors wolfed them down.

Regulators, bankers and investors all looked the other way, and now all point the finger at each other.

All true

Keep it up all you Palo Alto silly liberals - For whom the bell tolls? The bell tolls for thee

And then there is China......... Tick Tick Tick Tick..... Keep it up, you ship jobs overseas you are lazy and you want the government to solve it all..... And yes Virginia 700-Billion will look like chump change.

THE TRUTH
WITH $1.2 trillion in foreign-exchange reserves and the pool growing by more than $1 billion every day, China casts a giant's shadow over the global financial markets, even if it has mostly used the money to pile up American Treasury bonds.

The announcement on May 21st that it would invest $3 billion of its reserves in Blackstone, a New York-based private-equity firm soon to issue shares, shows that it is prepared to barge into murky private markets as well as liquid public ones. It is not the only inscrutable country to be cosying up to the inscrutable private-equity industry.

Around the world, a secretive society is emerging of governments flush with foreign assets, some of them petrodollars, that are increasingly calling the shots in international finance. The Blackstone deal is likely to stir others to invest their money even farther away from prying eyes than they do already.


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Posted by Nail 'em!
a resident of Another Palo Alto neighborhood
on Sep 29, 2008 at 7:02 pm

Another cause of this crisis is people like Gary, and the politicans they support. These are the people who complain about government spending even as they support their sacred "free market" myth. Gary asks for causes? NO REGULATION is the cause. NO RESPONSIBILITY is the cause. Anyone can write a flurry of analysis. What happened is that the people who are paid and elected to husband our future spent it all on themselves. I hope this thing goes for a few more weeks, and we rid the system - through failure - of the financial scum bags and their lawyering and political friends who have made financial transparency a joke. The Chinese would take them out to public trial and summarily shoot them, while asking their families to pay for the bullet. How many lives - millions of them - do you think these greedballs have hurt? Just the CEO of Lehman has caused more human suffering than an entire jail full of hardened criminals.


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Posted by ShorelineCT
a resident of another community
on Sep 29, 2008 at 7:23 pm

I see someone posted from last wkends Barrons. In the editorial commentary, this was an interesting section...."Another and perhaps the least mentioned political cause of the housing bubble was enacted by Republican tax-cutters in Congress in 1977 and signed into law by Pres. Clinton. They eliminated tax on the first $250K or $500K(couples) of capital gains from the sale of a owner-occupied homes [2 yr holding period]..."

This was a departure from the case before this law, where you could only (1) do this exemption ONCE in a lifetime (2) new home needed to be purchased with a price HIGHER than the selling price of old one.

This went a long way to ingniting speculators.


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Posted by OhlonePar
a resident of Duveneck/St. Francis
on Sep 29, 2008 at 7:55 pm

Gary,

You gave it a good shot, but after what happened in the market today, I don't think we can expect coolheaded discussion.

Maybe a restart when the first shock waves have settled?


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Posted by CRA not a major factor
a resident of Another Palo Alto neighborhood
on Sep 29, 2008 at 10:49 pm

The 1977 Community Reinvestment Act was not a major factor in the sub-prime crisis because 80% of the sub-prime loans were not subject to CRA provisions and the Bush Administration has significantly weakened the enforcement of CRA.

Web Link



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Posted by mike
a resident of Old Palo Alto
on Sep 30, 2008 at 6:10 am

Ernest, you sound brainwashed. Indeed, China flexes financial muscle but there's nothing 'murky' about Blackstone other than they made tons of money by using many of these risky financing instruments mentioned above better than a lot of other people.

In no way is that a justification for what I will essentially call greed. Anyhow...

I think the issue has been laid out well above and everyone touched on different aspects of what may have cause this: greed (desire to live outside of your means, massive profit seeking, speculation), deregulation (certainly we all know a multitude of cases where government deregulation is good or needed though) Private household savings rates are negative across the country and have been since at least 2004, in China that is not the case and they have 1.3 bn people (prob can't trust official Chinese data though). I really appreciated the comment about the contrast in sacrifice made during WWII and today, and I'm fully aware that they were different times, but I think the ways in which they could be similar are more valuable. If some of the WWII mentality can be regained (which won't happen overnight) America can overcome in the long run. Racism was still terribly prevalent in America then though, and we have the potential of witnessing a black president within the year; politics aside progress at its essence. Regardless of where you align yourself politically, harsh realities lay ahead - for example, we will have to raise taxes or cut benefits to fully finance all our entitlement liabilities(Social Security, Medicare, Medicaid).

