What was the Cause?
When all of the noise and complexity is taken away, it becomes very clear that social planning by politicians and bureaucrats forced lending institutions to make loans to people who were not credit worthy and that created an unrealistic high demand in the housing lending market and led to an enormous number of bad loans. What began as an admirable goal, to assist lower income families become home owners, turned disasterous.
Lending instutitutions were threatened and bullied by politicians and at the same time these same politicians were rewarded with enormous contributions for opposing any meaningful regulation until Freddie Mac and Fannie Mae, these government sponsored enterprises (GSEs) became the personal piggy bank of many members of Congress. For example, between 1989 and 2008, Freddie Mac and Fannie Mae gave over $133,000 to Senator Christopher Dodd, over $111,000 to Senator John Kerry and over $105,000 to Barak Obama. For a more complete list, see
Fannie Mae and Freddie Mac Invest in Democrats. And what did Fannie and Freddie buy with all that money? They bought protection from regulation. Each time an effort was made to regulate them, these members of Congress could be counted on to protect Fannie and Freddie. Lest you think this is only a problem with Democrats, there are also Republicans with their hands in the till. Americans deserve better than this.
This unholy alliance between Freddie Mac and Fannie Mae on the one hand and members of Congress on the other created an artificial price bubble in real estate, which was securing these bad loans. When the bubble burst, we were left with this mess, a mess in which American taxpayers are being asked to foot the bill.
On September 15, Investor’s Business Daily pointed out, the cause of the financial markets being dysfunctional by stating that "Democrats during the Clinton years are a prime reason for it.” This publication continued saying that during those years, “Tough new regulations forced lenders into high-risk areas where they had no choice but to lower lending standards to make the loans that sound business practices had previously guarded against making.”
There were some feeble efforts made to correct these problems. As stated in the New York Times, "To his credit, Mr. Bush accurately foresaw the danger posed by Freddie Mac and Fannie Mae and began calling as early as 2002 for greater regulation." How did Freddie and Fannie react to these proposals to regulate them? "
They flooded Washington with lobbying dollars, doled out hundreds of thousands in political contributions" to certain members of Congress. However, with congressional resistance, the president soon abandoned this effort.
Here are two articles that explain the origin of the problem. On May 31, 1999 the
LA Times ran an article in which it says, "In 1992, Congress mandated that Fannie and Freddie increase their purchases of mortgages for low-income and medium-income borrowers..... Most importantly, Fannie Mae has agreed to buy more loans with very low down payments–or with mortgage payments that represent an unusually high percentage of a buyer’s income."
On September 30,1999 the
New York Times carried an article saying, "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....will encourage those banks to extend home mortgages to individuals whose credit is generally not good enough to qualify for conventional loans." Even then there were warnings of what we see now. In the same article it said, "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 1980's."
In the NYT article Peter Wallison a resident fellow at the American Enterprise Institute said,''From the perspective of many people, including me, this is another thrift industry growing up around us. 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 bottom line is that the very people (politicians in Washington) who are working to solve the problem are the same people who created the problem in the first place.
What Do We Do Now?
Now, we are told, the stability of our entire American financial system is at risk. We are being asked to bail out these Wall Street "geniuses" and other fat cats or it could lead to worse problems. What a great choice we have now.
Should we bail them out? I am not yet sure that is wise. I am concerned that a bailout encourages bad and risky behavior causing people to think if they get in trouble the goverment will bail them out. I am concerned about the enormous debt placed on the backs of American taxpayers. I largely agree with the point made by Mark Sanford in the
Washington Post. Further, I have little confidence in the government running these organizations. Look what a mess they made of the GSEs such as Freddie Mac and Fannie Mae. Look at Amtrak, where what was supposed to be a profit making government venture still requires infusions of tax money each year.
One thing I am convinced of is that there should be investigations, even criminal if necessary of those involved, including politicians. Let's ensure that those who caused this crisis are held accountable.
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