Origins of the credit crisis

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GraceOMalley_IHB

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A few days ago I posted that I had heard that the credit crisis was an inherited problem from the clinton administration and I was promptly told that it was just another piece of republican propaganda. Which for all I knew might be true. Except this morning I found this... Again Im not really interested in furthering anyones agenda I just think its past time that we begin to make those accountable for these problems... accountable.





<strong>NY Times on September 30, 1999</strong>: 'Fannie Mae Eases Credit To Aid Mortgage Lending':



In a move that could help increase home ownership rates among minorities and low-income consumers, the Fannie Mae Corporation is easing the credit requirements on loans that it will purchase from banks and other lenders.



The action, which will begin as a pilot program involving 24 banks in 15 markets will encourage those banks to extend home mortgages to individuals whose credit is generally not good enough to qualify for conventional loans. Fannie Mae officials say they hope to make it a nationwide program by next spring.



Fannie Mae, the nation's biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people and felt pressure from stock holders to maintain its phenomenal growth in profits.



In addition, banks, thrift institutions and mortgage companies have been pressing Fannie Mae to help them make more loans to so-called subprime borrowers. These borrowers whose incomes, credit ratings and savings are not good enough to qualify for conventional loans, can only get loans from finance companies that charge much higher interest rates -- anywhere from three to four percentage points higher than conventional loans.



''Fannie Mae has expanded home ownership for millions of families in the 1990s by reducing down payment requirements,'' said Franklin Raines, Fannie Mae's chairman and CEO. ''Yet there remain too many borrowers whose credit is just a notch below what our underwriting has required who have been relegated to paying significantly higher mortgage rates in the so-called subprime market.''



In moving, even tentatively, into this new area of lending, Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980s (How prophetic!).

'

'From the perspective of many people, including me, this is another thrift industry growing up around us,'' said Peter Wallison a resident fellow at the American Enterprise Institute. ''If they fail, the government will have to step up and bail them out the way it stepped up and bailed out the thrift industry.''
 
The origin of the present credit crisis is the chartering of the Federal Reserve and fractional reserve banking in 1913.
 
It has been the goal of every presidential administration to expand home ownership. The growth of subprime certainly was encouraged by the Clinton administration. However, if this would have been deemed a bad idea at the time, the Bush administration and the Republican Congress would have changed it. It wasn't the Clinton administration that watched the bubble inflate and did nothing to discourage it and further deregulate the industry.



Realistically, you can't blame either Bush or Clinton for any of it. The bureaucrats and regulators who administer these programs watched it all happen with encouragement from everyone involved.



The practice of blaming the other party for any problem is a cornerstone of modern politics. It doesn't matter if there is any truth in it. Clinton blamed Bush I for the economic problems in 1992 when Bush I had little or nothing to do with it. It was politically expedient, and it won him the election. The Republicans are busy blaming Clinton for everything right now because they don't want the voters to hold them responsible for the results of Republican control of everything from 2000-2006.
 
[quote author="IrvineRenter" date=1222984026]It has been the goal of every presidential administration to expand home ownership. The growth of subprime certainly was encouraged by the Clinton administration. However, if this would have been deemed a bad idea at the time, the Bush administration and the Republican Congress would have changed it. It wasn't the Clinton administration that watched the bubble inflate and did nothing to discourage it and further deregulate the industry.



Realistically, you can't blame either Bush or Clinton for any of it. The bureaucrats and regulators who administer these programs watched it all happen with encouragement from everyone involved.



The practice of blaming the other party for any problem is a cornerstone of modern politics. It doesn't matter if there is any truth in it. Clinton blamed Bush I for the economic problems in 1992 when Bush I had little or nothing to do with it. It was politically expedient, and it won him the election. The Republicans are busy blaming Clinton for everything right now because they don't want the voters to hold them responsible for the results of Republican control of everything from 2000-2006.</blockquote>




You're right I recognize that. If Bush had spent the last 8 years cleaning it up then of course things would be different. But after getting some pretty harsh responses to my original post I didn't expect to find articles like this one, which 9 years later has accurately predicted the current state of affairs.
 
May I suggest you read this article? <a href="http://bigpicture.typepad.com/comments/2008/10/misunderstandin.html"> "Misunderstanding Credit and Housing Crises: Blaming the CRA, GSEs"</a>
 
The root of the credit crisis is simple.



People buying stuff they can't afford.



