What did cause the Crash? Many factors: failed government and
financial market policy, failed federal and corporate governance, failed
ethics and oversight, failed human integrity, greed, and ideology.
First, let’s just look at a chart documenting that the Housing Bubble
— and, thence, the Financial Crash — was NOT caused by a government
policy encouraging “sub-prime’ mortgages by HUD through Fannie Mae &
Freddie Mac.
Then, we will look at the myth that free-marketeer conservatives and
the Republican Party espouse… followed by the
“doesn’t-matter-what-is-your-ideology” logical reasons for the collapse
of housing and financial markets.
Proof That Fannie And Freddie Policies Didn’t Cause The Housing Bubble
The role of government agencies in causing the housing bubble
continues to be debated ad nauseam: “It’s all about the ‘sub-prime’
loans forced onto the market.”
Perhaps this chart of various housing bubbles around the world will shed some light.
If one truly thinks the “Crash” was all Fannie and Freddie’s fault,
then one must explain how nearly every other industrialized nation at
the same time experienced the same basic arc of a housing boom and bust…
when the other nations did not have Fannie or Freddie with which to
contend?
Take note of the exceptions: Germany never followed US fiscal or
monetary (that’s EU/ECB territory) or deregulatory policies. Independent
Switzerland never follows anyone’s policies and is not part of the
EU/ECB. And, Japan had already experienced it’s housing bubble a decade
earlier. Other than that, the balance did not have US policies
supposedly encouraging sub-prime lending through Fannie or Freddie, but
they did have other policies and actions in common with the U.S, and we
will explore those toward the end.
The Myth Espoused By Conservatives And The Republican Party
One group has stood out and apart reshaping the narrative about the
housing bubble, financial market collapse, and economic crisis… those
whose bad judgment and failed ideology facilitated the crisis: the Ayn
Rand-loving, free-marketeer, deregulators.
The game is afoot, and it’s an active campaign to rewrite history.
Until the truth is set free from this history re-writing effort, the
process of repairing what was broken is greatly hindered. It prevents us
from holding guilty parties responsible (and foments the passion of the
“Occupy” movement). The charade prevents implementation of measures to
prevent another crisis.
Unfortunately, the storytellers shout louder than truth tellers.
Wall Street and its acolytes have their revised tale: “They are mere
victims, as the entire boom and bust was caused by dictatorial
government policies shoving sub-prime mortgages down their throats by
HUD through Fannie Mae and Freddie Mac… Couldn’t possibly be
irresponsible lending… not derivatives… not extreme leverage… not
excessive compensation packages… Nope, it is, rather, long-standing
housing policies of Clinton and Democrats at fault.”
This “blame Fannie & Freddie” story has been articulated by
commenters to past articles on Faustian urGe. It is offered in numerous
editorials and commentaries over the last couple years in the Wall
Street Journal. Rush Limbaugh propagates the myth in speeches and on his
radio program. It has been a story delivered in Congressional testimony
and by congress members, themselves.
Even just a couple weeks ago, New York Mayor Michael Bloomberg
encouraged the distortion field to move the “eye of blame” off his
compatriots in the industry where he became wealthy when he stated the
mistruth to the ”Occupy Wall Street” protestors,
“It was not the banks that created the mortgage crisis.
It was, plain and simple, Congress who forced everybody to go and give
mortgages to people who were on the cusp.”
This line of argument simply does not hold up… Um, policies designed
to facilitate home ownership of “some” lower-income folk just below the
normal means of attaining prime mortgages was not mandated upon ANY
mortgage originator, nor their derivative-selling brethren. Nope.
Such a line of reasoning does, however, serve the interest of
partisan interest groups who advocated for financial market deregulation
and serve the interests of those politicians best positioned if
deregulation does not receive any blame for the crisis. But, this does
not change the truth even a little.
Moreover, the financial incentives offered by the government for
“some” mortgage originators to offer these products to “some” home
buyers NEVER negated the financial due diligence of originators,
lenders, packagers, cds funds… everyone in the financial industry. The
fault lay clearly at the feet of the financial titans who lost sight of
their fiduciary obligation to their shareholders and oversight bodies.
In a word, GREED of the marketplace encouraged by lax deregulatory and
monetary policy caused the crashes.
It should be noted, banks and other financial institution’s actions
are — and always will be — a risk to the entire economy (that’s why we
had and need to reinstate the “Glass-Steagall Act”); thus, reducing this
risk by increasing capital reserve requirements and reducing extreme
leveraging is required, even while this also reduces profitability. Oh
well, the trade off is having a secure and predictable market in which
to make profits.
Still, fear of increased regulations and constrained financial market
profits due to the public and congress acknowledging the industry’s
failures make for profound motivation to distort the reality field.
But, the biggest reason for the continued distortions is likely much
more human… “cognitive dissonance” — the state of having inconsistent
thoughts, beliefs, or attitudes, esp. as relating to behavioral
decisions and attitude change, such as happens when a belief system or
ideology fails profoundly.
“Doesn’t-Matter-What-Is-Your-Ideology” Explanation For Housing & Financial Market Collapse
So what are the facts; what is the reality field? The US economy is
quite complex and intricate, so certainly, no single problem or matter
was the cause. But, to be sure, there is a cause.
Check it out:
● Former Federal Reserve Chair Alan Greenspan reduced rates to
1 percent — lowest in 50 years — and kept them there for a uniquely long
time…
● Low rates led to lower general yields on municipal bonds or
Treasurys. Fund managers then turned to high-yield mortgage-backed
securities — failing to do adequate due diligence before buying them.
