The Root Causes of the Mortgage Crisis

[Galaxy]

To prevent future fiascos we need to understand the causes of the current one. While several mistakes were made, we can now begin to see some of them. A post in another thread by George F. prompted this thread.

It is your failure to see the underlying causes of what you see around you that prevents you from understanding what is happening.
The underlying causes are beginning to be common knowledge. Even the New York Times (not your typical conservative Republican news source) outlined one of the major causes (there were others) and what would happen in September 30, 1999.
Fannie Mae Eases Credit To Aid Mortgage Lending

By STEVEN A. HOLMES

Published: September 30, 1999

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

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

Fannie Mae, the nation's biggest underwriter of home mortgages, does not lend money directly to consumers. Instead, it purchases loans that banks make on what is called the secondary market. By expanding the type of loans that it will buy, Fannie Mae is hoping to spur banks to make more loans to people with less-than-stellar credit ratings.

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

''From the perspective of many people, including me, this is another thrift industry growing up around us,'' said Peter Wallison a resident fellow at the American Enterprise Institute. ''If they fail, the government will have to step up and bail them out the way it stepped up and bailed out the thrift industry.'' http://query.nytimes.com/gst/fullpage.html?res=9C0DE7DB153EF933A0575AC0A96F9582 60&sec=&spon=&pagewanted=2 (http://query.nytimes.com/gst/fullpage.html?res=9C0DE7DB153EF933A0575AC0A96F9582 60&sec=&spon=&pagewanted=2)

Freddie and Fannie were big slush funds for the Democratic Party. Community organizer organizations such as ACORN were empowered bt the Democrats to sue lenders who they did not feel were making enough of these very risky, sub-prime loans. And, who has the most experience as a "community organizer", Barack Obama. In fact, he did work for ACORN.
And its links to Obama.

Various ACORN chapters across the country, led by folks like Chicago's Madeline Talbott, staged in-your-face protests in bank lobbies and filed complaints meant to hold up mergers sought by targeted banking firms. Unless the banks agreed to ACORN's terms - which many (understandably) did.

Talbott & Co. generally wanted them to ease down-payment requirements and ignore weak credit histories. And their intimidating tactics often necessitated police action, as at a '97 protest at Pulaski Bank & Trust in Arkansas, where activists blocked drive-through lanes.
The movement's biggest victory, of course, came when Fannie Mae and Freddie Mac began buying up the riskier loans - providing fresh incentive for banks to make even more of them.

No need to recount where all that led.
Meanwhile, Obama was right there by ACORN's side all along.

"I've been fighting alongside ACORN on issues you care about my entire career," he told the group last November.

Indeed, in the early '90s, Obama was recruited by Talbott herself to run training sessions for ACORN activists.

ACORN also got funding from two charities, the Woods Fund and the Joyce Foundation, when Obama served on their boards, and from the Chicago Annenberg Challenge - the radical "education reform" outfit Obama ran from '95 to '99.

(In that context, it's worth noting that John McCain worked for years to rein in Fannie and Freddie. Had Democrats not blocked action, the whole mortage mess might well have been avoided.)

See: http://www.nypost.com/seven/09292008/postopinion/editorials/the_meltdowns_acorn_131274.htm (http://www.nypost.com/seven/09292008/postopinion/editorials/the_meltdowns_acorn_131274.htm)

[nursebee]

My vision is a little blurry from the recent market action, could you clarify under whose administration you suggest this started?

[JPK1NH]

My vision is a little blurry from the recent market action, could you clarify under whose administration you suggest this started?

Roosevelt.....you might be able to make a case for Hoover but it was Roosevelt that initiated the New Deal and created Fannie Mae.

[George Fergusson]

Roosevelt.....you might be able to make a case for Hoover but it was Roosevelt that initiated the New Deal and created Fannie Mae.

Though Galaxy claims to be looking for the "underlying causes" he's launched his attack against Obama and his support of McCain in the first post so right from the start I question his motives and his agenda- and I want none of either.

[Galaxy]

The article I quoted refers to the Clinton administration.

Actually, the earliest root cause was FDRs passage of the Glass-Steagall act which left investment banks vulnerable since by that law they could not be a part of demand deposit (regular) banks. This also meant they were not regulated like regular banks.