In case you're not sure who that is, it's Joe & Jane Sixpack.





The mechanisms that make that possible are also the ones that make credit possible. If people would have bought stuff they could actually afford, no problem.
 
The first "Subprime meltdown" happened in the late 1990's. Remember 125% LTV subprime mortgages?



F&F were directed to step in once all the Subprime 1.0 players went busto.



I apologize for writing such a techless post (no cites) but I have to go out of town for a couple of days, starting right now.
 
[quote author="NancyBotwin" date=1222983316]A few days ago I posted that I had heard that the credit crisis was an inherited problem from the clinton administration and I was promptly told that it was just another piece of republican propaganda. Which for all I knew might be true. Except this morning I found this... Again Im not really interested in furthering anyones agenda I just think its past time that we begin to make those accountable for these problems... accountable.





<strong>NY Times on September 30, 1999</strong>: 'Fannie Mae Eases Credit To Aid Mortgage Lending':



In a move that could help increase home ownership rates among minorities and low-income consumers, the Fannie Mae Corporation is easing the credit requirements on loans that it will purchase from banks and other lenders.



The action, which will begin as a pilot program involving 24 banks in 15 markets will encourage those banks to extend home mortgages to individuals whose credit is generally not good enough to qualify for conventional loans. Fannie Mae officials say they hope to make it a nationwide program by next spring.



Fannie Mae, the nation's biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people and felt pressure from stock holders to maintain its phenomenal growth in profits.



In addition, banks, thrift institutions and mortgage companies have been pressing Fannie Mae to help them make more loans to so-called subprime borrowers. These borrowers whose incomes, credit ratings and savings are not good enough to qualify for conventional loans, can only get loans from finance companies that charge much higher interest rates -- anywhere from three to four percentage points higher than conventional loans.



''Fannie Mae has expanded home ownership for millions of families in the 1990s by reducing down payment requirements,'' said Franklin Raines, Fannie Mae's chairman and CEO. ''Yet there remain too many borrowers whose credit is just a notch below what our underwriting has required who have been relegated to paying significantly higher mortgage rates in the so-called subprime market.''



In moving, even tentatively, into this new area of lending, Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980s (How prophetic!).

'

'From the perspective of many people, including me, this is another thrift industry growing up around us,'' said Peter Wallison a resident fellow at the American Enterprise Institute. ''If they fail, the government will have to step up and bail them out the way it stepped up and bailed out the thrift industry.''</blockquote>




<object width="325" height="250"><embed src="http://www.youtube.com/v/youtube" type="application/x-shockwave-flash" width="325" height="250"></embed></object>
 
BMP309-



That is right on. I'm glad you posted that link. Even if you take out the editorializing in the montage, you're left with quotes from congressmen and women.



Both parties are responsible for letting FRE/FNM become the incompetent behemoths they did: the democrats for their undying support of both FRE and FNM, as well as their CEOS and ardent promotion and insistence on lending to unqualified borrowers; the Republicans for having the majority and not force-feeding reform down FRE and FNM's (and the democrats') throats.



Required reading: http://townhall.com/columnists/ThomasSowell/2008/10/03/do_facts_matter?page=full&comments=true
 
[quote author="TR4" date=1223098911]BMP309-



That is right on. I'm glad you posted that link. Even if you take out the editorializing in the montage, you're left with quotes from congressmen and women.



Both parties are responsible for letting FRE/FNM become the incompetent behemoths they did: the democrats for their undying support of both FRE and FNM, as well as their CEOS and ardent promotion and insistence on lending to unqualified borrowers; the Republicans for having the majority and not force-feeding reform down FRE and FNM's (and the democrats') throats.



Required reading: http://townhall.com/columnists/ThomasSowell/2008/10/03/do_facts_matter?page=full&comments=true</blockquote>


Thanks TR4! Funny how nobody has replied, but you...looks like there's not too much to say? They are real quotes! I kind of feel bad for killing the thread that had so much love for talking about how it was Republicans faults. Sorry guys! :)
 
[quote author="BMP 309" date=1223105077][quote author="TR4" date=1223098911]BMP309-



That is right on. I'm glad you posted that link. Even if you take out the editorializing in the montage, you're left with quotes from congressmen and women.



Both parties are responsible for letting FRE/FNM become the incompetent behemoths they did: the democrats for their undying support of both FRE and FNM, as well as their CEOS and ardent promotion and insistence on lending to unqualified borrowers; the Republicans for having the majority and not force-feeding reform down FRE and FNM's (and the democrats') throats.



