[Quoted from the Dollars and Sense blog. I’m posting this because I agree with much of it, and also because it shows how completely cut off the mainstream debate is; we here center-left, center-right and right-wing solutions, but left-wing solutions simply don’t exist, as far as our media is concerned. –Amp]
A Gift for a Generation: A U.S. Financial System of Our Own
Last week, I posted ten points (that were by no means exhaustive) for Congressional action immediately in the wake of the financial crisis now gripping our country. At that time, the Democratic leadership of Congress was prepared to adjourn the current legislative Session to campaign, without taking any action at all to put policies in place that protect U.S. taxpayers and the global community that has accepted U.S. financial leadership. Those ten points, to be taken in conjunction with the Power to the People Committee’s platform available on the campaign website, are as follows:
1. Enactment of a foreclosure moratorium now before the next phase of ARM interest rate increases take effect;
2. elimination of all ARM mortgages and their renegotiation into 30- or 40-year loans;
3. establishment of new mortgage lending practices to end predatory and discriminatory practices;
4. establishment of criteria and construction goals for affordable housing;
5. redefinition of credit and regulation of the credit industry so that discriminatory practices are completely eliminated;
6. full funding for initiatives that eliminate racial and ethnic disparities in home ownership;
7. recognition of shelter as a right according to the United Nations Declaration of Human Rights to which the U.S. is a signatory so that no one sleeps on U.S. streets;
8. full funding of a fund designed to cushion the job loss and provide for retraining of those at the bottom of the income scale as the economy transitions;
9. close all tax loopholes and repeal of the Bush tax cuts for the top 1% of income earners; and
10. fairly tax corporations, denying federal subsidies to those who relocate jobs overseas; repeal NAFTA.
In addition to these ten points, I now add four more:
11. Appointment of former Comptroller General David Walker to fully audit all recipients of taxpayer cash infusions, including JP Morgan, Bear Stearns, Fannie Mae, Freddie Mac, and AIG, and to monitor their trading activities into the future;
12. elimination of all derivatives trading;
13. nationalization of the Federal Reserve and the establishment of a federally-owned, public banking system that makes credit available for small businesses, homeowners, manufacturing operations, renewable energy and infrastructure investments; and
14. criminal prosecution of any activities that violated the law, including conflicts of interest that led to the current crisis.
Ellen Brown, author of The Web of Debt writes, “Such a public bank today could solve not only the housing crisis but a number of other pressing problems, including the infrastructure crisis and the energy crisis. Once bankrupt businesses have been restored to solvency, the usual practice is to return them to private hands; but a better plan for Fannie and Freddie might be to simply keep them as public institutions.”
Too many times politicians have told us to support the “free market.” The unfolding news informs us in a most costly manner that free markets don’t work. This is a financial system of their making. It’s now past time for the people to have an economic system of their own. A reading of the full text on the Congressional “Agreement on Principles” for the proposed $700 billion bailout reveals the sham that this so-called agreement truly is. Today our country faces an economic 9/11. The problem that is unfolding is truly systemic and no stop-gap measures that maintain the current bankrupt structure will be sufficient to resolve this crisis of the U.S. economic engine.
Today is my son’s birthday. What a gift to the young people of this country if we were to present to them a clean break from the policies that produced this economic disaster, the “financial tsunami” that former Comptroller General David Walker warned us of so many months ago and instead offered them a U.S. economic superstructure that truly was their own.
Power to the People!
Cynthia McKinney
McKinney/Clemente 2008
US Green Party
It’s not just the mainstream media. No offense, but how many progressive bloggers even remember that Cynthia McKinney’s even running? Yes she has and she’s been coming up with solutions to problems that may not be perfect and people may disagree with but as you said. They aren’t even being mentioned at all.
But I might be in the minority here but I always thought McKinney put the two main candidates to shame.