So in spite of our country's many shortcomings and our own immediate uncertainty...give a little of your time to read with a kid once a week other than your own, sacrifice some material things in your life and be grateful for the many things you still have, encourage creativity and educational development, and salvage or nurture things that make America special enough that people from all around the world still would love to live.


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Posted by Perspective
a resident of Midtown
on Sep 30, 2008 at 6:55 am

I have to disagree with the poster above who has concluded that DEregulationw was at the root of the problem. I trace it back to the institution of affirmative action in lending practices. Fannie and Freddie were required by Congress through the CRA ( Community Reinvestment Act) to bring more minorities into the home buying community.Ok, great. I backed it. Liked the idea of making sure there wasn't any racism in lending.

The problem started when it became too regulated in 1997, and Fannie and Freddie started the long slide into basically blackmailing mortgage companies into lending to people without a solid history of jobs, recently bankrupted even, with no money down. Mortgage companies had to follow the rules, or not get F and F financial backing. What is a mortgage company to do if it wants big Daddy backing but follow the regulations?

So, yes, those of you screaming "greed" ..of course, people who wanted the easy way to home ownership took it, mortgage companies who wanted the money backing by F and F took it, but these were results of regulation-gone wild, results which could have been averted if the "prophets" had been heard instead of dismissed.

And, if money from Fannie and Freddie hadn't been heading into the very people's pockets who happened to be defending the status quo.

Those of you "blaming" the change of the wall between the financial institutions do not understand what the changing financial world was looking like and how it was impeding our economic growth in the world and at home. That did not contribute to this mess.

Last..Sar-Ox..should have been followed by our very own venered institutions of F and F..may have brought some of this to light a little stronger. The Auditor in ..lost track of time..2003?..started bringing the oddities forth, but he was shouted down ( metaphorically speaking).

And now, we want to put Fannie and Freddie even MORE into the very hands that profited from bad management in the first place, the very people who blocked regulation reform? The very people who run Medicare, MedicAid, Social Security, Welfare and Education?


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Posted by Perspective
a resident of Midtown
on Sep 30, 2008 at 6:55 am

I have to disagree with the poster above who has concluded that DEregulationw was at the root of the problem. I trace it back to the institution of affirmative action in lending practices. Fannie and Freddie were required by Congress through the CRA ( Community Reinvestment Act) to bring more minorities into the home buying community.Ok, great. I backed it. Liked the idea of making sure there wasn't any racism in lending.

The problem started when it became too regulated in 1997, and Fannie and Freddie started the long slide into basically blackmailing mortgage companies into lending to people without a solid history of jobs, recently bankrupted even, with no money down. Mortgage companies had to follow the rules, or not get F and F financial backing. What is a mortgage company to do if it wants big Daddy backing but follow the regulations?

So, yes, those of you screaming "greed" ..of course, people who wanted the easy way to home ownership took it, mortgage companies who wanted the money backing by F and F took it, but these were results of regulation-gone wild, results which could have been averted if the "prophets" had been heard instead of dismissed.

And, if money from Fannie and Freddie hadn't been heading into the very people's pockets who happened to be defending the status quo.

Those of you "blaming" the change of the wall between the financial institutions do not understand what the changing financial world was looking like and how it was impeding our economic growth in the world and at home. That did not contribute to this mess.

Last..Sar-Ox..should have been followed by our very own venered institutions of F and F..may have brought some of this to light a little stronger. The Auditor in ..lost track of time..2003?..started bringing the oddities forth, but he was shouted down ( metaphorically speaking).

And now, we want to put Fannie and Freddie even MORE into the very hands that profited from bad management in the first place, the very people who blocked regulation reform? The very people who run Medicare, MedicAid, Social Security, Welfare and Education?


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Posted by Perpsective
a resident of Midtown
on Sep 30, 2008 at 6:55 am

Sorry, finger spasm pushed submit twice above..