Required reading: http://townhall.com/columnists/ThomasSowell/2008/10/03/do_facts_matter?page=full&comments=true</blockquote>


Thanks TR4! Funny how nobody has replied, but you...looks like there's not too much to say? They are real quotes! I kind of feel bad for killing the thread that had so much love for talking about how it was Republicans faults. Sorry guys! :)</blockquote>


This thread has died (almost) because the fundamental premise of this entire thread is flawed. It really isn't worthy of further comment. It has apparently left you with the impression that you were right, and the silence was some kind of admission of defeat. That is silly. The GSEs did not cause the credit crisis. They got caught up in the bubble, they did the same stupid things others were doing, and it caused them to go bankrupt. An argument can be made that lax oversight of the Bush administration during the bubble caused the bankruptcy of the GSEs, but I doubt the regulators could have or would have been able to prevent their demise. None of this caused the credit crisis.



As for the evidence of the Clinton administrations responsibility. First, since the whole premise of the thread is false, neither Clinton or Bush or the GSEs are responsible for the credit crisis. Second, as for the conversations being evidence of bad policy, do you understand that the stated mandate of the GSEs is to provide housing opportunities to middle-class and lower-middle-class Americans? The "smoking gun" quotes you show above are typical of conversations with GSE regulators since they were privatized in the early 1970s. They were being pressured by the Clinton administration for performing the function for which they were created. I am quite sure the Bush Administration had the same conversations as did Nixon, Ford, Carter, Reagan, and Bush 1.
 
Sorry, IR, I'm not buying. No one responded to my post linking to The Big Picture, and I posted that first. So <em>I</em> must be right.

















[And yes, that is sarcasm.]
 
The present credit crisis has it's roots in the charter of the Federal Reserve in 1913 including fractional reserve banking. If the free market determined interest rates without interference the business cycles would be much smaller in scope. As long as we have a fiat currency with fractional reserve banking and a central bank setting some type of interest rate, we will have extreme business cycles including depressions every other generation or so and extreme booms and busts.
 
[quote author="EvaLSeraphim" date=1223167957]Sorry, IR, I'm not buying. No one responded to my post linking to The Big Picture, and I posted that first. So <em>I</em> must be right.

















[And yes, that is sarcasm.]</blockquote>


Never once did I say I was "right." Just stated it was interesting nobody commented. Usually people get angry if something is posted that they don't agree with, and immediately try to discredit that post. It would be very silly to say I just assumed with one youtube video that I was "right" on <em></em>the origins of the credit crisis<em></em> Puleeezzz. We all know there are many factors--often times the democrats are left out of those factors--I just pointed out that both parties contributed.
 
[quote author="BMP 309" date=1223174534][quote author="EvaLSeraphim" date=1223167957]Sorry, IR, I'm not buying. No one responded to my post linking to The Big Picture, and I posted that first. So <em>I</em> must be right.

















[And yes, that is sarcasm.]</blockquote>


Never once did I say I was "right." Just stated it was interesting nobody commented. Usually people get angry if something is posted that they don't agree with, and immediately try to discredit that post. It would be very silly to say I just assumed with one youtube video that I was "right" on <em></em>the origins of the credit crisis<em></em> Puleeezzz. We all know there are many factors--often times the democrats are left out of those factors--I just pointed out that both parties contributed.</blockquote>


On that we can agree. This was not the mess of either party. I do believe the Republicans will be held responsible for it by much of the general public in November's elections because they were the party in charge when this all happened, but that does not make them responsible. Just as presidents have little real control over the economy yet they always take blame or credit, the Republicans are going to be hurt by this dramatic economic slowdown just before the general election.
 
More analysis from Barry over at The Big Picture:



<blockquote>

The Sunday New York Times has a very interesting article on Fannie Mae and the current financial crisis. They do a decent job at delving into the complexities of the GSEs, and the many factors that went into the decision making at the senior level of the company. This includes pressure from clients such as Coutrywide CEO Angelo Mozilla, pressure from Congress, and the demands from investors for the company to be more aggressive. Most of all, it looks at the ongoing competitive demands of the market place that Fanny was in.



The key to understanding the GSE story is grasping their role within the bigger picture of the economy and housing sector. While there are some pundits who prefer talking points over reality (Charlies Gasparino, Lawrence Kudlow, James Pethoukoukis, all toed the GOP line) I prefer to keep all of my analyses based on the data and facts. Rather than creating historical revisions for partisan reasons, I prefer to keep it reality based. (I'm an independant, and that's how I roll).