There’s just this silence all around on anything beyond the Big Two. Know how I found out that Ralph Nader was hanging out in one of my city’s parks? By reading about it after the fact. And I’m on all the Green and Peace and Freedom mailing lists locally so they clearly didn’t know about it even though Nader ran as a Green twice.
I’ve not been focusing on national politics like I probably should (but I can only deal with one catastrophe at a time and local disasters take priority) but she’s the only candidate who really interests me. The rest of the election seems more like a soap opera (and seems sometimes to be marketed as one) than usual.
6. full funding for initiatives that eliminate racial and ethnic disparities in home ownership;
7. recognition of shelter as a right according to the United Nations Declaration of Human Rights to which the U.S. is a signatory so that no one sleeps on U.S. streets;
I can find a lot in this platform to agree with, but policies such as this one don’t protect U.S. taxpayers; they would cost them more money.
13. nationalization of the Federal Reserve and the establishment of a federally-owned, public banking system that makes credit available for small businesses, homeowners, manufacturing operations, renewable energy and infrastructure investments;
Credit is already available for such things at normal market rates. If you’re talking about putting pressure on commercial banks or on entities such as Fannie Mae to give credit to such enterprises that would not normally qualify for such, then you’re steering us right down the road we find ourselves on now.
Which leads to:
The unfolding news informs us in a most costly manner that free markets don’t work.
Actually, the market hasn’t been free; it’s been replete with various kinds of regulations, including pressure from the government in various ways to make loans to people who couldn’t afford them. Certainly loosening of some kinds of regulation permitted greed both on the part of the banks and investments houses and the people taking out the loans to play a part. But misguided policies on the part of the government in trying to make loans available to people that would not normally have qualified for such also played a part.
Fix regulation in those areas where greed was allowed to run unchecked. But people who took out loans they couldn’t pay back were greedy too. Don’t lend money to people who can’t afford to pay it back. If you want to subsidize people, then call it such. Recognize it’s an outright grant of money you won’t get back and tell the American people how much money it’ll cost and where it’ll come from.
RonF,
The current financial crisis is not a crisis of failed mortgages (of which there are currently roughly $100 billion). The current crisis is a crisis of credit default swaps and other derivatives on mortgage backed securities. Poor people didn’t invent or use credit default swaps.
Furthermore, the vast majority of the defaulted predatory mortgages for poor people were made by institutions that had no requirement to loan to poor people (we have already nationalized Freddie and Fannie, which handled mortgages that had any such requirements, and we did so because Frannie and Freddie got burned holding Lehman’s mis-rated garbage securities, not because of its own bad mortgages), so blaming the failed predatory mortgages on requirements that banks lend to poor people is either duplicitous or ignorant.
Fannie and Freddie were not leaders in creating sub-prime mortgages, and they were not heavily involved in ARMs (and certainly not in exploding ARMs). To the extent that Freddie and Fannie got into sub-primes, they did so because they were losing market share to the predatory non-bank lenders (which were backed by the now defunct Bear-Stearns and Lehman Brothers, among others).
The not perfectly free market failed in exactly the areas where it was most free (the completely unregulated credit default swap market working in tandem with the unregulated non-bank mortgage lenders). The freer part of the market caused the failure of the regulated part of the market (Freddie and Fannie), not the other way around.
This is a free market failure, not a regulated market failure. Your comment implies that if the market were truly free, these sorts of problems wouldn’t happen, a claim so ridiculous that you don’t even argue it explicitly. The history of unregulated financial markets is a history of wild booms and busts.
I spent some time working in the brokerage industry during uni time and a lot of it seems emotional to me (which is interesting given that it’s still mostly male and male stereotypes are still prevalent). Very reactionary in nature. Don’t know if that’s really due to regulation or not, just the fact that there’s human beings involved maybe. It’s a really strange industry of sorts to be in the middle of. And that last hour on the phones before the closing bell, really emotional.