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Posted by No Assets No Job Loans
a resident of Another Palo Alto neighborhood
on Sep 30, 2008 at 9:24 am

Here's a good story about recent lending practices spurred on my too much money trying to invest in the U.S. real estate bubble through CMO's. By the end, banks didn't even ask if you had a job or assets. They were called Liar loans. The pressure didn't come from Fannie and Freddie but from investment banks selling derivatives.

The story is from May 2008.

Web Link

Web Link


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Posted by Gary
a resident of Downtown North
on Sep 30, 2008 at 9:55 am

Here is an article from Investors Business Daily, describing the role of CRA and Fannie and Freddie.

Web Link




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Posted by Sharon
a resident of Midtown
on Sep 30, 2008 at 10:12 am



"IN 1772, the collapse of the Ayr Bank led to the Edinburgh banking crisis of that year. Only three of Edinburgh's 30 private banks survived.
Adam Smith commented that "the operations of this bank seem to have produced effects quite opposite from what was intended".
The Ayr Bank had been established in 1770 to provide long-term loans and provide credit to people who otherwise found it difficult to borrow, financing a speculative boom in housing, turnpikes and canals, the transport infrastructure of the time.

It borrowed from other banks in London and Edinburgh and, as borrowers began to default, it had to pay off its debts by securing greater loans.
Smith's final verdict on its collapse was that it only enabled borrowers "to get much deeper into debt, so that when ruin came, it fell so much the heavier".

The British economy struggled to recover until the 1780s.

The collapse of the Ayr Bank tells us much about the present crisis.

In 1999, then president Bill Clinton instructed the Fannie Mae Corporation to ease credit requirements on loans to ethnic minorities and low-income earners.

In this nationwide scheme, the pilot program alone involved 24 banks. This was to include what became known as the sub-prime sector.

Fannie Mae's chairman and chief executive in 1999 said that in addition to "reducing down payment requirements" the corporation would underwrite loans in the sub-prime market.

Fannie Mae's board is largely made up of prominent Democrats.

Fannie Mae and its sister corporation Freddie Mac are government-sponsored enterprises, exempted from taxation and with any losses guaranteed by public monies, although shares of profits go overwhelmingly to investors, executives and board members with shares". Web Link.........
....The lesson of all of this is not that Wall Street is greedy, nor even that banks should be limited in onselling debt, although periodically this is true.

The main lesson is that banking and credit should be run on sound banking principles rather than as a political project.

For where politicians become involved in banking, as in the case of the Democrats and Fannie Mae, only incompetence, pork-barrelling and corruption will follow.

As Smith put it:

"I have never known much good done by those who affected to trade for the public good.
The sober and frugal debtors of private persons would be more likely to employ the money borrowed in sober undertakings which, though they might have less of the grand and marvellous, would have more of the solid and the profitable."

The sooner we get back to this the better.

Bailing out bankrupt banks will only prolong the pain.

It is likely markets will, left to their own devices, recover as growth in the real economy starts coming back.

It is equally likely panic measures will be taken, just as they were in 1938, when the worst was over.




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Posted by Not so fast
a resident of Downtown North
on Sep 30, 2008 at 10:15 am

Persp,

CRA had nothing to do with the current mess, though it's interesting to me how you want to blame poor black people.

We are here, at this world-historical juncture, because Congress (read GOP) and the president completely decoupled risk from lending. This series of deregulations led, predictably, to an enormous credit bubble that, predictably, has popped.


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Posted by Mike
a resident of Mountain View
on Sep 30, 2008 at 11:28 am

FOLLOW THE MONEY

Today's problem started long before we were born.

STOP! Look at your "money!"

The top of each bill states, "Federal Reserve Note." What is the Federal Reserve?

Most Americans don't know. Understandable ... the Federal Reserve Bank (FRB) does not publish much information about their activities -- and for good reason.

Most Americans assume the FRB is a branch of Government. Not so. The FRB is a private corporation, owned by foreign interests. This bank and its stockholders control the entire wealth of America.

"Give me control of a nation's money and I care not who makes the laws." -- Mayer Amschel Bauer

To understand this FRB corporation's identity and purpose, let's review the early days of our Nation ...

After the Revolution, representatives of wealthy European banking families proposed a Central Bank for America to our Founding Fathers. This bank would provide money for our young nation to grow into a world power.