The current housing and credit crises has many, many underlying sources. Its my opinion there were two primary causes leading to the boom and bust in Housing: A nonfeasant Fed, that ignored lending standards, and ultra-low rates.



This nonfeasance under Greenspan allowed banks, thrifts, and mortgage originators to engage in all manner of lending standard abrogations. We have detailed many times the I/O, 2/28, Piggy back, and Ninja type loans here. These never should have been permitted to proliferate the way they did.

</blockquote>


<a href="http://bigpicture.typepad.com/comments/2008/10/fannie-mae-and.html">Read the rest.</a>
 
I went out for takeout this evening, and caught the start of this weeks' episode of "This American Life" (an award winning radio program on NPR). I often listen to TAL because it's brutally honest, and gives a forthright look at the seedier side of American life. I find it entertaining, and often sad. This week it just frightens the shit out of me.



Act III regarding Credit Default Swaps is particularly frightening.



Act IIII they take the time to savage both Phil Graham and the 'Pubs and Bill Clinton and the Treasury Department for failure to regulate - get this - not subprime mortgages, but a little known device called a Credit Default swap and a problem with it called Counterparty Risk. I was aware that they existed, but I had no idea what the exposure was or how pervasive they were.



I kept all my books from MBA School, and all my undergraduate finance books. Of the eight finance texts I have in my possession (I've lost a few over the years), exactly one mentions credit default swaps. It garners exactly three paragraphs at the end of P. 738 in "Investments, Fourth Edition" by Bodie, Kane, and Marcus. The End of the World as we know it - and it gets three paragraphs. At least they covered it.



If you can't tell, I'm really, really frightened. And (unusually) stone sober. This is not going to be a fun trip.



Here is the link to the show (it's an hour long):



<a href="http://www.thisamericanlife.org/Radio_Episode.aspx?episode=365">http://www.thisamericanlife.org/Radio_Episode.aspx?episode=365</a>
 
[quote author="no_vaseline" date=1223289894]I went out for takeout this evening, and caught the start of this weeks' episode of "This American Life" (an award winning radio program on NPR). I often listen to TAL because it's brutally honest, and gives a forthright look at the seedier side of American life. I find it entertaining, and often sad. This week it just frightens the shit out of me.



Act III regarding Credit Default Swaps is particularly frightening.



Act IIII they take the time to savage both Phil Graham and the 'Pubs and Bill Clinton and the Treasury Department for failure to regulate - get this - not subprime mortgages, but a little known device called a Credit Default swap and a problem with it called Counterparty Risk. I was aware that they existed, but I had no idea what the exposure was or how pervasive they were.



I kept all my books from MBA School, and all my undergraduate finance books. Of the eight finance texts I have in my possession (I've lost a few over the years), exactly one mentions credit default swaps. It garners exactly three paragraphs at the end of P. 738 in "Investments, Fourth Edition" by Bodie, Kane, and Marcus. The End of the World as we know it - and it gets three paragraphs. At least they covered it.



If you can't tell, I'm really, really frightened. And (unusually) stone sober. This is not going to be a fun trip.



Here is the link to the show (it's an hour long):



<a href="http://www.thisamericanlife.org/Radio_Episode.aspx?episode=365">http://www.thisamericanlife.org/Radio_Episode.aspx?episode=365</a></blockquote>


Ok, this is where I said "I told you so". I have been warning about CDSes for two years. I have been telling you we will have massive bank failures. I have been telling you that re prices will fall much farther in real vs. nominal dollars because the dollar will devalue greatly and folks will not be able to afford to buy cheap housing. I have been telling you there will be a credit freeze. I have telling you the Federal Reserve will flood the markets with dollars. If you doubt it, go back and read when I started posting. And I am going to tell you something again. Paulson will not be buying mortgages or loans. He will not be buying MBS that are bundles of mortgages. Paulson will be buying the equity tranches of CDOs. And they are close to worthless, and will be completely worthless in a couple of years.



This is not, and has never been a subprime crisis.

This is not, and has never been a housing crisis.

This is a debt/credit crisis. And there is no way to fix it. Government intervention will only prolong the agony and make it worse in the long run. Manipulation of interest rates by a government charted Federal Reserve is the cause.
 
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