Look at the up and down swings just during the past week. Maybe they should shut down Dow and others on Mondays until the requisite wheeling and dealing of the weekend has time to sink in. Okay, maybe just have an afternoon session.
The current crisis is a crisis of credit default swaps and other derivatives on mortgage backed securities.
Well, if some of the mortgages backing the securities didn’t fail, what was the problem?
Furthermore, the vast majority of the defaulted predatory mortgages for poor people were made by institutions that had no requirement to loan to poor people
At no point have I used the phrase “poor people”. I’ve said “loans to people who couldn’t pay them back.” There are plenty of people who are not poor who took out ARMs and other mortgages on much more house than they could afford who are not poor. In my neighborhood there are $500,000 homes that people bought on ARMs. They could have gotten a $250,000 home on a 30-year fixed mortgage, but no; they had to have a BIG house. That’s greed. And that’s a bad mortgage that devalued the security it was a part of.
This is a free market failure, not a regulated market failure.
In fact, it’s not a free market; it’s a regulated one. Improperly regulated, as it turns out, but it’s a regulated market.
Your comment implies that if the market were truly free, these sorts of problems wouldn’t happen, a claim so ridiculous that you don’t even argue it explicitly.
Or implicitly, either. Kindly make your own arguments; don’t build strawmen out of what I didn’t say and claim that’s what I meant.
So you are merely defining free market to refer to the imaginary pixie land of perfect libertarian heaven for purely pedantic reasons, and not to attempt to deny that the current market failures imply something about the current level of financial regulation being too lax (which is what this being a free market failure should be read to mean by any reasonable reader)?
Also,
There was no misguided government policy to try to make unaffordable loans to rich house speculators buying $500,000 houses. In the past 2 years, Fannie and Freddie were deregulated to allow them to get into the jumbo loan business in order to try to keep the housing bubble afloat, but that is a removal of regulation (that kept them out of that market), not a regulation. Even when they were allowed into the jumbo market, they had no goals in terms of getting people into houses they couldn’t afford. So either your first statement was merely ignorantly wrong, or you are now trying to shift its meaning. Do you actually have any idea whether your neighbor’s mortgages were securitized by Freddie or Fannie, or are you just assuming that they must be because they were a bad idea, and Lehman Brothers and Bear-Stearns would never have subsidized bad bets?
And I don’t buy your claims about the implications of your statements. So I will continue rebutting the ridiculous claims I see you implicitly making.
I think you’re sorta right here Charles, at least I hope you are. But first of all, the derivatives derive their value from the underlying security (the mortgage) so if there is a crises in the derivatives it should’ve been caused at least initially by mortgage defaults. But the problem appears to have been amplified in these derivative securities b/c of peculiar market conditions. Here’s what I gather happened:
In the good ol days the mortgage backed securities (MBS) , were very liquid. If a Hedge Fund or whoever owned them needed cash, they could quickly sell them at a fair market price. When housing prices started to decline and defaults increased, funds wanted to sell the risky MBS but determining the exact composition was time consuming and costly. Buyers started to worry that the seller may simply be trying to unload their worst-performing assets, but had no efficient way of really knowing, given the complexity of these instruments, and this asymmetric information made the market for all MBS illiquid. You couldn’t sell these thing in a panic b/c the mere fact hat you’re selling tells the buyer you hold crap. The derivatives, irrationally, started to be valued at close to zero while th underlying mortgages were worth much more.
Now, if you’re right and defaults aren’t really all that bad, the 700bill in derivatives are probably undervalued (since they are ultimately aligned with the underlying security) as Warren Buffet has indicated (he said he’d pic them up if he had 700bill). If we pick them up at 65cents on the dollar we could very well expect them to get back to par when housing prices recover. The next President may then have a huge profit with which he can shore up social security, a pyramid scheme representing the next great financial crises.
Failed capitalism may save American socialism.