The Founding Fathers refused. The United States, a sovereign nation, could create its own money by Congressional power "to coin money and regulate the value thereof."

The Founding Fathers knew that European bankers would siphon off the wealth and natural resources through currency manipulation. They had done it in every major European country.

Thomas Jefferson warned us ...

"If the American People ever allow private banks to control the issue of their currency...the banks and the corporations that will grow up around them will deprive the people of all property until their children wake up homeless on the continent their Fathers conquered.

"I believe that banking institutions are more dangerous to our liberties that standing armies. Already they have raised up a moneyed aristocracy that has set the government at defiance. The issuing power should be taken from the banks and restored to the people to whom it properly belongs." -- Thomas Jefferson

The private European banking families, failing to gain control of our currency, did not give up. During the next 100 years, they tried many times to establish a Central Bank for America. But Americans, mindful of Jefferson's warning, caught on to their paper money "tricks." Public sentiment remained against them.

Then, in 1907, a banking panic shifted public opinion against the American banking industry. The European families saw their chance to take control of America's banking system.

To magnify public outrage toward the existing banking system, the European bankers promulgated "full banking reform."

(They used newspapers they owned and lobby groups they funded.) They clamored for Congressional investigations. They offered their expertise in drafting reforms to protect the public against future bank failures.

By 1912, there was widespread public concern over banking reform. Presidential candidates from each political party offered their own versions of a national monetary reform bill.

What the public didn't know ...

The public had no way of knowing that the two main "competing" reform bills were virtually identical.

German banker, Paul Warburg, wrote both bills.

The public had no way of knowing that Warburg's firm (Kuhn, Loeb Company), one of Europe's wealthiest and oldest banking houses, financed the election campaigns of the three 1912 Presidential candidates.

Thus, foreign bankers controlled the reform bill's wording, AND results of the 1912 Presidential election

Thus, they were guaranteed establishment of America's Central Bank -- and total control America's currency.

In 1913, new President Woodrow Wilson, signed into law the foreign banker's Central Bank plan, deliberately mis-titled, "THE FEDERAL RESERVE ACT."

This bill officially transferred Congress's Constitutional duty to issue America's currency to a private corporation: The Federal Reserve Bank of New York.

Moreover, ONLY powerful banking families could buy this private corporation's stock (NOT available to the public)!

"This [Federal Reserve Act] establishes the most gigantic trust on earth. ... the worst legislative crime of the ages is perpetrated by this banking and currency bill." -- Congressman Charles A. Lindberg, Sr. (1913)

From the beginning, the President and Congress were supposed to monitor FRB activities ...

Meanwhile, through subtle law changes, this corporation has become INDEPENDENT OF ALL CONGRESSIONAL CONTROL. This corporation, secretive in its operation, even REFUSES TO BE AUDITED BY THE UNITED STATES GOVERNMENT.

"The few who understand the system, will either be so interested in its profits, or so dependent on its favors, that there will be no opposition from that class." -- Rothschild Brothers of London (1863)

How the FRB steals our wealth ...

Let's examine how the FRB creates our currency (so-called "money").

When FRB management proclaims that one billion dollars should be created for use by the American people, they simply write a check for one billion dollars!

The FRB, is not required to have any funds of its own to cover this check! (It's backed by nothing -- no gold, no silver -- NOTHING!)

They create new money out of THIN AIR! Is this counterfeit or what! Read on!

With this check, they buy one billion dollars' worth of US Treasury Bonds from major banks and brokerage houses. The banks and brokerage houses now have one billion "new dollars" in their accounts. These they loan, LOAN, into the economy.

In exchange for their check (backed by nothing), the FRB now owns one billion dollars' worth of US Treasury Bonds!

How would YOU like to open your zero-balance checkbook, write a check for one billion dollars, then have one billion dollars' worth of interest-bearing Treasury Bonds placed into your account?

No wonder the European banking families lobbied for the "right" to issue America's currency!

When the FRB takes possession of US Treasury Bonds, it takes possession and control of the real wealth of America: the labor and property of millions of citizens, TRANSFERRED TO THE TREASURY THROUGH TAXES, to back up these Treasury obligations.

