A few common talking points of the right in recent days are that:
1) The efforts of the left to occasionally let poor people (Some of whom were probably black, can you imagine?) buy some homes is a big part of what lead to the current financial dire straits we find ourselves in.
2) Fannie Mae and Freddie Mac were a big part of the problem, and since they were government-sponsored, this is certainly not a failure of the free market and there’s no need whatsoever for more regulation and everything’s fine with our economic theories and oh look a bird.
In an opinion piece in the Wall Street Journal, of all places, Thomas Frank lays that crap to rest.
First, Fannie and Freddie:
I asked Bill Black, a professor of economics and law at the University of Missouri-Kansas City and an authority on the Savings and Loan debacle of the 1980s, what he thought of the latest blame offensive. He pointed out that, for all their failings, Fannie and Freddie didn’t originate any of the bad loans — that disastrous piece of work was done by purely private, largely unregulated companies, which did it for the usual bubble-logic reason: to make a quick buck.
Now, of course, that’s not to say that they weren’t part of the problem . . . certainly they were, but they didn’t create the problem. They just, like virtually everyone else, made it worse.
But what about ‘the greed of the borrowers’?
So when we have dispatched this first canard, we learn from other conservatives that it is the sub-prime people who are to blame; that by taking out loans they couldn’t possibly pay off, these undesirable borrowers have ruined us all.
There is no way to measure the number of people who took out mortgages they knew they couldn’t afford, of course, but for what it’s worth, a 2007 report by the Mortgage Bankers Association reports that the FBI estimates “80 percent of all reported fraud losses arise from fraud for profit schemes that involve industry insiders.” That means the lenders, not the borrowers.
Huh. Now, that’s fascinating. I wonder who Professor Black thinks actually is at fault?
Most of the mistakes for which we are paying now, Mr. Black told me, were actually made “by four entities that under conservative economic theory should have exercised effective market discipline — the appraisers, the originators of the mortgages, the rating agencies, and the investment banking firms that packaged the subprime mortgage-backed securities.” Instead of “disciplining” the markets, these private actors “served as the four horsemen of the financial apocalypse, aiding the accounting fraud and inflating the housing bubble.” It is they, Mr. Black says, who “turned a crisis into a catastrophe.”
Weird. I totally wouldn’t have guessed that an army of rational private actors acting in their own self-interest would have lead us directly to the brink of financial ruin in the absence of strong government regulation.
I guess you learn something every day.
Don’t comment unless you accept the basic dignity, equality, and inherent worth of all people.
For some reason assigning blame in this annoys me. It always seems like (While of course there are many factors) the real fault lies with something I didn’t like in the first place.
I figure that it all boils down to greed. Someone wanted more house than they could really afford (or money from the equity) so they borrowed money from someone that just wanted to write lots of loans that would eventually be sold and resold etc. etc. and this was all going to be okay because housing prices always go up.
I think that was the common mistake, housing prices always go up. Once you buy that the rest of it makes sense.
I’d let the originators off of the hook by the way. They’re in sales, middlemen (if you’ll pardon the expression). They sell annuities. I’ve never heard that they had any other purpose. The banks design the instrument and the sales people sell it.
The appraisers and rating agencies on the other hand….
Should probably add that some more regulation is a good idea. The market won’t work if you’re too big to fail. I’m sure that we’d recover from the total melt down of the banking industry…but I’m not such a market purist that I think it’s worth it.
I would like some mechanism to ahem…”eliminat the moral hazard for the key players” in other words soak the rich.
I’m finding this sudden appearance of “blame the (black) poor” really startling – I’ve been reading Australian and British reports and haven’t seen this anywhere, just from US sources. Not that Australians and British people aren’t racist, but it seems such ridiculous reasoning – the “sub-prime” mortgagees were not the ones profiting, assets were vastly over-valued, and regulation was conspicuously absent in which case people are free to make up whatever crap they like about their company’s value.
One of the specific “blame the blacks” lines they’re using involves the Community Reinvestment Act.