Cynthia McKinney has agreed to appear at an internet debate on Revolution Broadcasting (Click on name for link) on October 9, 9pm-12 midnight EST (6-9pm PST) with Constitution Party candidate Chuck Baldwin. Nader and Barr have not confirmed their appearance yet.
Trevor Lyman of Ron Paul moneybomb fame is also trying to get people to pledge to donate to create another debate open to third party candidates.
I probably left out a step. Firms holding undervalued MBS are then forced t value them at the market (mark to market accounting stndards) which is essentially zero. This rocks their balance sheets, forcing them to recapitalize by raising new money. this drives down their market price as investors assume their in trouble and the short sellers come in and as panic spreads banks fear that any bank that wants to borrow from them is on the verge of bankruptcy and they refuse to lend.
and thus credit comes to a halt and we stand on the verge of a severe recession. Very serious problem, and much harder to untangle than some recent wall street crises (like enron, internet bust, etc) b/c there is no clear cut culprit…and with credit, the repurcussions are even more serious.
There was no misguided government policy to try to make unaffordable loans to rich house speculators buying $500,000 houses.
No, there wasn’t. Nor did I say there was, which again brings us back to setting up strawmen. No, this comes under the heading of “greed”. BTW, we’re not talking about “rich house speculators” either, whatever the hell they are, and in any case is something else I didn’t say. What we’re talking about are people who were looking to buy a house to live in. They picked up a loan that either had an interest rate well below market value or that was an “interest only” loan, betting that when the deal expired they’d have a higher income and could afford what would be available at the time. Surprise! Their income didn’t go up. And what with the price of gas more than doubling over that time span and other such things, the amount of disposable income they had may well have even gone down. So they look to get out from under. Surprise again! Lots of people were in the same boat. That increased the inventory of homes to be sold and the number of people looking to cut new loans. The law of supply and demand drove housing prices DOWN to the point that lots of people were living in homes worth less than the money they owed on them (they were “upside down” on their loans) and the price of loans went up to boot.
Trust me, these folks aren’t poor, but they aren’t rich. Now, I don’t know where you live. I live in the SW Chicago suburbs. I bought my house for $90,000 in 1986. It’s about 1600 square feet of space (some below grade, which would normally depress the value some), a 3 bedroom and 2 bath tri-level. At the top of the bubble I could have thrown a stick of dynamite into the front door and sold the remains for about $300,000 (it’s a 3/4 acre lot). I say “throw a stick of dynamite in the front door” because people in the area are (or were …) tearing down houses like mine, splitting up the lots into 1/4 or 1/5 acre lots and building houses twice the size for > $500,000 each. Not as speculation – they were building them to live in. Around me, and around a lot of urban areas, people living in $500,000 homes aren’t rich.
Of course there’s a lot of low-income folks (“poor people”? Define poor ….) who are getting their finances destroyed over this as well. They have to share the blame – no one held a gun to their heads and forced them to buy a house by gambling on whether their income would rise and interest rates would fall. But government does bear some of the blame as well.
In the past 2 years, Fannie and Freddie were deregulated to allow them to get into the jumbo loan business in order to try to keep the housing bubble afloat, but that is a removal of regulation (that kept them out of that market), not a regulation.
Actually the change in Fannie Mae and Freddie Mac goes back to the 1995 changes made to the Community Reinvestment Act during the Clinton administration. The idea was to get financial houses to make “affordable” loans to low-income folks. To quote Wiki:
In the same article it notes that during the present Administration efforts were made by the Administration to rein Freddie Mac and Fannie Mae in, but it was blocked by the Congressional Democrats. Rep. Barney Frank (D-MA) was one of the leaders in this, seeing the whole thing as a nefarious plot to keep poor people from getting affordable loans (which, it turned out, they couldn’t actually afford) and stating that Freddie Mac and Fannie Mae weren’t really in financial trouble.
References are given in the Wiki article.
I remember “redlining”, where banks wouldn’t make loans in a given neighborhood purely based on the race or average income levels there. The original CRA was written to prevent that, and that was fine. But politicians got greedy for votes. And “community organizers” got greedy for power.