In other words, whenever this private, corporate, Federal Reserve Bank of New York "buys" (with counterfeit money) a billion dollars worth of Bonds, THE TREASURY MUST EVENTUALLY CONFISCATE A BILLION DOLLARS' WORTH OF AMERICAN LABOR AND PROPERTY TO "COVER THE CHECK."

(Enter the IRS, asset forfeiture -- and the Police State.)

Now you know why Thomas Jefferson passionately fought the issuance of America's currency by a private bank.

But wait, there's more ...

To amplify citizens' burden of this money system, THE FRB COLLECTS INTEREST ON ITS TREASURY BONDS! This further increases American citizens' debt to the Treasury.

Federal Reserve Notes are "debt money." In other words, every "note" issued by this corporation adds corresponding debt onto the backs of Americans - in perpetuity.

(Folks, their so-called "notes" are not even lawful notes!)

The result of FRB plunder ...

The effect of the FRB on our Nation and its citizens has been devastating. Since 1913, the value of the American Dollar has fallen to 11 cents! (Probably 1-2 cents today.) Our gold reserves have vanished. The continuously inflated money supply wipes out the value of life-long savings.

Within as few as five years, INTEREST PAYMENTS ON THE NATIONAL DEBT (see Do the Math! below) WILL EXCEED ANNUAL REVENUES COLLECTED BY THE TREASURY.

Sadly, not one in 100,000 Americans could identify the group responsible for these tragic statistics.

Federal Reserve Notes are not Constitutional money!

FRB "notes" cost only 2-3 cents to print (regardless of denomination). Then, they're "loaned" to We-the-People at FULL FACE VALUE PLUS INTEREST! These pieces of paper confirm America's ever-growing debt to shrewd, wealthy FRB stockholders.

Thus, the "Federal Reserve Bank" is NOT Federal, there's NOTHING on reserve, and is NOT A BANK. It puts NOTHING in and takes EVERYTHING out!

"The Federal Reserve Banks are one of the most corrupt institutions the world has ever seen. ... this Nation is run by International Bankers." -- Congressman Louis T. McFadden
Google THE DEATH OF CONGRESSMAN LOUIS T. McFADDEN, OCT '36 and An Astounding Exposure

Is this the American Dream ... or, an American Nightmare?

Now you know why the entire "Federal Reserve" banking system, along with the IRS, must be abolished.

(In case you didn't know, the IRS, another outlaw private organization, is the "collection agent" for the Federal Reserve Bank). Oh well, ... that's a topic for another report.

That's the truth about your money. Isn't it time for a change?

Do the Math!

A few years ago, I (a non-economist) did this simple arithmetic exercise. I have not updated the numbers.

(Back then) The fraud known as the "National Debt" is more than $5 trillion.

ALL the Federal Reserve Notes (FRNs) on this planet would not equal $5,000,000,000,000.00!

NOT EVEN CLOSE -- about $4.6 trillion short! There are perhaps 350 billion FRNs in circulation! In other words, if We-the-People collected ALL our so-called "dollars" (FRNs), we couldn't even pay 10% of this ALLEGED debt! Got the idea?

OK, suppose we decided to pay this phony debt at $1 million per day. How long would it take? (Using round numbers and NO interest.) Let's see ...

$5,000,000,000,000.00 / $1,000,000.00 per day
= 5 million days
= 13,698 YEARS!

That's about 685 GENERATIONS OF GRAND KIDS -- who must continue to pay the debt at $1,000,000 every day!

I don't think so! NOW YOU KNOW WHY THE FRAUDULENT "NATIONAL DEBT" CAN NEVER BE PAID!!!

Can you say, "ECONOMIC SLAVERY?"

Recommended study

For more information about money, get "THE MONEY MASTERS," video (a 2-volume, 3 1/2 hour, non-fiction, historical documentary) by John Train. Book by the same name available at Amazon.com

This video reveals the origins and operations of the corrupt banking plutocracy that owns and rules America - and how it is gradually and clandestinely imposing a worldwide tyranny. This will help you understand how international bankers gain control of America.

Also, read "The Creature from Jekyll Island." (also at Amazon.com)

This book answers the question: Where does money come from? Where does it go? Who makes it? The money magicians' secrets are unveiled.