The logic for that act (according to a report on NPR last week) was that folks thought that combined investment/demand deposit banks had created bad securities and foisted them off on unsuspecting savings and checking account customers, causing the Great Depression. This is typical populist demagoguery.

Fortunately, Clinton signed the Gramm-Leach-Bliley act in the late 1990s that removed the prohibition against combined investment/demand deposit banks. This obviously produces more diversified banking institutions, thus reducing risks. See:
Bill v. Barack on Banks, Clinton instructs Obama on finance and Phil Gramm (http://online.wsj.com/article/SB122282635048992995.html)

But, for obvious reasons, the Gramm-Leach-Bliley act did not outlaw stand alone investment banks like Goldman Sachs. But they were free to be acquired by Bank of America (Merrill Lynch) or to form their own bank holding company (Goldman Sachs) when they were under severe financial stress.

My main point here is that investment banks would not have been under such severe financial stress if they were not separate standalone institutions, as the Glass-Steagall act required.

Another point is that as part of regular banks they will be regulated and cannot use 40 to 1 leverage. Banks currently are limited to 10 to 1 leverage. Of course, they would have been subject to this regulation if it had not been for the Glass-Steagall act.

Finally, the Glass-Steagall act was not all bad. It established the FDIC.

[JPK1NH]

Though Galaxy claims to be looking for the "underlying causes" he's launched his attack against Obama in the first post so right from the start I question his motives and his agenda- and I want none of them.

Don't get me wrong GF. I agree that the mess was disproportionally by Democrats....hands down.

Roosevelt by creating FNMA
A Democrat Congress in 1970 created Freddie Mac to give Fannie Mae "Competition"....what a mockery of a sham!
Carter and a Dem Congress in 1977 pushing through the CRA
Clinton expanding CRA and forcing banks to make loans to unqualified people.
Dodd, Frank, Obama and other Dems taking bribe money (contributions) to protect FNMA

Johnson, Reigns and Raum Emmanuel all abusing FNMA and Freddie and cooking the books to get huge bonuses....and now the American Taxpayer is left holding their butts after last nights bailout vote.

Geez, Bush even tried to pass legislation in 2002-3 to get better oversight.
McCain sponsored legislation in 2005 to do the same.....but the Dems kept on blocking it.

[Galaxy]

Though Galaxy claims to be looking for the "underlying causes" he's launched his attack against Obama and his support of McCain in the first post so right from the start I question his motives and his agenda- and I want none of either.Well, evidently you do not want to follow the root causes to their source. I do, including pointing out those that did some things to help, like Clinton, as I discussed above. Evidently, Clinton has somewhat cleaner hands in this than Obama. I certainly would trust Hillary Clinton over Obama in managing the economy.

[Galaxy]

Roosevelt by creating FNMA
A Democrat Congress in 1970 created Freddie Mac to give Fannie Mae "Competition"....what a mockery of a sham!
Carter and a Dem Congress in 1977 pushing through the CRA
Clinton expanding CRA and forcing banks to make loans to unqualified people.
Dodd, Frank, Obama and other Dems taking bribe money (contributions) to protect FNMA

Johnson, Reigns and Raum Emmanuel all abusing FNMA and Freddie and cooking the books to get huge bonuses....and not the American Taxpayer is left holding their butts after last nights bailout vote.

Geez, Bush even tried to pass legislation in 2002-3 to get better oversight.
McCain sponsored legislation in 2005 to do the same.....but the Dems kept on blocking it. Excellent summary of the facts.

[Sundance]

Just curious..................

If minority ownership of homes is the "root cause" of
this mortgage crisis. Can you please cite the percentage
of the bad paper today that is a direct result of this??

I ask because I recall hearing on the radio that it was
something like 5%...... if that is true, then calling it
the root cause is sorta silly.

[George Fergusson]

Well, evidently you do not want to follow the root causes to their source.

I know the root causes and their sources, you do not but this does not stop you from proceeding as if you knew it all already. You refuse to look at anything from a new perspective, to reexamine your beliefs, to question your convictions. Your mind is closed. In this thread already you have identified numerous crucially important elements affecting the current financial crisis and yet you have misinterpreted every single one of them, one after the other, point by point. It is mind boggling to me that you can have such a warped perspective of the world and still be able to function in it.