You may also find this video a helpful guide.
As with most candidates and platforms, I am split: I like some of the stuff McKinney is saying, but not all of it. Amp, out of curiosity (you said you “agree with much of it”) which #s do you not agree with?
My own ten second take on them:
I wouldn’t support a complete moratorium across the board as it would have pretty serious effects, but i would support a significant change in the law which makes it much harder to accomplish and/or increases the rights of redemption. you could bar some small segment though.
This won’t do people that much good. 40 year loans are horrible animals in terms of total payment. I almost never tell my clients to take them. Anyone who needs a 40 year loan is already in too much trouble and probably needs to move.
Great! use our state as an example; Mass has some of the best law in taht area though we always need improvement.
Great! This is a lot of my practice; affordable housing is a crucial goal. I have seen it done very poorly, though, so the details are pretty important.
Sure, in theory. Sort of depends on the details.
Nope.
If she means shelter as a constitutionally protected right, then nope. That said, I would support significant increases of funding to provide shelter, which would hopefully solve the problem without requiring a new right to be legally created.
That scary phrase “full funding” again. Does it mean what she thinks it means? I read it as saying “as much money is necessary to accomplish the job, irrespective of other competing uses for that money.” If so, then i would only support it for the absolute top priorities of the country, and I don’t think this is one of them.
Closing all tax loopholes is probably impossible. We could (and should) close more of them. Reworking the income tax is a good idea.
Good and bad. We all hate the subsidies. but we don’t want corporations to pack up and leave, or the US economy will tank. While we can tax them more than we do, we need to be sure that we don’t tax them too much.
Hmm. Still not sure on this one.
Sounds good–what does it mean in practice?
Why?
Might work. in principle, it’s an interesting idea, though we’d need more details.
Great! However, most conflicts of interest aren’t criminal, BTW.
BTW, i note that #1,2,4,6,7,8 look at first glance like things which would cost money. #9 and 10 look like things which would raise money. (#13 I don’t know enough about.)
Is the proposal that #9 and 10 would pay for #1,2,3,6,7, and 8? If not, where is the money coming from?
Sad that McKinney has become something of a political joke – outside of her political circles she’s known as very little other than a race-issues politician, and the last time she was in the news before this election was that capitol hill police debacle. In her run with the Green party she actually seems pretty impressive, but I doubt she can shake any of that background.
Whether it’s racist or not, most Americans don’t have any interest in a politician who only gets into the news when she’s complaining about white people.
Could it be that is the only time the MSM is interested in her or what she has to say? That’s often the case with African-Americans unfortunately. Just look at what has happened so far with the MSM in how it handles its coverage of Barack Obama who’s biracial.
And I’ve examined her votes on issues and her stances on issues and I don’t view it as “race-based” in fact, I find it very women-affirming and very feminist. Much more than any candidate put out by the two major parties during this whole entire debacle called the national election.
The so-called bailout plan failed to pass the House vote and the stock market responded accordingly.
It may be for the best. The bailout plan was a needlessly expensive gift to Wall Street; there are more moderate plans that would do the job. As bad as a bad recession would be, it might be better than a $700 billion dollar boondoggle to the richest, most reckless, and most incompetent people in the country.
Unfortunately, the Democrats are a mix of genuinely right-wing, and somewhat progressive but cowardly. Still, they’re marginally better than Republicans. What I’d like to see is a band-aid measure to keep home mortgages from being foreclosed for the next six months, by which time hopefully the people who didn’t create this mess can take charge of trying to fix it.
How is it that denying subsidies to corporations which have already packed up and left will encourage more companies to pack up and leave? That doesn’t make sense.
Many of those companies still have employees and/or operations in the U.S., or otherwise choose to do business in the U.S. in a manner which benefits the economy. they can still pull something out. And of course, new companies are making business decisions regarding location on a daily basis, and/or revising their operations.