We get a close look at their mirrors and smoke machines, their pulleys, cogs, and wheels that create the grand illusion called money. A dry and boring subject? Just wait! You'll be hooked in five minutes. Reads like a detective story -- which it really is.

But it's all true. This book is about the most blatant scam of all history. It's all here: the cause of wars, boom-bust cycles, inflation, depression, prosperity.

Creature from Jekyll Island is a "must read." Your world view will definitely change. You'll NEVER trust a politician -- or a banker -- again.

Mike


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Posted by Gary
a resident of Downtown North
on Sep 30, 2008 at 11:51 am

I found this opinion piece, by Jeffrey A. Miron, a senior lecturer in economics at Harvard University interesting. He is a Libertarian, thus I suppose that means that he does not want a governemtn bailout for ideological reasons. I am not a Libertarian, however I find his argument to allow bankruptcy over bailout interesting.

Web Link


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Posted by Jeff
a resident of Crescent Park
on Sep 30, 2008 at 12:32 pm

I am copying my post on this site under the comments about Eshoo's vote explanation. My views are based on first hand observation of the mortgage industry, and all the major players including numerous meetings at Fannie (95% of the Fannie reps in each meeting were lawyers, so that might be a clue as to how things got so messed up):

Do you know where this problem originated? I saw it first hand. I was COO of a company providing applications software to 7 of the top 10 lenders, and 20 of the rest of the top 100 when I became involved in discussions with business partners to enable sub prime loans to targeted minority and low income buyers.

I was incredulous after meetings with the factions involved in this effort: mortgage brokers and one of the biggest title companies in the world, who wanted to form a joint venture to target Hispanic buyers. Almost all the brokers participating were also Hispanic, and the reps from the title company were from minority groups also. They were out to make money from the mandate. I did not see or hear much in these discussions that was altruistic.

The incentive to do this came from Fannie and Freddie, who were in turn incented by Congress years earlier to provide more means for minorities and low income types to buy homes. Frank Raines and Jamie Gorelick each took away over $25M from options in Fannie Mae stock. Both were members of the Clinton Democratic administration. Fannie's relaxed standards allowed them to become the place to sell these loans, which then were securitized.

This crisis was caused by programs starting with Jimmy Carter in 1979-Democrat welfare programs for people who should not have been buying homes at all. Now it turns out they really were not qualified to buy them, and all the rest of us are going to pay for them to keep those homes. The bonuses and other fees that heads of Wall Street firms have taken are nothing compared to the government give away of homes for the unqualified.

You can guess at the outcry from liberals if Bush had tried to kill this sub prime (later renamed a PC "non prime")program. It was (is) a pyramid scheme with the worst elements of welfare thrown in.


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Posted by Jeff
a resident of Crescent Park
on Sep 30, 2008 at 12:54 pm

By the way folks-the mortgage business has two customers for every transaction: the homebuyer, and the party you are going to sell the loan to.

The name of the game in mortgages is to eliminate as many requirements to make a loan as possible without going under the minimum requirements the loan buyer requires. In the case of Fannie, there were encouraged (required?) by Congress to make it easier for minorities and low income buyers. They responded by lessening the requirements for loans they would buy. That made it possible for the mortgage lender to require less from the intended buyer.

Have you heard of "stated income"? Do you find it hard to believe that loans have been made in the billions of dollars to people who merely stated their income, and did not have to offer proof? This and lots of other tricks and techniques allowed Fannie to meet its goals, and for the officers and board members of Fannie to cart off many millions in options, leaving the seeds for the mess we have today.

Without Fannie there would be no buyer loans with such shoddy standards, nor a seller to the Street of massive bundles of securities backed by these loans.

And remember Fannie was told to do it by our government starting with Jimmy Carter in 1979. They were just "following orders".


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Posted by Perspective
a resident of Midtown
on Sep 30, 2008 at 2:48 pm

Very well said, Jeff.

The good news is that more minorites than ever in the history of the USA now own their own homes ( or at least are keeping up with their mortgages)..this is good news, since it is the single biggest material predictor of growing wealth in a community.

