Figure 1.-- |
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As a result of the crisis. the main-stream media in the United states like the New York Times began talking about 'market failures'. Left wing economists began calling for the nationalization of major financial insttutions and insesently blamed the crisis on the free market and greedy bankers. Here there is enough blame to go around. But the simple fact is that the crisis in the United States was at heart a real estate bubble and Government interference in the free market was an unintended, but major cause of that bubble. Alan Greenspan and the Federal Reserve maintained low interest rates for an extended period, fueling speculation. Left wing politicans chatrged that banks pursued unfair lending practices preventing minorities and other low-income borrowers from obtaining mortgages. The Government beginning in the Clinton Administration began pressuring banks to make looser loans so that low-income people could qualify for home mortgages. Congress passed the Community Reinvestment Act (1977). Further legislation and administration policies encouraged banks to make mortgage loans to low income buyers. In the 2000s, Government lenders Freddie Mac and Fannie Mae were financing reckless sub-prime lenders. Democrats in Congress opposed Bush Administration efforts to regulate the two home lenders. These policies placed large numbers of homes in the hands of speculators and low-income individuals without the income or responsibility to be home owners. The Bush Administration contributed to the crisis through an ideological resistance to financial regulation. In fairness to President Bush, however, the Administration did attempt to regulate the two Federal financial giants (Fanny Mae and Freddie Mac) at the heart of the bousing bubble. Here they were stopped by Senate Democrats (including Senator Obama) who threatened a filabuster. Although the media would like to paint the crisis as a failure of the free market, it was to a very large extent a result of government tinkering with the free market. This was essentially a failure of public policy and resulted from goverment intervention which prevented markets from operating freely. The Obama Administration and Congressional Democrats continue to shield Frannie and Fredie from needed regulation and go focus on the ideological them that gteedy bankers and unreliable free markerts were at the heart of the crisis. Of course there are other aspects to consider, but there is no doubt real estate was at the hear of the crisis.
As a result of the crisis. the main-stream media in the United states like the New York Times began talking about 'market failures'. The main-stream media is not only left wing, but it is invested in President Obama. As a result, has followed thge Obama Administration line of blame everything on Bush who 'drive tge car into the ditch'. Left wing economists began calling for the nationalization of major financial insttutions and insesently blamed the crisis on the free market, Wall Street, and greedy bankers.
There is enough blame to go around when finding the cause of the crisis. But the simple fact is that the crisis in the United States was at heart a real estate bubble and Government interference in the free market was an unintended, but major cause of that bubble.
While the realestate bubble was at the center of the crisis, there are several factors to be considered. Any responsibility here can be scattered around the political spectrum and Governent and business institutions. Of course there are several aspects to consider, but there is no doubt real estate was at the hear of the crisis.
Alan Greenspan and the Federal Reserve took interest rates to low levera and maintained low interest rates for an extended period. This resulted in abnormally low mortgage rates fueling speculation leading to a bubble.
Both Democrats and Republicans in Congress support changes in the tax code, exempting $0.5 million in capital gains for primary residences held at least 2 years. This incouraged home owners to 'flip' their homes.
One aspect of the growing untitlement society in America, Democratic and Republican Congressmen began persuing policies to increase home ownership. Democrats in particular charged that banks pursued unfair lending practices preventing minorities and other low-income borrowers from obtaining mortgages. The practice was vilified as 'red lining'. Congress passed the Community Reinvestment Act (1977). The Government beginning with the Clinton Administration increased pressure on banks to make looser loans so that low-income people could qualify for home mortgages. The Clinton Administration basically criminalized banks that refused to loan to subprime borrowers. Further legislation and administration policies encouraged banks to make mortgage loans to low income buyers. The Clinton Administration basically criminalized banks that refused to loan to subprime borrowers. In the 2000s, Government lenders Freddie Mac and Fannie Mae were financing reckless sub-prime lenders who were making loans without down payments to people with no verifiable income.
These policies placed large numbers of homes in the hands of speculators and low-income individuals without the income or responsibility to be home owners. Freddie Mac and Fannie Mae warehoused the subprime loans and in doing so left taxpapers liable for the losses incurred. Democrats in Congress opposed Bush Administration efforts to regulate the two home lenders. Chairman Barney Frank in an 2010 unprecedented tough reelection battle conceded that he erred in not better regulationg the two quasi-Governmrent banks, primarily because he thought the Republicans were attempting to stop loans to poor people. Senate Democrats (including Senator Obama) who threatened a filabuster.
The Bush Administration contributed to the crisis through an ideological resistance to financial regulation. In fairness to President Bush, however, the Administration did attempt to regulate the two Federal financial giants (Fanny Mae and Freddie Mac) at the heart of the bousing bubble. Here they were stopped by the Democrats. The Bush Administration's resistance to regulation was based on the mistaken idea that markets are self regulating. This idea was shared by Chairman Greenspan. Any basic review of American economic history shows that this is not the case. But as a result the Government failed to regulate the new deritives market.
Derivitive trading expanded exponedntially during the Clinton and Bush Administration. The market reached the $615 trillion level. Trading in mortgages including sub-prime loans was a major part of that market. These poorly understood securities should have been traded through central clearing houses. Trading on exchanges or other open forum would have exposed derivities to examination, resulting in a needed degree of transparency. Neither the U.S. Commodity Futures Trading Commission (FTC) or the Securities and Exchange Commission (SEC) assumed responsibility. Here USFTC Director Brooksley Born saw the danger, but was prevented from taking any action by the Clinton Administration. Fed Chairman Greenburg even met with her and explained how the derivitives market was self regulating.
Poor management of leading investmentand mortgage banks fed the derivities impossion. Most of these banks such as KLehman Brothers increased their leverage beyond 30 to 1. And they failed to adopt basic risk management strategies. Had they done so they may have been able to manage sub-prime losses. But as they were so highly leveraged they did not have the capital to absorb the losses. Highly levered Lehman was forced to declare bankruptsy. Insurance giant AIG was brought down by poorly spervised traders in a small unit of the other wise sound insurance firm.
Although the media would like to paint the crisis as a failure of the free market, it was to a very large extent a result of government tinkering with the free market. This was essentially a failure of public policy and resulted from goverment intervention which prevented markets from operating freely. The Obama Administration and Congressional Democrats continue to shield Frannie and Fredie from needed regulation and focuses on the politically expedient ideological theme that Wall Street, greedy bankers, the Bush Administration were responsible for the the crisis. There is a total failure of President Obama to admit the central role that Government and the Democrats played in the unfolding crisis. Here the question relates to free markets. Is it true that free markets are inherently unstable and responsible for the crisis. Charlie Munger, Warren Buffett's Berkshire-Hathaway partner, ponys out cryptically that win a lion escapes from the zoo and hursts some innicent person, it is not the lion's fault, it is the zoo keeper's responsibility. The same is true of the 2007-09 financial crisis. It was the fault of the Federal Government, including Democrats and Republicans in Congress, Federal agencies (especially the FTC and SEC), the Federal Reserve, and two Administrations (both the Clinton and Bush) administration that were responsible. This is why President Obama's refreain that he does not want to gove the keys back to the people who drove tghe economy in the ditch. It suggests that he does not fully understand what caused the problem and is determined to gain political advantage rather than correct the problem or accept any degree of personal responsibility.
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