The goal is generally to tax them at the best rate of return, which is basically the sum of [tax income] and [supplementary benefit from doing business]. If you raise taxes too high, they may move their business elsewhere (which reduces taxes.) If you make taxes too low, you may be failing to tax people who would stay here and produce business even at a higher tax rate. You can predict it as much as you want, but it’s hard to know without trying. And it is also very hard to really identify exactly what the [supplementary benefit] number really is.
Remember though that businesses are necessary for other factors of our economy (see the [supplementary benefit] part above). Many other countries who have lower budgets are trying desperately to get businesses to move to the countries. So they tax them little, if at all. Similarly, other countries actively subsidize their important businesses.
If you believe–as do I–that having some businesses in the U.S. is necessary, then you have to also consider the competition, and what it would take to get people to stay and produce/work/build in the US instead of elsewhere. SOMETIMES, that may be a corporate tax shelter or subsidy.
Personally, I think we give too much corporate welfare. I think we are probably at the far end of the scale. But I am certainly willing to consider the possibility that we need to give some, though less of some type of business subsidy in order to retain businesses here.
@Radfem – I guessed as much. It’s so damned sad that we hear so little about individual politician’s political decisions – we only hear about them when they’ve done something that will make a big splash around the water cooler.
RonF, there are two ways I could take your argument, one I kind of agree with, and one I definitely don’t.
Let’s start with the disagreement. Subsidized housing and guaranteed below market mortgage rates for low income people have been available in some form or another in every industrialized, developed country for decades, including in the US. It has been a constant initial condition and not a variable. To say that this is *partially responsible* is only correct in the sense that the good people at Bic are partially responsible if I stab someone with a pen.
On the other hand, I think there’s an element in the general culture that increasingly glorifies the cheap trappings of wealth. For a very crude example, consider the elevation of Donald Trump into an MTV celebrity. There are some people out there who think they are living within their means, but they are so obsessed with these sort of materialistic matters, and have so much of their self-worth wrapped up in it, that they have rather shockingly overestimated what their “means” is. This, I think, is one of the partial causes.
But, of course, to say that because of this, that therefore the market should not be blamed, is fallacious. The market is a part of the culture, and it should be structured around the culture that it finds itself in.
RonF,
You brought up $500,000 mortgages for your neighbors as an example of how when you referred to misguided government policies getting people into mortgages they couldn’t afford, you weren’t talking about low-income people. When I pointed out that there was no government policy that supported giving your neighbors $500,000 mortgages they can’t afford, you claimed that you brought up your neighbors as an example of greed being a cause of the problem. In response to my acknowledging that F and F had recently had their regulations relaxed to allow them into the jumbo ($500,000+) market, you then went on to cite a quote from wikipedia claiming that policies at Fannie and Freddie that encouraged lending to low-income and minority borrowers were risky (so, you are back to making the argument you previously claimed was a straw man argument when I rebutted it earlier), and you claim that this refutes my statement that Fannie and Freddie were only allowed into the jumbo mortgage market recently, even though the loan program your cite described have nothing to do with jumbo mortgages. So you are claiming that you didn’t make the arguments you did, and then making new non-sequitor arguments.
Your citation of the CRA program is simply inexplicable unless I pay attention to your implicit argument. The CRA program has nothing to do with F and F getting into the jumbo loan market, and everything to do with the current standard Republican Talking Point (TM) that the CRA program represented a misguided government program to give (low-income and minority) people loans they couldn’t afford. Your discussion of it contains a scare quoted “afford” (suggesting you think the program was inadequately concerned with making sure that low-income home buyers could actually afford the mortgages they got), and ends with a short diatribe about how anti-red lining measures were okay, but the modern CRA was a result of greedy politicians and greedy community organizers trying to gain power and votes by giving people homes they couldn’t afford. So you are back to making the argument you claimed you weren’t making, about the program I accused you of making it about, but you are making this argument while claiming that you are merely pointing out that F and F got into the jumbo market back in 1995 (which they didn’t).
