Who Caused The Financial Meltdown? Was McCain Negligent? 2008 Presidential Debates Don’t Tell All.

As you probably know, if exposed to any news at all in the past week, the Federal Government is bailing out the financial industry to the tune of $700 billion. Their plan is to buy up bad mortgage debt with the hope of resolving the financial crisis and perhaps some day recovering that money. No government estimate has ever come in on time and on budget, so don’t bet your life on that $700 billion being enough.

To put that $700 billion in perspective, with that same amount of money, we could have followed Boone Pickens plan and erected enough wind power facilities to generate 20% of the US energy needs with wind power!!! Instead, we are buying BAD MORTGAGES!! Think about that. Instead of burning coal and oil, we could use wind for 20% of our energy, but we are buying bad mortgage debt instead!

As it turns out, the funniest aspect of the debates last week, and the saddest, was an accusation made by Senator Obama. Obama stated that regulations had been hurled out the window by the Republican administration, and that disregard for government regulation resulted in our current financial malaise.

But it wasn’t deregulation at all, it was the weakening of mortgage requirements.ย  Mortgage requirements, specifically for the poor and minorities, were severely weakened over a much longer period than the tenure of the Bush Administration, going back as far as the Carter Administration. Regulations as a whole were not reduced on Wall Street. In fact, regulations on public companies are more stringent today than they ever have been.

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20 thoughts on “Who Caused The Financial Meltdown? Was McCain Negligent? 2008 Presidential Debates Don’t Tell All.”

  1. Goodbye American Empire.
    You guys have always had third world health care, third world social security, and third world quality politicians.

    Now you get third world status.

    And you deserve everything you get.

    Oh dear, you say, my money is gone!
    Oh dear, half the world says, my son has been murdered by an American soldier.

    Truth is – the rest of the world is busy trying to clean up the mess you guys have made and after it is all over you can learn to live within your means, which, at the moment, means living in poverty.

    Bad luck. No tears from across the ocean.

  2. @Truth be told

    Thank you, Truth.

    It’s the best and most objectively detailed explanation I’ve ever read.

    You should be appearing on TV worldwide for a “Crisis for dummies” show.

    People need to get a clue instead of panicking irrationally. At least, thanks to you, they could panick with some knowledge.


  3. Good to see someone with a decent response.

    We were negligent in saying “banks”. It was also mortgage houses/lenders that contributed to the problem. The banks were at first pressured to make the bad loans, but mortgage lenders came on strong in subsequent years and were glad to take their commissions whether the loans were based on reality or not so long as they were legal. We will try to incorporate that into the article.

    It is absolutely correct that banks were forced to weaken standards. The laws still in place clearly state the penalties for not doing so, and there were considerable pressures applied in the late 1980s from the Federal Reserve to provide such loans and ignore credit history as a means of determining credit viability.

    Barney Frank pushed hard for legislation to keep requirements lax and in 2003, we could have averted this entire crisis with proper oversight over Fannie Mae and Freddie Mac. Barney (Rubble) Frank fought tooth and nail against Bush administration legislation for regulating the industry insisting there was no problem.


  4. Watched your reponses to Roger, You made another error. Youre assertion, that banks made the loans because they had to,is totally incorrect. The Banks made those loans b/c they could make a quick buck by securitizing the loans. And the great part, from the banks perspective was that they had no risk. That risk was assumed by the people buying the securities, that had no clue what they were investing in. Loss of transparency causes the s#*t to hit the fan.

  5. There are several problems with your analysis. The first problem is that you ignore the fact that banks actually accounted for a small % of the subprime loans. As a mortgage lender for the last 15 years,I know the requirements banks had b/c I was competing against them. They were never as aggressive as other mortgage lenders. The second problem is that you must not be aware of the history of mtg lending. Back in 2000-2001 there was a major contraction in Sub Prime lending. Very simply the market dried up for riskier loans. The reason is that someone decided that making loans to people with marginal credit and tight income was a bad idea. What is the difference today. Transparency. With all these subprime loans securitized no one knew what they were investing in. By securitizing these loans, the firewall was eliminated and the virus spread throughout the system. The third problem I have with this article is the patisan bias. Which party controlled the White House and Congress for the period between 2000-2006? Which party has as its mantra “Free Market, Free Market”?Which party choose as its nominee someone who was involved in a similar crisis with similar results to the taxpayer?Which party has a person running the presidential campaign, who was on Fannie and Freddie’s payroll 2 months ago.
    P.S. Which way did Larry Craig vote on the bailout bill?