[Galaxy]

I see your back to your standard operating procedure George. It's sad and certainly no worthy of a point-by-point reply because there are no substantive points to reply to.

[sqkcrk]

We don't need to know the causes. We just need to know what we are going to do about it. ;)
Just like Global Warming. Right Governor?

[George Fergusson]

I see your back to your standard operating procedure George. It's sad and certainly no worthy of a point-by-point reply because there are no substantive points to reply to.

Fine with me, you ignored the one point I did make, that you're unwilling or unable to take a fresh look at the evidence. Your response was in keeping with your "standard operating procedure" too. You're not interested in learning anything new or exploring new perspectives, you're only interested in advancing your hateful partisan viewpoint in ignorant defiance of reality. Good luck with that.

For the other people involved in or reading this thread: Everything is not always as it seems. This financial crisis is not a partisan issue in fact it's not really even a political issue. It cannot be blamed on the Democrats or the Republicans.. there are a lot of players, but the real culprits for the most part have neither revealed their identity or their intentions. Further the problem and it's causes is systemic.

[Galaxy]

We don't need to know the causes. We just need to know what we are going to do about it. ;)
Just like Global Warming. Right Governor?Goint point. Let's just go fix it without knowing the cause(s). :scratch:

[tecumseh]

my other brother george writes:
You refuse to look at anything from a new perspective, to reexamine your beliefs, to question your convictions. Your mind is closed.

tecumseh replies: exactly...

is there really any point george in bashing about some question when some folks mind are so extremely rigid or so unaware of their own limited perspective?

[George Fergusson]

is there really any point george in bashing about some question when some folks mind are so extremely rigid or so unaware of their own limited perspective?

Galaxy can believe what he wants. I just want other people with inquiring minds and an interest in the truth to get good solid information. Obtaining an objective perspective on things isn't impossible.

[Galaxy]

For the other people involved in or reading this thread: Everything is not always as it seems. Yes , there is a conspiracy behind every tree and you are the only one that sees them.:sThis financial crisis is not a partisan issue in fact it's not really even a political issue. Evidently, Pelosi and Obama haven't consulted with you and bought in to your theory that "in fact it's not really even a political issue." It cannot be blamed on the Democrats or the Republicans. Really??? That leaves out almost all politicians. Surely, you are not blaming this on Libertarians. I would not. there are a lot of players, but the real culprits for the most part have neither revealed their identity or their intentions.
I know the root causes and their sources, ...At least, George F be consistent. And oh, by the way, tell us the "root causes and their sources". And, try to stay in control if someone disagrees with you.
Further the problem and it's causes is systemic.To some, all bad things that occur are the fault of the system. Just like the school and other shootings are the fault of the gun culture (system) never the fault of the individual(s) who actually did it. :no:

[Galaxy]

Galaxy can believe what he wants. I just want other people with inquiring minds and an interest in the truth to get good solid information. Obtaining an objective perspective on things isn't impossible. "people with inquiring minds". Actually, your conspiracy posts probably save some folks money. They don't have to buy the National Enquirer to get their fill of conspiracy theories. Heckavu job George.

[Galaxy]

Let's get back on topic, the causes of the current lack of confidence in the credit market. There have been at least a couple of mistakes made in the last two weeks.


The failure of the House to pass the rescue bill last Monday. This was a multi-trillion dollar mistake. Too many Republicans have been listening to the Paleo-Libertarian's absolutist free-market rhetoric. Yes free markets are basically good. But, you must know when free markets are in failure mode. That is when folks lose confidence. Human confidence is a very fragile thing when it comes to their money. The economy cannot function without confidence. Hopefully the House will pass the bill today. But the damage of last Monday's no vote has already been done and will take a substantial time to overcome. Finally, Pelosi's speech, last Monday before the vote, blaming the whole fiasco on Republicans was not only grossly inaccurate, but just plain dumb from a political standpoint.
The Fed and the Treasury made a huge mistake in letting Lehman Bros go bankrupt. At the time, I thought it was a good idea to make an example out of at least one large firm due to moral hazard reasons. I guess I to have been listening to too many Paleo-Libertarians like Ron Paul. This bankruptcy had a huge negative impact on confidence, starting with money market funds.