Incidentally, your cite is also misleading about the increase in size of Fannie and Freddie (“By 2007, Fannie and Freddie owned or guaranteed nearly half of the $12 trillion U.S. mortgage market. ” implies that F and F increased in size between 1995 and 2007). That statement implies that these “risky” policies caused F and F to increase in size to nearly half the market, when, in fact, F and F were steadily dropping in market share from the late 1990s or early ’00s (when they controlled more than half the market), with their share drop being matched by a share increase by the non-banks and ibanks, the market share that actually produced this crisis.
Also, while that article claims that a nebulous “some” of the mortgages given to low-income and minority buyers through community organizations were “risky mortgages” , the overwhelming majority of risky mortgages passed through the non-banks, backed by the ibanks, both of which were not answerable to F and F. F and F loans, particularly those made in concert with the community organizations, were predominantly fixed rate mortgages.
The over-leveraging of F and F (which you inexplicably include in your quoted passage) did play a major role in F and F’s failure, was the result of political favoritism, didn’t cause the current crisis, and doesn’t have anything to do with F and F backing loans to low-income and minority home buyers.
Manju,
Obviously, there are failed mortgages behind the failed securities and derivatives, but the portion of the security market that is imperiled is much larger than the portion of the mortgage market that is imperiled (in part because a single failed mortgage may be part of dozens of securities, so a single mortgage can poison securities worth much much more than the original mortgage).
I don’t disagree with your description of the rest of the problem, until you get to your casual aside about Social Security. SS is not in any significant trouble, and the predicted failure of SS has been roughly 40 years in the future for roughly 20 years. In recent years, the number of years in the future that the failure of SS is predicted for has been increasing. This is a sign that there is a problem with the accounting used to estimate when SS will fail (too low of an average wage base growth rate), not a problem with SS.
Medicare, on the other hand, has serious problems.
No, I didn’t say I wasn’t talking about poor people. I said I was talking about people who took out loans they couldn’t pay back. You made a statement that seemingly presumed that meant that I meant only poor people, so I gave an example of people who were not poor but fell into the group of people I was talking about (“people who took out loans they couldn’t pay back”). Now apparently you think I’m only talking about people equivalent to the example I gave. Wrong again. Your problem is that you keep trying to wedge this into one class or another. I’m not talking about a particular economic class. I’m talking about people who took out loans they couldn’t pay back. Regardless of their starting income.
Now, the CRA ties in because it effectively required banks, etc., to make “affordable” loans to a large number of people who it turned out couldn’t actually afford them. The CRA itself was aimed at a subset (“poor people who took out loans they couldn’t pay back”) of the people I am talking about (“people who took out loans they couldn’t pay back”). That was most of the loans, but not all of them, which is why I use the phrase I do. Fannie Mae and Freddie Mac got into the business big time. Sure, others offered such loans as well, but F&F got the ball rolling and the other institutions had to then do so to a) compete, and b) to pass CRA audits. If S.190 hadn’t been blocked in 2005 (or it’s equivalents in 2003) something might have been done about F&F specifically, and the information developed would likely then have led to a general overhaul of the market before we got to this point.
As far as my neighbors go, I have no idea who they got their loans from. Nor does my statement imply where they got it from. It’s enough that the market overall encouraged this practice though regulations and de-regulations passed in the Clinton Administration and whose examination and re-regulation was blocked by Congressional Democrats claiming that Republicans were trying to screw poor people.
Sailorman:
Let’s start with the disagreement. Subsidized housing and guaranteed below market mortgage rates for low income people have been available in some form or another in every industrialized, developed country for decades, including in the US. It has been a constant initial condition and not a variable.
Oh, true. It’s one thing to subsidize housing and below market mortgage rates. But then you know what you’re doing. You know that this is going to cost money and that it’ll be a budget hit. But that’s not what we have here.