● Fund managers made this error and relied on credit ratings agencies
to do their work — Moody’s, S&P and Fitch. But, the ratings
agencies had placed AAA ratings on junk securities, claiming they were
as safe as U.S. Treasurys.
● Derivatives became an unregulated financial instrument hiding the
truth of real risk. Exempt from proper oversight, insurance supervision,
and reserve requirements, derivatives permitted AIG to write
$3 trillion in instruments while reserving absolutely nothing against
future claims.
● The Securities and Exchange Commission changed the leverage rules
for the exclusive pleasure of five Wall Street banks in 2004. The “Bear
Stearns exemption” replaced the previous capitalization rule leverage
limit and permitted unlimited leverage for Goldman Sachs, Morgan
Stanley, Merrill Lynch, Lehman Brothers and Bear Stearns.
● Wall Street’s compensation system encouraged a short-term
performance perspective, and offered traders great upside with none of
the downside, leading to excessive risk-taking.
● The demand for higher-yields led Wall Street to begin bundling
mortgages, with the highest yields coming from subprime mortgages
cleverly buried in piles with prime mortgages. This deceptive market for
packaging mortgage-backed instruments was exempt from most regulations.
The Federal Reserve could and should have provided oversight, but
Greenspan chose not to… ever the Ayn Rand free marketeer.
● The mortgage originators’ unregulated scheme saw them holding
mortgages for a very short period, thus allowing them to be
creative/unscrupulous with underwriting standards, ignoring all
traditional lending metrics such as income, credit rating, debt-service
history and loan-to-value.
● New mortgage products came on the market to attract more subprime
borrowers to create higher yielding packaged instruments —
adjustable-rate mortgages, interest-only, piggy-back mortgages
(concurrent mortgage and home-equity line) and negative amortization
loans (borrower’s indebtedness goes up each month). These “innovative”
private-sector mortgages — not those encouraged by HUD policies —
defaulted in hugely disproportionate frequency compared to traditional
30-year fixed mortgages.
● To remain competitive and satisfy demanding boards and
shareholders, traditional banks developed computerized underwriting
systems for mortgages and relied on software programs instead of
thoughtful managers. Employees were paid on loan volume, not quality.
● The Glass-Steagall Act — previously the fire wall separating Wall
Street investment banks and Main Street commercial banks — was repealed
in 1999 during our deregulatory zeal, thus allowing FDIC-insured banks
(deposits guaranteed by the government) to enter into excessively risky
business arrangements. The law’s repeal also permitted industry
consolidation to the extreme.
● In 2004, the Office of the Comptroller of the Currency preempted
state laws regulating mortgage credit and national banks. Thereafter,
national lenders sold increasingly risky mortgage products in those
states. Then… default and foreclosure rates skyrocketed.
Deregulating the financial sector, jettisoning protections that had succeeded for decades is THE FATAL FLAW.
Congress failed its obligation and permitted Wall Street to
self-regulate, and Greenspan through the Fed ignored financial market
abuses, falling prey to his own coined phrase of “irrational
exuberance.” His exuberance was his belief in the purity of free
markets.
The discredited belief that free
markets require no adult supervision is the reason for our crisis and
why a new false narrative has been created.
So Here’s The Big Truth Bottom Line
1) The Fed kept its policy interest rate, the federal funds rate,
below the natural or neutral interest rate for an extended period.
2) Given the excessive monetary easing shown above, the Fed helped
create a credit boom that found its way–via financial innovation, lax
governance (both private and public), and misaligned incentives–into the
housing market.
3) Given the Fed’s monetary worldwide influence, its too-loose,
too-long monetary policy was exported across the globe. As a result, the
Fed helped create a global liquidity glut that in turn helped fuel a
global housing boom.
4) The G7-G20 regularly meet to synchronize their fiscal and monetary
policies, which would effect the money supply and interest rates across
the economies in the housing chart atop this post. Other than Germany
(note its line in the housing chart), most of Europe is right there with
the US of A. Though Eurofund/ECB rates were held relatively high due to
Germany’s insistence, the ECB rates generally followed the curve of Fed
rates while most of Europe followed US-style fiscal policies.
5) Imitation takes hold with the drastic financial market
deregulatory path: Europe, after watching the U.S. bubble up since 1980,
took a page from our deregulatory manual and started their own
financial and economic liberalization, ala Reagan. For example, the same
irresponsible and deregulated private-sector behavior as seen in the
US can be noted in the UK, “During the period 2001-2007, many lenders
began offering loans of increasing multiples of income sometimes to
people with poor credit ratings; products that did not require a deposit
became more common — 125% mortgage products appeared.” ( Simon Lambert,
“This is MONEY,” Daily Mail UK). Deregulated loans became too easy to
get in the UK, as in the US., connected with Thatcher’s banking
deregulation that happened in the 1980s. Spain, France, Belgium, et al…
followed suit.
Comment collapsed by the community
I know you can't legally hunt in all the places listed. Does TN have state game lands?
And then to infringe on free speech by not allowing folks to say something about government; I would call that redneck ploitics, where ya shoot yourself in the ass and ask questions later where you have no ass to seat on....
Wow, the mid of a teabag is something, aint it?
Oh, forgive me...but if it was drafted by a Liberal, everything would be hunky dory.
The Occupy movement has completely STALLED months ago, as if there was an agenda. Time for the occupiers to pack up their bags and head home.
First they ignore you, then they ridicule you, then they fight you, then you win . by Mahatma Gandhi.
I am not even part of the occupy movement, but I am smart enough to know poking a stick at it or making ridiculous laws only increases the tension.Though I must say, you sure picked an appropriate name for yourself.
And that includes you.