What is the root cause of the sub-prime crisis shaking the global economy? We need to know so we don’t allow it to screw up our economy even worse.

Many point to dishonesty and poor judgment on Wall Street. There was plenty of that leading up to the near-trillion dollar bailout, and even now the stock market is busily disciplining stupid, dishonest companies.

Others point to the many people who falsified loan applications to get mortgages beyond their means. That too played a role.

But dishonesty and poor judgment are as old as Adam and Eve. Something more was at work in the present crisis, a crisis of unprecedented scope. Why didn’t profit-minded loan companies run thorough credit checks? Why did they keep pumping out low interest loans to high risk borrowers, ignoring the risks?

It’s as if somebody spiked the financial system’s punch bowl with stupid juice, driving normally prudent financiers to dash, en masse, over the cliff.

It seems that way because it is that way. The brewers of the stupid juice were largely (if not exclusively) politicians in Washington who sought to redistribute wealth from the rich and middle class to poor people with bad credit. These politicians fostered various laws and institutions that directed, cajoled and legally bullied mortgage companies to extend big loans to people with little credit.

A case in point is a group called ACORN—Association of Community Organizations for Reform Now. Stanley Kurtz explains in an Oct. 7 essay at National Review Online:

“You’ve got only a couple thousand bucks in the bank. Your job pays you dog-food wages. Your credit history has been bent, stapled, and mutilated. You declared bankruptcy in 1989. Don’t despair: You can still buy a house.” So began an April 1995 article in the Chicago Sun-Times that went on to direct prospective home-buyers fitting this profile to a group of far-left “community organizers” called ACORN, for assistance. In retrospect, of course, encouraging customers like this to buy homes seems little short of madness.

… At the time, however, that 1995 Chicago newspaper article represented something of a triumph for Barack Obama. That same year, as a director at Chicago’s Woods Fund, Obama was successfully pushing for a major expansion of assistance to ACORN, and sending still more money ACORN’s way from his post as board chair of the Chicago Annenberg Challenge. Through both funding and personal-leadership training, Obama supported ACORN. And ACORN, far more than we’ve recognized up to now, had a major role in precipitating the subprime crisis.

How has Obama responded to the lessons of the subprime crisis? He and other far-left Democrats like Nancy Pelosi and Barney Frank have pointed their fingers at President Bush, John McCain and the free market. The dodge is so transparently silly that even Saturday Night Live, no friend of conservative politics, debunked it in a recent skit about the bailout.

Obama, Pelosi and Frank blame what they characterize as a Republican rage for deregulation, but Bush and Republicans in Congress, including McCain, pressed repeatedly for closer oversight of the twin-headed financial monster called Fannie Mae and Freddie Mac. The two entities are government sponsored enterprises, with an implicit guarantee of government backup. That cozy relationship with Washington allowed them to pursue reckless investment activities knowing the government would probably rescue them if things went south.

Bush, McCain and others recognized the problem and tried to fix it. Democrats repeatedly blocked these efforts. When the problem finally exploded, the monster’s tentacles had reached so deep into the economy that even many defenders of limited government concluded the government need to step in to avert an economic meltdown.

What drove Obama and other Democrats to block reform efforts? Some point to a huge infusion of lobbying money. Fannie and Freddie contributed enormous sums to Obama and other Democrats while McCain, an influential veteran senator, was getting bread crumbs from these institutions. Clearly the skilled lobbyists at these two giant mortgage companies directed their money where they thought it would most benefit them.

There’s a less cynical explanation. Whatever influence the lobbying money might have had, it took a back seat to an ideological motivation. Obama, Pelosi, Frank and other far left Washington Democrats have long believed that giving Washington more and more power to redistribute wealth is the way to make America a better place.

The curious thing is how uninterested these politicians are in the results of their ongoing experiments in social and economic engineering. They are unfazed by the latest results in the credit markets. They are unfazed by the fact that states with the highest taxes on businesses (such as Michigan) have lost jobs and seen worker salaries decline while states with low taxes on business (such as Arizona) have been creating jobs and raising average worker salaries. They are unfazed, moreover, by the results of similar experiments abroad.