  6. Scooter, with all due respect, that is naive.

    1. Securitization of good mortgages would never have posed a problem. It was securitization of bad mortgages forced down banks throats by the liberal bills we cite. And had Barney Frank and the Democrats approved 2003 legislation to oversee Freddie Mac and Fannie Mae, none of this disaster would ever have happened.

    2. What specific deregulation allowed securitization? Do you have any clue of what you speak?

    You can play again if you like, but you better have a better argument than that.

  7. Deregulation is not what the article is about. It is about regulations endorsed by Barney Frank and the Democrats that resulted in the problem. It is also the defeat of regulations in 2003 by Barney Frank and the Democrats to regulate Fanny Mae and Freddie Mac.

    There is no deregulation that led to the problem, it was regulation, specifically Democratic legislation.

    It is good to see a Democrat that is informed enough to realize it had nothing to do with Bush and that acknowledges Barney Frank was the primary cause. We appreciate your contribution.

  8. Hi Roger…

    The article wasn’t a dream. We are certain. ๐Ÿ™‚

    The regulations we are speaking of are regulations on Wall Street, not drugs, foods, mileage, etc.

    Those would be a completely different topic and have nothing at all to do with this crisis. The primary regulations that caused this problem are still in place and they force weaker standards on lenders, which is the entire crux of the sub prime mortgage mess.

    Whether Federal organizations failed or not is also, for the most part, with the exception of the SEC, irrelevant. McCain DOES hold the SEC responsible for failing to enforce regulations and poor oversight. That could have contributed to the problem, but the SEC is not Wall Street and the failure of the SEC is not due to any reduction in regulations for businesses as a whole.

    Our argument is right on the money and your response mostly unrelated. Had we not instituted programs that forced banks to take on bad loans, there would be no bad loans. Sub prime is a direct result of the bills we cite, and Barney Frank and the Democrats are to blame for today’s problems for forcing them down the financial systems throats and because they resisted oversight and regulation of Fannie Mae and Freddie Mac in 2003 that would have addressed this issue five years ago, and much more cheaply.

    But Frank wanted those sub prime mortgages. He loves those things.

    Barney Frank cost us 700 Million bucks. That’s our story, and nothing you have said changes it.

    Now, if you go do some research and come back with an article. We would be glad to publish it.

  9. Yes, the problems we are dealing wit today do date back decades but you are dreaming if you think regulations today are more stringent then they were 30 years. They aren’t. Republican presidents haven’t had the political clout to eliminate federal laws and so what they have done is (1) defund them to the extent that they represent failed agencies (FEMA is a perfect example of a failed agency and the same can be said for FDA, SEC, EPA, and many others). And when it was political dangerous to defund agencies Republican presidents placed industries hacks in keep agencies rolls. Two instances will suffice to demonstrate how this works: Enforcement of OSHA regulation was given over to the paragon of worker safety Antonin Scalia’s son (he’s the one who represented industry against USHA regulations addressed repetitive motion industries) and Corporation f or Public Broadcasting was given to a man who didn’t believe in public broadcasting (CPB isn’t regulatory but what happened their illustrates a pattern of behavior).

    For all practical purposes, America has no regulatory structure (or Attorney General supports) today because Republicans in many cases with Democratic complicity have gutted key agencies and then replaced career professionals in key positions with industry cronies and campaign supporters. Your argument is disingenuous if not out right prevarication.

  10. Great and long response. This is an article unto itself. We would be happy to publish it as such if you would like, given a bit of work on your side.

    Our article is based on factual reports from the New York Times and the Boston Globe, both liberal outlets that clearly place the blame at Frank’s feet.