Ok, the bad news is that the majority of us, homeowners or not, are now going to pay the price for overregulated lending practices that blackmailed mortgage companies into lending to extremely high risk buyers. I had forgotten about the 'stated income" part of the process, Jeff. Thanks.

when I first heard about no money down, super low interest rate ARMs, ( and simply 'stated income") I didn't believe it. I thought it was yet another "right wing nut" myth trying to scare people.

Unfortunately, like so many "right wing nut" supposed myths, it turned out to be true.


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Posted by E.PO
a resident of South of Midtown
on Sep 30, 2008 at 6:06 pm

It is usually easier for government to take control over big companies, but the real help that is really needed in order to solve the root of the problem is to give a direct subsidy (cheaper rates etc.) to the homeowners who need the extra loan if they still want to stay at their existing home. Sometimes it will be economically reasonable not to do that.
After the bailout of Freddy and Fenny, the government will have to deal with the first layer of bad mortgages and give the loaners some kind of subsidy through their control over those companies.
The existing problem is with the second layer of mortgages, which are the pure commercial part that were given by banks that are now calling for help from the government. Unfortunately from the point of view of the homeowners it doesn't matter if it is the first second or third layer of mortgage, when they are in trouble, all of the lenders are in the same boat.
Therefore, the money of the tax payers must be used cautiously by trying to aim as direct as possible to the homeowners in trouble and not to the lenders. This will solve also the problem to the lenders in a more healthy way. If it is needed to get to homeowners through the lenders, it must be as transparent as possible.
Regulation – there must be a clear regulation regarding responsibility of financial risks of mortgages. A healthy capital market cannot rely on irresponsible spreading of mortgage risks by selling those mortgage backed securities to everyone and then by doing so; the original lender (the bank) does not care what happens next, until it is a huge bubble crisis. The solution must be by keeping a direct connection between the operators of the mortgage (the lender) and the risk of a failure of a borrower. Only if the bank will care about that it will make a better risk management of differential rates for loaners.
One conclusion that I have about globalization is that it could be tricky and dangerous when you think you have spread your risk all over the world (China, Japan etc.) but you end up by spreading the risks upon your neighbors, the people of your own country that will have a huge and bigger debt for years to come.


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Posted by E.O.
a resident of South of Midtown
on Sep 30, 2008 at 6:08 pm

It is usually easier for government to take control over big companies, but the real help that is really needed in order to solve the root of the problem is to give a direct subsidy (cheaper rates etc.) to the homeowners who need the extra loan if they still want to stay at their existing home. Sometimes it will be economically reasonable not to do that.
After the bailout of Freddy and Fenny, the government will have to deal with the first layer of bad mortgages and give the loaners some kind of subsidy through their control over those companies.
The existing problem is with the second layer of mortgages, which are the pure commercial part that were given by banks that are now calling for help from the government. Unfortunately from the point of view of the homeowners it doesn't matter if it is the first second or third layer of mortgage, when they are in trouble, all of the lenders are in the same boat.
Therefore, the money of the tax payers must be used cautiously by trying to aim as direct as possible to the homeowners in trouble and not to the lenders. This will solve also the problem to the lenders in a more healthy way. If it is needed to get to homeowners through the lenders, it must be as transparent as possible.
Regulation – there must be a clear regulation regarding responsibility of financial risks of mortgages. A healthy capital market cannot rely on irresponsible spreading of mortgage risks by selling those mortgage backed securities to everyone and then by doing so; the original lender (the bank) does not care what happens next, until it is a huge bubble crisis. The solution must be by keeping a direct connection between the operators of the mortgage (the lender) and the risk of a failure of a borrower. Only if the bank will care about that it will make a better risk management of differential rates for loaners.
One conclusion that I have about globalization is that it could be tricky and dangerous when you think you have spread your risk all over the world (China, Japan etc.) but you end up by spreading the risks upon your neighbors, the people of your own country that will have a huge and bigger debt for years to come.


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Posted by OhlonePar
a resident of Duveneck/St. Francis
on Oct 1, 2008 at 1:16 am

Jeff,

The riskiest loans did not involve Freddie or Fannie. What you're describing is a case of moral hazard--you don't target high-risk loans unless the system protects you from the risk. What you describe is an example of that.