In the previous century, many European democracies experimented aggressively with centralized planning and wealth redistribution, and the results are in. Those with high taxes and heavy labor regulations generally experienced sluggish economic growth and high unemployment. Countries like Ireland and Estonia, who now have lower, flatter taxes and less regulation on their labor markets, are booming, with both workers and businesses moving ahead. Those in Washington who care about the poor, who care about workers, should take note.

UPDATE: My Tennessee blogging cousin, Bill Hobbs, has an excellent discussion of this issue at Newsbusters.


  • Scott

    Superbly done.

  • Daniel

    If you want to get to the root of the problem, John, you’ll have to dig deeper than mere redistribution.

    It’s not a question of politicians funneling money from the wealthy and middle-class to the poor, it’s a question of easy-credit monetary policy that propped up companies making horrific business decisions. It’s more important to look at the money supply itself (and the Federal Reserve) than legislation.

  • Daddio

    The far left ideologues will never change. It is not about the results, it is about the intentions. As long as they can point to their efforts to bring “fairness and equality” to the poor, they are justified in committing any sort of egregious acts. There can be no consequences for these people because they serve a greater good. (At least in their minds). Witness the bout between Frank and O’Reilly. O’Reilly is as big a blowhard as they come, but in this instance he was right. Frank et al were not just asleep at the switch, they were actively stoking the fires of this disaster. At the very least Frank should be impeached. I think he should be in jail for malfeasance.

    Death to tyrants, prison for Congress.

  • http://www.cdobs.com John Powers

    Daddio,

    Impeach away, but the common chant on blogs to jail those that made bad law is distressing.

    Death to whose tyrant? Those we agree with or those we disagree with? Prison for which Congressmen, my party or yours?

    I think one of the root causes of the most recent bank failures is a fear of being jailed for financial failure. Many companies (Merill Lynch for example) were in fine cash positions, but sold for a song, rather than violating accounting standards.

    JBP

  • smrstrauss

    Big deal. In 2004, four years ago, Democrats thought that there was not a crisis with Fannie and Freddie. At the time, who would have said that there was looming crisis with Washington Mutual, Lehman Brothers, Bear Sterns and AIG?

    And, what you are not saying is that in all the years in which Bush asked for tighter regulation of Fannie and Freddie, until the last two years (when the legislation to regulate WAS passed) the REPUBLICANS were in charge of both houses of Congress.

    So, the Democrats could have said good things about Fannie and Freddie and bad things about tighter regulation, but unless the bill was filibustered in the Senate (which it wasn’t), they really had no power to block the legislation. Who blocked it? Well, obviously there must have been some Republicans who were not interested in passing the bill.

    Moreover, what you are NOT saying is that in 2005 in the House of Representatives, a bill to far more tightly regulate Fannie and Freddie was passed with the cooperation of leading Republicans, such as Bennett (who sponsored the bill) and Michael Oxley chairman of the house finance committee, who got the cooperation of Barney Frank.

    So, in 2005 in the House, a bill was passed to more tightly regulate Fannie and Freddie, but it failed in the Senate. It never got out of committee. Why? Because at the time, the Bush administration wanted to go all the way and cut off Fannie and Freddie entirely.

    Here’s the proof:

    Former Chairman of the House Finance Committee Michael Oxley says (in the Financial Times in early September) Quotes:

    In the aftermath of the US Treasury’s decision to seize control of Fannie Mae and Freddie Mac, critics have hit at lax oversight of the mortgage companies. The dominant theme has been that Congress let the two government-sponsored enterprises morph into a creature that eventually threatened the US financial system.

    Mike Oxley will have none of it. Instead, the Ohio Republican who headed the House financial services committee until his retirement after mid-term elections last year, blames the mess on ideologues within the White House as well as Alan Greenspan, former chairman of the Federal Reserve.

