Issue Position: Financial Crisis History - Basic Outline

Issue Position

Issue Position: Financial Crisis History - Basic Outline

There is much blame to go around in the meltdown that is currently under way in the financial industry. However, the real truth has yet to be told by the mainstream press. I believe the main culprit is Big Government. It is a bloated and incompetent federal bureaucracy that led us here. The main role of government is to protect equal rights, not provide equal things. I refer to this as the Robin Hood Syndrome. Some would call it social elitism or just plain socialism. It is always doomed to fail. Thomas Jefferson once remarked that "if the government were to tell us when to plant wheat, then we should soon want bread." Things haven't changed very much . . . have they?

Follow the heavy hand of government. In 1977, under President Jimmy Carter, the Community Reinvestment Act was born. Sounds harmless enough, but this laid the groundwork for what was to come. In 1995, during the Clinton administration, the CRA was retooled and new stipulations were added. Banks were forced to make loans in low-income and mostly minority neighborhoods or they were threatened with fines, loss of business, and ostracism. Lawsuits were filed. The social crime of the day was called redlining.

Enter the central players. The Government Sponsored Enterprises known as Fannie Mae and Freddie Mac were created in 1938(Fannie) as part of Roosevelt's New Deal to provide federal money for housing, and 1970(Freddie) during Lyndon Johnson's Great Society. In 1968, Fannie was privatized and removed from the federal budget. This was when it became a GSE with private profits, exemption from state and federal income taxes & oversight, and the implied backing of the Federal Government. Freddie was created as competition for Fannie. They currently control about 90% of the secondary mortgage market.

The mortgage lenders eventually realized that they could make a lot of money on closing costs and fees. Then greed took over. Standards were lowered even further. Congress did not perform its regulatory responsibilities regarding Fannie and Freddie. Throw in low interest rates and a rapidly growing money supply, and you had the seeds for an enormous real estate bubble. Nobody thought it would ever end.

The mortgage companies and banks eventually found a way to remove the risk, that they were forced to assume by the government meddling, by selling the risky mortgages as credit default swaps. As long as prices were escalating, everybody was safe. There is a saying on Wall Street that the innovators are always one step ahead of the regulators. There was a backroom manuever, in 2000, that kept credit default swaps from being regulated. These arcane instruments are at the center of this mess. Eventually companies were selling and buying credit default swaps, collateralized debt obligations, and derivitives. It seems that value was anything that they wanted them to be. They were all so complicated, and finally oh so deadly.

Now we are all reaping the toxic results of another misguided federal giveaway. The Wall Street Journal warned us in 1998 that Fannie and Freddie were another ENRON, aka cooking the books, waiting to happen. Alan Greenspan warned us several years later that they were a potential problem. Many were making money and many were asleep at the wheel. Franklin Raines, former budget director for Bill Clinton, became the head of Fannie Mae. He set up a schedule of bonuses, and in a five year period(1999-2004), he benefited to the tune of $90,000,000. to $100,000,000. mostly from bonuses. Fannie and Freddie became a promised land for Democrats. Things were out of control. The regulators were looking the other way. It was so bad that even welfare recipients were qualifying for mortgages. Another government social program run amok. Now the taxpayers are expected to pick up the pieces.

Players, like Barney Frank, Chairman of the House Finance Services Committee, and Senator Chris Dodd, Chairman of the Banking Committee, were blocking all attempts at reform. They even benefited financially. Standards were lowered . . . low down payment, no down payment, no verification of income, and subprime was the name of the profit rhyme. Former President Bill Clinton recently said "In retrospect, it probably was not a good idea to give mortgages to people on welfare." Now we are supposed to believe that the government can be trusted to bail us out? It is time to have a thorough independent investigation of how it happened and why it was allowed to happen. It is time to tell Congress that the PARTY really is over . . . for them.

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