It's been easy for mortgage lenders to be unscrupulous and dishonest without paying a penalty for it. That's a lack of regulation right there. I know that when I was going through my own mortgage application that it was *extremely* difficult to get real information about who was paying what. The business is set up to be obscure for the borrower.

In that sense, the people who defaulted on their mortgages weren't necessarily being irresponsible. Many of them were ignorant about loan conditions (something the industry encourages by concealing information when possible) and *trusted* the lenders to not saddle them with a mortgage beyond their means.

It always comes back to the separation of decision making from risk. And a lack of regulations over lending practices in general--credit cards are a good example of that--the banks use any excuse to shoot up their interest rates.


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Posted by Perspective
a resident of Midtown
on Oct 1, 2008 at 6:11 am

OP, you don't understand who was regulating the risk taking. Who was essentially blackmailing the mortgage companies into aggressively lending to people who were extremely high risk. Blackmailing them into giving affirmative action mortgages by saying "do it, or we don't back you up". Once you figure out who was doing this ( F and F), then you need to learn who was regulating F and F..

Take your blinders off. This is too big for partisanship. It is time for everyone to wake up and understand the role of meddling with the the free market in this debacle.

The bottom line: our nation, led by congress regulating F and F, put the taxpayers and our entire economy at high risk for the riskiest loans in order to accomplish the social goal of higher home ownership by minorities/poor.

The question now: Was the result worth it? Are we willing to do it again?




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Posted by Sharon
a resident of Midtown
on Oct 1, 2008 at 8:14 am



IBDWeb Link

Has a story on Obamas work with Acorn and the training of activists to intimidate and blackmail lenders

"Obama, who once represented ACORN in a lawsuit against the state of Illinois, was hired by the group to train its community organizers and staff in the methods and tactics of the late Saul Alinsky.
ACORN would stage in-your-face protests in bank lobbies, drive-through lanes and even at bank managers' homes to get them to issue risky loans in the inner city or face charges of racism.

In the early 1990s, reports Stanley Kurtz, senior fellow at the Ethics and Policy Center, Obama was personally recruited by Chicago's ACORN to run training sessions in "direct action."
That's the euphemism for the techniques used under the cover of the federal Community Reinvestment Act to intimidate financial institutions into giving what have been called "Ninja" loans — no income, no job, no assets — to people who couldn't afford them."....

Obama was the attorney representing ACORN in this effort.
Last November, he told the group, "I've been fighting alongside ACORN on issues you care about my entire career." Indeed he has.

Obama was and is fully aware of what ACORN was doing with the money and expertise he provided. The voters should be aware on Nov. 4 of the roles of both in creating the current crisis.


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Posted by OhlonePar
a resident of Duveneck/St. Francis
on Oct 1, 2008 at 11:11 am

Perspective,

Please, you need to take off your political blinders and admit who was running things for the past eight years. Who deregulated the market, who created the moral hazard.

The poor did not create the rampant speculation that drove up real-estate prices. The poor did not create a situation in which lenders approved high-risk loans. Affirmative Action did not force lenders to approve mortgages that had explosive ARMs after two years. Affirmative Action was not responsible for the falsely high appraisals that occurred in the last five years.

There's a logical fallacy in your thinking, Perspective--and that's your assumption that there is a single cause to all of this and that ALL the blame should be assigned to that one cause.

Fact is, if there was one cause to this collapse then it should have happened *much* earlier.

If it was one cause then a GOP-controlled government had six years to do whatever it wanted to change things.

Fact is, one of the critical changes in the law happened in 2004--as Stephen Levy points out in another thread. The timeline of events works a lot better if you pinpoint 2004 changes by the SEC that relaxed leveraging requirements as the tipping point into the Wall St. disaster. The Wall St. disaster can be summed up as loss-of-faith. Creditors stopped believing Lehmann and such could make good on their loans.

If the mortgage securities hadn't been bundled and resold multiple times, you wouldn't have a situation that permeates the entire financial market. If the big firms weren't allowed to be over-leveraged they wouldn't have tanked so quickly.

The free market got ahead of itself and failed to work. As Robert Reich has pointed out, it's absurd to think of markets as something wild found in nature. There's nothing abnormal about regulating them.

From Barron's post is a nice timeline. Read it, absorb it, think about it and think about how events don't happen in isolation.



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