    The critics have forgotten that the House passed a GSE reform bill in 2005 that could well have prevented the current crisis, says Mr Oxley, now vice-chairman of Nasdaq. He fumes about the criticism of his House colleagues.

    “All the handwringing and bedwetting is going on without remembering how the House stepped up on this,” he says. “What did we get from the White House? We got a one-finger salute.” The House bill, the 2005 Federal Housing Finance Reform Act, would have created a stronger regulator with new powers to increase capital at Fannie and Freddie, to limit their portfolios and to deal with the possibility of receivership.

    Mr Oxley reached out to Barney Frank, then the ranking Democrat on the committee and now its chairman, to secure support on the other side of the aisle. But after winning bipartisan support in the House, where the bill passed by 331 to 90 votes, the legislation lacked a champion in the Senate and faced hostility from the Bush administration.

    Adamant that the only solution to the problems posed by Fannie and Freddie was their privatization, the White House attacked the bill. Mr Greenspan also weighed in, saying that the House legislation was worse than no bill at all.

    “We missed a golden opportunity that would have avoided a lot of the problems we’re facing now, if we hadn’t had such a firm ideological position at the White House and the Treasury and the Fed,” Mr Oxley says. (See: http://www.ft.com/cms/s/0/8780c35e-7e91-11dd-b1af-000077b07658.html?nclick_check=1)

    End quotes:

    Then what happened? Well the Democrats and moderate Republicans cut down the Republican bill, which never got out of Senate committee. McCain’s backing of a bill to more tightly regulate Fannie and Freddie has received a lot of publicity lately, but in my opinion, his bill would not have regulated any more strictly than the House bill, Federal Housing Finance Reform Act of 2005. (For confirmation, see http://www.opencongress.org/bill/109-h1461/show and click on “more” after “amends the housing”)

    Moreover, most financial experts in the real estate market are now saying that Fannie and Freddie played a very small role in the vast increase in risky loans that were made in the Real Estate Bubble. By far most of the loans were made by commercial mortgage companies, who were unregulated and not subject to the Community Reinvestment Act (CRA).

    So, why did they make so many loans to the poor. NOT because of any government law or prodding. They made lots of loans to the poor because they almost desperate to make as many loans as possible in a boom market, and the greatest area of opportunity was in poor areas. Bush was even proud of it.

    Here he is in 2003 in signing the “American Dream Downpayment Act of 2003:

    “The rate of homeownership in America now stands a record high of 68.4 percent. Yet there is room for improvement. The rate of homeownership amongst minorities is below 50 percent. And that’s not right, and this country needs to do something about it. We need to — (applause.) We need to close the minority homeownership gap in America so more citizens have the satisfaction and mobility that comes from owning your own home, from owning a piece of the future of America.

    Last year I set a goal to add 5.5 million new minority homeowners in America by the end of the decade. That is an attainable goal; that is an essential goal. And we’re making progress toward that goal. In the past 18 months, more than 1 million minority families have become homeowners. (Applause.) And there’s more that we can do to achieve the goal. The law I sign today will help us build on this progress in a very practical way.

    Many people are able to afford a monthly mortgage payment, but are unable to make the down payment. So this legislation will authorize $200 million per year in down payment assistance to at least 40,000 low-income families. These funds will help American families achieve their goals, and at the same time, strengthen our communities.”

    So you could say that Bush contributed to the bubble and to making risky loans.

  • http://www.cdobs.com John Powers

    Nonsense smrstrauss (and Michael Oxley),

    There are 1000 ways to increase homeownership among minority groups that do not involve financial swindles. The claims of one thoroughly discredited Representative are not particularly persuasive, when he shares a good deal of the responsibility for the regulatory mess.

    President Bush and a grand majority of Americans are in favor of home ownership..but I have yet to see evidence that Bush and the majority are also in favor of shiftless behavior.

    JBP

  • smrstrauss

    First, with regard to shiftless behavior. True, the head of one of the Fannie Freddies, or maybe it was both, participated in financial misstatements of earnings, which in essence defrauded stockholders.