What we have here are mortgages that were supposed to be paid back at market rates at one point or another when the people taking them out could not in fact do so. So when that became apparent, the market dove.
If I’m holding paper at 8% and I’m told “The people who took this loan out can only pay 6% but the government will pay the other 2%”, then I’m fine, I can make my plans if I and the markets can count on the people paying the 6%. And the government can plan to pay out that 2% and raise taxes or reduce expenditures elsewhere. Money may come from here or it may come from there, but everyone knows how much money is supposed to come from the various places, everyone who’s putting money in is expected to be able to pay it and it’s all good.
But: if I’m holding paper at 8% on the basis of “The people who took this loan out will pay 4% for 3 years and then will pay 9% after that to make up the difference” and then, hey, guess what, they can’t really pay that 9% (they can only pay 6%) and there was no reasonable expectation that they could, then that paper isn’t going to pay me 8% and I can’t get credit against it based on an 8% payback. So if I made plans or committments based on that 8% payback there’s problems. And if that 9% was “x%”, with “x” having no particular limits except based on what the market would be like when this loan (and millions like it) all came due at the same time, then there’s a very serious problem and you had to be a riverboat gambler to sign that loan. From either side of the table.
It seems to me that part of this is that we’re being asked to subsidize loans well after they were made, loans that were not initially planned to be subsidized and that we therefore didn’t budget to subsidize. We’re hoping that we can buy up the loans, repackage them, and resell them and that the discount won’t be too severe. We’ll have to lay out the capital ($700 billion), but then we hope to get a good chunk of that back, less the discount. So the total bill won’t be $700 billion, but there will be a bill.
Charles:
Your citation of the CRA program is simply inexplicable unless I pay attention to your implicit argument. The CRA program has nothing to do with F and F getting into the jumbo loan market, and everything to do with the current standard Republican Talking Point (TM) that the CRA program represented a misguided government program to give (low-income and minority) people loans they couldn’t afford.
RonF:
Now, the CRA ties in because it effectively required banks, etc., to make “affordable” loans to a large number of people who it turned out couldn’t actually afford them. The CRA itself was aimed at a subset (”poor people who took out loans they couldn’t pay back”) of the people I am talking about (”people who took out loans they couldn’t pay back”). That was most of the loans, but not all of them, which is why I use the phrase I do. Fannie Mae and Freddie Mac got into the business big time. Sure, others offered such loans as well, but F&F got the ball rolling and the other institutions had to then do so to a) compete, and b) to pass CRA audits.
Awesomeness.
Game, point, match to Charles. Unless, of course, RonF is saying that Charles is lying. But I don’t see that.
Ron – problem with your It’s All 1995’s Fault theory. Here’s what you quoted about the CRA above:
In the real world:
That quote should have been attributed to me, not sailorman.
I make the distinction because it’s a matter of setting the parameters. There have been a number of rather uncontrolled arguments from the libertarian side along the lines of “intervening in the market to help those less well off leads to disaster”.
For those who only mean it in the specific sense regarding that bill from 1995, I say this: I don’t think the timeline works. There have been a lot more pertinent events that have transpired in the thirteen years hence, and it seems like a doctrinally motivated stretch. (Consider, just for a gander, the Commodity Futures Modernization Act, which deregulated derivatives trading.) But with all the uncertainty and whodunnit, there is of course uncertainty in any statement, including those I’m otherwise fairly confident in.
On the other hand, for those who mean it in a broad, hardline, categorical sense, it’s simply wrong. There is no uncertainty here. I’m seeing a lot of those arguments out there, and even if all of us here can agree that those people are nuts, their sound bites influence public opinion more than mine or yours.
RonF,
You remain simply wrong about the effects of CRA. I don’t really care about your disapproval of your neighbors, although I also don’t see what they have to do with misguided government policies of excessive regulation.