Here’s all you need to know about that:
1. It’s a 1977 law.
2. It applied only to banks and thrifts.
3. The mortgage crisis didn’t come out of banks and thrifts, but rather unregulated mortgage outfits.
4. I win.
There are people who have no idea how to figure out how much house they can afford. There was a woman interviewed on NPR (or possibly BBC) who was still absolutely convinced she could afford her house, but she was forced into foreclosure when her mortgage went up $200/month. She could have run into the same problem with job or health problems or with big repairs. As far as I could tell, she was utterly sincere– and I think her job was giving other people advice about home buying.
I admit this is blaming something I usually blame, but conventional schooling generally doesn’t have anything about how to live as an adult. This means that if someone doesn’t have unusually good instincts or sensible parents who can teach what they know or a spouse with good financial sense who gets listened to, they really vulnerable to making bad choices.
1) Of course Fannie and Freddie didn’t originate the loans – they are not banks. So? That hardly proves they are not responsible for the crisis.Their role was to provide government backing for mortgages by buying them up and repackaging the debt. And in that role they grew to dominate mortgage banking – and created the market for sub-prime mortgages.
The motivation was profit – Fannie and Freddie made money off the loans they underwrote/packaged. and they were as “greedy” as any private lender (it seems many left-leaning folks are stuck on that greed part).
So F&F found ways to create more customers – by extending loans to borrowers who otherwise would not get them. They did this by subverting free market banking’s discipline and cold assessment of risk .
They were able to do this because their government backing allowed them to ignore the usually rules of free market economics.
2) The private banks that made these bad loans were forced to by the CRA – which established quotas and imposed sanctions on lenders that did not meet the quotas.
The Clinton white house expanded the scope of CRA lending enormously.
This was basically affirmative action applied to mortgage lending: People without the credit/collateral to justify a loan by financial merit got the loan anyway.
And if a private lender did not meet government-mandated quotas for such irrational loans, they were penalized.
So this author’s attempt to shift blame onto private banks is disingenuous at best. The government made the market – and forced private institutions to make bad loans as a condition of playing in the market.
3) Guess who was packaging the debt from these affirmative-action loans?
Fannie and Freddie.
And guess who F&F showered with campaign contributions?
The Dems who instituted and expanded CRA – generating loans that “greedy” F&F profited from.
One hand washes the other.
– – – – – –
None of the points made in the WSJ opinion piece succeed in explaining away the connection between the CRA, Fannie and Freddie, and the current crisis.
This comment edited because ClaraT is a previously banned poster operating under a sockpuppet.
ok you win.
i have family in california. they tell me of incredible stories of people who have purchased these homes that they clearly could not afford and signed for interest only loans in which only the interest is paid and the principle remains untouched for years. the plan is to sell the property at a date in the future for a significant profit thus the principle would not need to be paid down. it sounds like high stakes gambling to me.
by my reading of the reinvestment act and specifically the 1995 changes made to it, this is precisely the type of foolishness that was allowed for, with the perfectly predictable result that many folks would lose their homes. if we are to place blame at all, i would say that some lending organizations, under the relaxed mortgage rules, allowed some folks to make incredibly risky financial decisions and some folks, taking advantage of the relaxed rules, risked that money and lost.
how this came to be a black thing is unclear to me.
A friend of mine who was steered into a sub-prime mortgage talks about her experience here.
It isn’t just people wanting more than they can afford. It’s often contientious people being led down the garden path because sub-prime mortgages made a lot of money for the people who sold them.
Right, Siobhan, and it’s worth asking who has the greater and overriding responsibility in that situation. Is it the would-be homeowner, who probably doesn’t know much about the industry, how loans are structured, how homes are valued, how the real estate market works, etc.? Or is the loan originator, whose job it is to know all of that?
—Myca
Everybody’s read this, right? To those of us wondering
it’s a real eye-opener.
Great link, Lu … it really explained the technical aspects of how ‘subprime’ works (er … worked) in a way that makes sense.
—Myca
Myca, I thought the broker’s job was to sell mortages?
She screwed up and it bit her badly. I feel bad for her.
The private banks that made these bad loans were forced to by the CRA – which established quotas and imposed sanctions on lenders that did not meet the quotas. The Clinton white house expanded the scope of CRA lending enormously.