    But of this we can only say they were the heads of private capitalist companies, like Enron. It was greed that made them do it, not a desire to help the poor and minority groups.

    Now the misstatement of earnings defrauded stockholders. In what way did shiftless behavior on the part of Fannie Freddie harm the people who took loans, or even the taxpayer. The taxpayer does have to pay upfront for Fannie/Freddie, but in time those mortgages are good, and will be sold, and we are most likely to make a profit on this deal.

    This article http://knowledge.wpcarey.asu.edu/article.cfm?articleid=1644 shows that the rate of delinquency for Fannie and Freddie is relatively low, which indicates that they were not taking in vast amounts of sub-prime mortgages. (The figures are from a July article, with delinquency rates as of April. Certainly they have increased since then, but then so have the delinquencies at commercial banks and mortgage firms.)

    A quote from the article:

    As of April, Sanders said, the rate of serious delinquencies on loans held by Freddie Mac was 0.81 percent. Fannie Mae’s rate of serious delinquencies was 1.15 percent. Those rates compare to market-wide rates of serious delinquency of 1.47 percent for prime mortgages, 8.35 percent for Alt-A mortgages, and 20.74 percent for subprime mortgages.

    Fannie Mae and the smaller Freddie Mac either own or guarantee nearly half the entire market of U.S. home loans. The companies purchase mortgages from lenders, keep some for their own investment portfolio, and resell some to Wall Street investors as collateralized debt obligations or asset-/mortgage-backed securities.

    “It is clear that Fannie and Freddie are the remaining source of stability and prudent underwriting practices among financial intermediaries,” Sanders said. “It is their willingness to continue to purchase conforming loans that is keeping the U.S. housing market afloat.”

    Finance Professor Herbert Kaufman holds the same view. “Fannie and Freddie haven’t been involved in subprime mortgages — those with all the defaults, the real source of the market crisis. Fannie and Freddie, instead, have mainly bought prime mortgages, with strong credit standards and fairly strict lending requirements. Even in this bad mortgage market, the default rate on those prime mortgages is reasonable based on historical precedent.

    End quote

    So, though Fannie and Freddie did show the same kind of greed that Enron and lots of other companies (I forget them all) had shown, they do seem to have been prudent investors.

    As for the ideas that the Democrats forced Fannie and Freddie to lend more to minorities and that caused either the bubble or the sub-prime mess, neither are valid.

    The CRA and HUD guidelines do require Fannie Freddie to lend in minority areas and to middle income and low income people, but in both cases the companies have absolute discretion over whom they will lend to. And in most cases (judging by the low default rates) they loaned money prudently.

    The bubble was mainly caused by commercial mortgage companies, many of whom made the most risky of sub-prime loans, and they were not regulated.

    Democrats called out repeatedly for regulation of commercial mortgage brokers, but Republicans turned a deaf ear.

    Now, re Bush not being in favor of shiftless behavior. I’m sure that he says he isn’t. But perhaps we should judge by actions and not words.

    See:

    http://www.washingtonpost.com/wp-dyn/content/article/2007/08/22/AR2007082200049.html

    And
    http://www.guardian.co.uk/world/2007/feb/08/usa.iraq1

    And
    http://www.nytimes.com/2008/09/11/washington/11royalty.html?em

  • http://www.mvpicton.co.uk The Shalom Family Campaign for Social Justice

    “The Credit Crisis: Who Brewed the Stupid Juice?” Good question, but really, don’t we already have a good idea of the answer? It’s the common culmination of part of our own ‘root kit’!

    There is only one that could possibly bring this common chaos and hurt to our common humanity. The Devil, Satan, Lucifer, the Fallen Angel, in consequence – SIN? For unbelievers of any God we suppose there will always be an alternative offering of excuse for the selfish, greedy, short sighted behaviours of human beings. Some may consider such matters as totally irrelevant and not give a damn, but we will stick with the notion that we are, by differing degrees, all living under the powers and influence of Satan.