Money funds are designed to act like bank accounts. When you put $1 in you expect to get $1 out, including all the interest earned, any time you want.

Faith in this promise vanished last Tuesday, when the Primary Fund (http://www.bloomberg.com/apps/quote?ticker=RFIXX%3AUS) -- owned by the Reserve, the company that invented money-market funds -- closed at 97 cents a share. In industry parlance, it ``broke the buck.''

The Primary Fund got stuck with $785 million in worthless paper issued by bankrupt Lehman Brothers Holdings Inc. Suspecting trouble, its institutional investors started to run. http://www.bloomberg.com/apps/news?pid=20601039&refer=columnist_quinn&sid=aWw6OFBN3ppI This, in turn started runs on other money market funds and some banks. Wachovia's immediate, acute liquidity problem was due to institutional runs on it's banks.

Bush immediately (and wisely) announced a Federal guarantee for money market funds. In reality though, because the way it is structured, it does not go near far enough.

We should do something similar to what the Irish just did. Guarantee all bank and money market deposits and bond holders of banks. Of course, we should not guarantee the stockholders of banks.

Folks have to have a "safe place" to park their cash. And, gold buried in the back yard is neither safe nor prudent in deflationary times.

[George Fergusson]

At least, George F be consistent. And oh, by the way, tell us the "root causes and their sources". And, try to stay in control if someone disagrees with you.

You already know the root causes, at least you already know what I believe whether you believe it or not, and I hate repeating myself. Besides, you reject the truth because it does not support your "the Democrats did it" conspiracy theory.

To some, all bad things that occur are the fault of the system. Just like the school and other shootings are the fault of the gun culture (system) never the fault of the individual(s) who actually did it. :no:

So I blame the system and you want to blame individuals. Now who's the conspiracy theorist? I'll admit to being one if you will too :)

We should do something similar to what the Irish just did. Guarantee all bank and money market deposits and bond holders of banks.

Money is leaving other countries and is heading for Irish banks now. These other countries aren't too happy about that, they're losing their deposits. Boy, they shoulda seen that coming.

It's like this mark-to-market thing. They want to eliminate that and allow banks to invent values for their hard-to-value assets. Great. Well, we have a credit crisis caused by bank's lack of trust and confidence in other banks, and investor's lack of trust and confidence in the banks so nobody wants to lend or invest money to banks. Great. So, how is letting the banks lie about their assets going to help instill confidence and trust? It's not. You'd think they would see THIS coming, but they don't.

Can't you see that the people trying to manage this mess are in a panic and not thinking clearly?

Can't you see that maybe we're just not clever enough to "manage" this crisis?

Folks have to have a "safe place" to park their cash. And, gold buried in the back yard is neither safe nor prudent in deflationary times.

They're going to treasuries, even with yields near zero. Two weeks ago 90 day treasuries were yielding less than nothing and still people were buying them.

The bank runs have started. Do you know what that means?

[Galaxy]

This short video is a news report that contains several other pieces of evidence:

http://www.youtube.com/watch?v=63siCHvuGFg&feature=related

[George Fergusson]

I'll have to wait till I am at work to watch that.

What a nice day it is here in New England!

[dragonfly]

What a nice day it is here in New England!

Down here as well. Breezy, a little humidity, and high in the low to mid-80's.

[Galaxy]

I just came back from putting Apiguard (thymol) in some of my hives. It's 73 degrees, low humidity, and with bright blue skies. There are few places on Earth better than the Blue Ridge Mountains of Virginia on such a fall day.

[JPK1NH]

I just came back from putting Apiguard (thymol) in some of my hives. It's 73 degrees, low humidity, and with bright blue skies. There are few places on Earth better than the Blue Ridge Mountains of Virginia on such a fall day.

Yea, and the scenery around Lynchburg doesn't exactly suck.

[Bodo]

Likewise a great day in Western NC. Too bad I had to replace the alternator on the Jeep...could have been worse :)