If this is the fault of a Carter-era law and its Clinton expansion, why did it take until 2007 for us to see the bad effects? In traditional banking, if the banks were being “forced” into taking bad risks, surely we should have seen banks failing because of all those defaults — housing values haven’t gone up continuously since 1977.
In fact, there are no “quotas” under the CRA (just like the first Dodd draft of the bailout didn’t have a 20% payout to ACORN) — I do wish people would actually read the laws they’re talking about and back up their claims with a citation to the specific section of the law.
The CRA requires that each depository institution’s record in helping meet the credit needs of its entire community be evaluated periodically. That record is taken into account in considering an institution’s application for deposit facilities. Neither the CRA nor its implementing regulation gives specific criteria for rating the performance of depository institutions. Rather, the law indicates that the evaluation process should accommodate an institution’s individual circumstances. Nor does the law require institutions to make high-risk loans that jeopardize their safety. To the contrary, the law makes it clear that an institution’s CRA activities should be undertaken in a safe and sound manner.
So F&F found ways to create more customers – by extending loans to borrowers who otherwise would not get them. They did this by subverting free market banking’s discipline and cold assessment of risk . … 3) Guess who was packaging the debt from these affirmative-action loans? Fannie and Freddie.
Could I get a citation to back up the claim that F&F were the only ones engaging in the creation of mortgage-backed securities, or even the only ones engaging in the creation of MBSes that included high-risk loans?
Incidentally, let’s look at who benefited most from F&F’s political action committees:
Go to http://www.opensecrets.org/news/2008/09/update-fannie-mae-and-freddie.html. Copy and paste the chart into MS Excel. Go to Data, sort, sort by total from PACs, descending. Here’s what your chart will look like for the top 5 recipients:
Blunt, Roy: House (R-MO) $78,500
Bennett, Robert F: Senate (R-UT) $71,499
Bachus, Spencer H: (R-AL) $70,500
Bond, Christopher S ‘Kit’: Senate (R-MO) $64,000
Reid, Harry: Senate (D-NV) $60,500
Huh! look at that! When you look at the PAC money, which are contributions actually controlled by the F&F corporations themselves (rather than the money donated by the employees who worked there), the top 4 recipients are Republicans. Obama’s $126,349 consisted of $6,000 from the PACs, and $120,349 from the folks who worked at F&F who voluntarily supported him with their own after-tax dollars.
Search Franklin Raines in the FEC’s database. Franklin Raines, who in McCainWorld is now Obama’s BFF, gave just as much money ($1000) to the Friends of Phil Gramm PAC in 2000 as he ever has given Obama. If we’re really going to start doing guilt-by-campaign-donation, the Republicans aren’t going to get off easily.
Now, can the next person who says that this crisis is all the fault of Carter, Clinton and Democrats as a whole please cite some actual information to back up their claims?
ClaraT, given your email address and IP address, I believe that you are a sockpuppet for a commenter by the name of Ben-David.
Looking at Ben-David’s past posts, in particular the racism and homophobia that’s exemplified so many of them, I find it hard to believe that he (you) accepts the basic dignity, equality, and inherent worth of all people.
That’s the moderation policy for this thread, so you’re not welcome here any longer.
Furthermore, Ben-David has already been banned from the blog, so (lucky you) now you’re banned too!
PG has already demolished your argument, so I won’t go into that, but I will note that your utter lack of respect for the proprietors of the blog and the other commenters tells us everything we need to know about your respect for the truth.
—Myca
Cool, a sock puppet! Good catch, Myca.
That F & F didn’t originate the loans is irrlevant. Bear Sterns didn’t origintate loans either. Are they therefore exonerated?
I suppose it makes logical sense that the problem originated with the, well, originators: mortgage banks. But the reason these banks felt comfortable making so many risky loans is that they knew they didn’t have to hold onto them. In other words, there was a huge secondary market for these loans.
Of all the players in this secondary market F and F were by far the largest. They controlled trillions while the largest hedge funds control around 30billionish per fund (and there’s only about 4-5 in that league).
I understand as a % of their assets, F and F had fewer bad loans than others, but they were so huge that the total number still dwarfed all other players. and, of course, unlike Goldman Sachs, they managed to blow themselves up.