    Some will scoff at such an idea, but there is nothing new about that fact. Proving to yourself that you are not under his influence, directly or indirectly, should be a whole lot easier than believing that he doesn’t exist. Why would anyone be selfish? Why would anyone be selfless? What could possibly motivate us to be either and what gives us the liberty to chose? God-willing, a correctly formed moral conscience?

    It seems the latest chaos has somewhere been built upon the false promise of happiness; to be found in ‘riches’ beyond need, both individually and as corporate concerns. Why should we have more than we need? Even those who have made vast riches upon the latest financial calamity will meet their own reward. Is it really a ‘justifiable’ expression of moral, corporate, or personal responsibility to make a fast buck, at any expense, just because you can? As proposed, are we not, ‘under the influence’, of , “I just couldn’t resist the temptation – I had to do it!”, some might say or, “Well, if I don’t do it, somebody else will!”. All excuses for the ‘golden calf’, of modern times, the lame capitalist market place, which has been found guilty of speaking in false tongues.

    But we are all human. We discover a taint, in our individual best efforts and collective choices. It is an inescapable part of what being human is all about; we are not perfect without God’s grace. All of us are responsible for this ‘stupid juice’, but especially those of us, who have turned away from, or resist, the capacity within each and every one of us, to form, encourage and use, a correct moral conscience.

    Was it not Jesus Christ himself who adjured us to “stay awake”, for there would always be wars, famines, tribulations. Is not the present situation just another test in our faith in our journey to Heaven? We have seen with our own eyes that faith can indeed move mountains, just look at what the bank systems have been doing for years, money created out of nothing but faith, but the faith, being exposed of mortal man, is unswervingly, undeniably blighted by the ‘root kit’. It has become something which appears to serve only for itself, not for each other.

    For the average citizen trying to make ‘sense’, or ‘waking up’ to the real worldly affairs of everything-that-is, trying to be, or trying to make a positive difference in the world, all seems impossible, especially when leading figures in our societies, those regarded as being in ‘higher positions’ of ‘authority’ and ‘respect’, seem to be, ‘getting away with it’ all the time.

    Even those of us who have tried to live a simple, Family and Community life, well within our means and beyond the shadow and misery of debt, (to this end we make our reply here – please see the Shalom Family Campaign for Social Justice website) have been cast adrift, by the almighty, seemingly unshakeable ‘faith’ of corporate enterprise and its view of ‘right’ from ‘wrong’.

    None of us may be able change the world but since evil flourishes when good people do nothing, we kindly urge everyone to ‘stay awake’, do not be afraid. Do whatever you can, wherever and whenever you can. Keep passing the baton, for the ‘race’ (if there ever was one) and the journey is far from over. This is just another beginning. Have hope and faith. This beginning is all of ours too?

    Kind regards,

    The Shalom Family.
    Immorally Evicted by Crest Nicholson UK
    Moderators permitting, please ‘Google’, ‘houseboat eviction'(without marks) for more details.

  • http://www.cdobs.com John Powers

    “Is it really a ‘justifiable’ expression of moral, corporate, or personal responsibility to make a fast buck, at any expense, just because you can?”

    Absolutely, positively yes…One may ask is it more justifiable to lose a fast buck like so many did over the last month, and the obvious answer is NO.

    Thousands of great companies have seen the brink of disaster in the last few weeks waiting for someone to come in and make a “fast buck” by investing wisely. Literally millions of jobs, and at least in the short term, the production capabilities of the West are at risk because no one wants to make a “fast buck”.

    We need 100x the number of speculators (and 1/100 of the condemnation of those who may have failed in the past) plowing ahead in the market today to get moving again. More “fast buck”s please!

    JBP

  • Mary Myers

    If you want to know who to blame for the credit crisis, blame the American people. As H.L. Mencken said, “Democracy is a form of government whereby you give the people what they want and you give it to them good and hard.”

    The voters want socialism, now let them eat it.

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