Its hard to measure what % of the blame should go to them, but I’d think it would be quite large.
Manju,
I agree that F&F got over-invested in MBSes. That still doesn’t explain why Bear, Lehman, Goldman, Morgan and the gang went down as well.
What do you mean Goldman didn’t ‘blow itself up’? Despite Ben Stein’s whining that Goldman was shorting CDOs, it apparently was deep enough in MBSes that it no longer could function as an i-bank but instead is now a bank holding company — it and Morgan became “dowdy deposit-taking banks subject to regulatory authorities,” in one Indian business reporter’s wonderful phrase).
Were F&F somehow forcing Wachovia and WaMu to make risky decisions about mortgages and investments in commercial real estate? Or did all these profit-driven entities get fooled by the high scores the credit rating agencies gave the securities and buy them up like candy?
I have no problem blaming F&F for their own downfall. What I haven’t heard yet is why they’re to blame for everyone else’s, too. For example, was F&F a sufficiently big player on the other side of AIG’s credit default swaps that F&F alone could bankrupt AIG, or were there an awful lot of other folks who did the same business?
F&F got too devoted to making their stock price go up, but that’s not something that government regulation makes you do; it’s what being a publicly held corporation these days tends to make you do. It’s because these problems were of capitalism, not socialism, that they are not peculiar to F&F but in fact were part of most of the big publicly-traded financial institutions. (Hedge funds and private equity firms, of course, are not publicly traded.)
Also, I must point out that publishing Thomas Frank occasionally doesn’t save the WSJ from rampant dishonesty. Its editorial board continues to claim that Gramm-Leach-Bliley (the legislation that removed Glass-Steagall’s barrier between retail and investment banking) passed the Senate on a 90-8 vote that included most Democrats.
What they don’t mention is that the 90-8 vote was not on the bill itself but on the conference report after the reconciliation with the version passed by the House. When voted on by the Republican-controlled Senate of 1999, GLB was an almost perfect party-line vote: no Republican voted against it, and the only Democrat who voted for it was Hollings (SC).
Because of those old traditions of comity, once a bill has passed both houses of Congress and is back up after conference, even those who opposed it tend to vote to accept the conference report and send it on to the White House. If there had been another party line vote on the conference report, that wouldn’t have stopped the legislation; it just would have been seen as graceless. Apparently Democrats might as well go the full Pelosi and abandon all efforts at letting even things they disapprove of go smoothly; otherwise they’ll only be accused a decade later of having supported something they all voted against.
Right, PG.
The point is not, “Fannie and Freddie are blameless,” the point is, “What went wrong, went wrong because of lack of regulation, not because of ‘big government.”
—Myca
If it were just F&F, why would $37bil of the money the government is loaning AIG be going to i-banks, including Goldman?
AS MUCH as $US37 billion from federal bail-out loans to American International Group has gone to investment banks, including Goldman Sachs Group, the company US Treasury Secretary Henry Paulson used to run.
Without the Government money, Goldman, Merrill Lynch, Morgan Stanley, Deutsche Bank and other companies could have become some of the biggest creditors in a bankruptcy filing by AIG, the world’s largest insurer, because of its billions in losses on subprime bonds and corporate debt.
“It was the biggest crisis ever — if you’re an investment bank,” said Joshua Rosner, a managing director at investment research company Graham Fisher & Co in New York. “We didn’t just save AIG. We saved the counterparties, the banks. It’s true that it would have been a disaster, but it would have been a disaster for them.”
Whatever the causes of this financial mess, and they are complex, left-wingers should not use it as an excuse to say how awful capitalism is.
Has any body ever come up with anything better ? The economic system set up by communist governments such as the late Soviet Union was the most inept and inefficient ever devised by mankind. It guaranteed general poverty except for party bigwigs, who had all sorts of priveleges.
A recent book on gullible Americans who settlled in the Soviet Union in the 1930s describes a lavish banquet for Stalin and guests filled with the choicest gourmet dishes during WW2 while millions in that country were starving.
Did anyone say that?
Better than free-market capitalism?
Yes. It’s called a mixed economy, which involves the government regulation needed in order to prevent the massive bust cycles an unregulated market will produce on its own.
Like the one we’re in right now.
—Myca
Myca,
I suspect that in Robert’s head, this
F&F got too devoted to making their stock price go up, but that’s not something that government regulation makes you do; it’s what being a publicly held corporation these days tends to make you do. It’s because these problems were of capitalism, not socialism, that they are not peculiar to F&F but in fact were part of most of the big publicly-traded financial institutions.
got turned into
Workers of the World, Unite!
I’m actually a very pro-capitalism liberal; one of the areas where I diverge with the Democratic Party is that I’m skeptical of unions. However, much like greater regulation probably saved capitalism in the U.S. during the Depression and allowed the U.S. to avoid becoming a socialist or communist country, I believe we need some regulation on the extremely complex, globalized forms of capitalism we have today. We ain’t living in Adam Smith’s time where the biggest problem to worry about is the government’s mercantilism.
Actually, that brings up a very good point. This situation has begun to dominate other countries’ media as well. I’d trust foreign media and viewpoints more for the time being, especially considering that it’s election season.
In 2005 I had an interview with a mortgage broker about getting a loan. Seemed to be a really nice down-to-earth kind of guy, initially there was not a whiff of salesman-slickery.
After he showed me numbers for the loans he could arrange – all of these were adjustable-rate, he refused outright to offer me fixed-rate “products” – I asked him how much of a commission I would owe him. He said I shouldn’t worry about that . . . someone else paid his salary. I did not make a follow-up appointment.
As they say “there’s a sucker in every game, and if you don’t know who the sucker is, it’s you.” Don’t tell me that our friendly neighborhood broker and his employers didn’t know exactly what they were doing.
I think most of the mortgage holders caught up in this mess were just optimistic (a great American virtue!), and foolishly trusting, and not exercising prudent skeptisism of a scheme that seemed too good to be true.
The finance industry manipulated this optimism and lack of prudence to raid people’s life savings and intenture millions of people to the banking system. They also (more massively) scamed the retirement and pension funds into shelling out the money for these mortgages. And now they’re dropping the remainder of the mess on current and unborn taxpayers.
The “middlemen” are the folks with the last laugh here.
I too have heard plenty of stories from well-informed friends and co-workers who had to DEMAND a fixed-rate mortgage in order to get one. In fact, who had to demand one REPEATEDLY. That’s a lot to ask of the average first time home-buyer.
Second, I have to add a personal anecdote to the appraiser issue. When my husband and I bought in 2006, our real estate agent TOLD THE APPRAISER what the agreed purchase price was, to which the appraiser apparently responded “oh good, that will be easy to make.” The real estate agent (who had only been doing it a couple years during the huge boom) was completely confused as to why we might be pissed that she told the appraiser what the “goal value” was for the house. We, gasp, wanted a REAL appraisal.
There were a lot of signs that things were not working the way they should be. But the home buyers (especially first time buyers and people who really were buying homes to live in and do it once or twice or three times in a lifetime) can’t be expected to necessarily see how the defects in their individual process were really symptoms of a very very sick system.
The “blame immigrants” line for the housing crisis has been thoroughly disproven. The majority of sub-prime loans didn’t go to people of color. Period. http://www.canow.org/canoworg/2008/09/gender-race-and.html
Emily, this isn’t intended to be sarcastic or mean, but how much did you study the process of buying a house before you did it?
Even I know making billions, trillions of dollars available, without the proper safeguards is a formula for disaster. The responsibility for the meltdown also rests in no small part on the Politically Correct policies of the Clinton administration. The current financial crisis is the perfect storm, generated by a series of unfortunate but entirely foreseeable events, not the least of which being the aforementioned agenda, accompanied by a complete lack of accountability.
When Bill Clinton eased banking restrictions, he dished out $8-billion dollars for “community reinvestment loans.” When the financing schemes collapsed, as is their wont whenever individuals buy inflated properties and default, it left banks around the world (see global economy) in the lurch. Senator Hillary Clinton counted on the loan giveaways to buy votes. Interestingly enough, had Hillary secured the nomination; she, instead of Barack Obama would preside over the bailout. So, can anything stop the meltdown? Where’s that $8-bilion plus dollars? Where’s Hillary Clinton?
World markets will not rebound; they know the bailout does not address the fundamental reasons – rampant corruption, illegal immigration, and dependence on foreign oil – that there is a problem. Simply put, the bailout is good money after bad. Demand accountability. But after cashing in on the Politically Correct mortgages, Hillary says she held her nose and voted yea on the bailout. Currently, Bill says he tried to reign in Fannie & Freddie. Gentlemen, I want my money back: http://theseedsof9-11.com
Wow, this really is a rorschach test. The problem is whatever you didn’t like BEFORE the crisis.
Folks, these are some nice discussions, had fun reading them.
I have not however seen a lot of blogs or websites that discuss our unsustainable lifestyle as a major contributor to our current crisis. Albeit the Derivatives, CDS, and CDO’s have enourmously accelerated the decline of our financial supremacy, the underlying imbalance between our wealth creation vs. consumption had to eventually end in a serious adjustment. Let me explain with some examples (in no particular order of importance)
We ate away into our home equities by using our equities as ATM’s, and as a result our equity interest in our homes is down to around 47% now, as opposed to over 80% in 1950.
We have sold off our assets to foreigners. Our net ownership of our overall assets was at 97% in 1980, and stands at round 80% today.
The ratio of our national debt as a percentage of our national income has gone up from 150% in 1950 to 366% in 2007. I hate to predict what it will be by the end of this year.
Our debt as a percentage of our networth has climbed to a whopping 62% as of 2007.
We use 27% of the worlds energy, and 25% of the worlds petroleum, whereas our population is only 4.5% of the world’s. We also produce the largest waste per capita in the world. We own a whopping 48.6% of the worlds cars and trucks.
It is one thing to consume resources that one produces, but consistently ‘consuming more than you produce’ is not sustainable.
On the bright side, there are 12 countries (all are in Europe) that consume more beer per capita than US.
On another bright note, the UK shares the blame with us for this current crisis, we are not alone to shoulder the burden of being responsible for the world’s collapse. The invention of Derivatives, of the Credit Default Swaps variety, was actually started by a small office of a major US financial entity in London. This litte experiment made so much in comissions for the parent US company, that it spread across all US fiancial entities, and now is on the verge of gobbling up the entire world.
Most of the reporting in the media would lead you to believe the Mortgages had most to do with our decline. Not so by a long shot. It is like blaming paper if the US dollar goes down, because most dollars we have seen exist in paper form. Similarly even though derivative products exist for mortgages, LIBOR rates, and just about anything bet worth, just because the mortgages are the first ones that caused the massive call-in of CDO obligations and caused this crisis, one cannot point to mortgages as being the culprit. If i loose in Vegas, i dont blame ‘Blackjack’ my typical means of throwing money in Vegas, rather it is my gambling nature that is the culprit. Similarly, the Wall Street crowd lost it all for us, because of their gambling nature of betting on derivatives. It just so happens the underlying product for these derivatives that collapsed first was home mortgages.
For all the politicians (yes every one of them from all parties) claiming that they care, and can help us, how come NOT ONE of them had a clue this tsumani was right withing our own shores? Warren Buffet rightly avoided Derivatives like the plague, and he even called them financial WMD’s. Whereas our illustrious leaders were busy looking for non-existant WMD’s elsewhere.
In the end, we Americans cannot blame anyone but ourselves (we have tried to point fingers at Clinton, our Congress, Greenspan, Paulson, and just about anyone with authority).
Collectively, we have acted irresponsibly and greedily, and have to face the inevitable decline in prosperity that is around the corner. However, we do have the progressive brainpower in this country to bring us back to prosperity, if we put our minds to it and dont ‘loose’ it. A great economist once predicted that if you took all the worlds money and distributed it evenly amongst all humans, it would take about 2 years for the wealth to get back in approximately the same hands.
The awesome blogger “Tanta” (aka Doris Dungey), who wrote the post that Lu links above, has passed away. She was an amazing exemplar of citizen journalism: taking one’s highly specialized knowledge and sharing it in an accessible way with laypeople in order to help them understand current events.