    Many of your regulatory references have absolutely nothing to do with the current crisis, so, if you want to debate that, we would more than welcome an article from you and give it the same gravity as any of ours so long as it is accurate and does not get accusatory or abusive about alternate opinions.

    Feel free to check our web site under our political section for the link explaining how to submit an article if you are interested.

  11. Repeal of the Glass-Steagall Act. This action, in 1999, was one of two major cases when a cornerstone of New Deal regulation was explicitly repealed. (The other was the repeal of the Public Utility Holding Company Act, and if your utility rates are sky-high, you can thank Congress for that, too.) Glass-Steagall provided that if you wanted to speculate as an investment bank, good luck to you. But commercial banks were part of the banking system. They created credit. They were regulated, supervised, usually enjoyed FDIC insurance, and had access to advances from the Fed in emergencies. So commercial banks and investment banks were two different creatures that should stay out of each other’s knitting.

    But beginning in the 1980s, regulators who didn’t believe in regulation either allowed explicit waivers of some aspects of Glass-Steagall or looked the other way as commercial banks and investment banks became more alike. By 1999, when Citigroup had jumped the gun and assembled a supermarket that included a commercial bank, investment bank, stock brokerage, and insurance company, Glass Steagall was so hollowed out that it was effectively dead. The coup de grace was its official repeal, in the Gramm-Leach-Bliley Act. That’s Gramm as in former Sen. Phil Gramm, a deregulation zealot and top adviser to John McCain.

    Three Basic Reforms

    What all of these sins had in common was that they led financial markets to misprice assets. In plain English, that means buyers were purchasing securities based on bad information, often with borrowed money. When firms started losing money on sub-prime in mid-2007 and other owners decided it was time to get their money out, the whole miracle of leverage went into reverse. And it spilled over into other securities that had been mispriced thanks to all the conflicts of interest tolerated by regulators.

    That’s why, no matter how much taxpayer money the Federal Reserve and the Treasury keep pumping in, they can’t turn dross back into gold. The next administration and the Congress need to return the financial economy to its historic task of supplying capital to the real economy — of connecting investors to entrepreneurs — and shut down the purely casino aspects of the system that have only enriched middlemen and passed along huge risks to everyone else.

    Next time Get more background information before you write your BS

  12. Failure to Police Conflicts of Interest. Remember the accounting scandals of the 1990s? In those scandals, accounting firms were paid once to audit corporate books and then again to help clients cook the books and still pass muster with the audit. That was a sheer conflict of interest. Though accountants were (loosely) regulated, Congress did not crack down until cooked books caused the stock market to crash. A second conflict of interest was the corruption of stock analysts, who were telling customers to buy dubious stocks because their bosses were profiting from underwriting the same stocks. In the aftermath of the dot-com bust, Congress narrowly cracked down on these two abuses with the Sarbanes-Oxley Act but simply ignored others — such as the role of bond-rating agencies and the habit of basing executive bonuses on stock prices that could easily be manipulated by the same executives.

    Failing to Regulate Hedge Funds and Private Equity. When Roosevelt’s New Deal acted to rein in the abuses in financial markets, it regulated the major players — commercial banks, investment banks, stock brokers, holding companies, and stock exchanges. But two of the biggest purveyors of risk today — hedge funds and private-equity firms — simply did not exist. Today, private-equity firms and hedge funds do most of the things banks and investment banks do. They basically create credit by making markets in exotic securities. They buy and sell firms. They speculate in financial markets with borrowed money, taking much bigger risks than regulated banks. According to House Banking Committee Chair Barney Frank, more than half the credit created in recent years has been created by essentially unregulated institutions. The people in charge of the government — conservative Republicans — took the view that these new-wave financial players offered transactions between consenting adults who needed no special consumer protection. But they were oblivious to the risks to the larger system.

  13. Failing to Police Sub-prime. The core idea of bank regulation is that government inspectors periodically examine the quality of bank assets. If too large a portion of a bank’s loan portfolio is behind in its interest payments, the bank is made to raise more capital as a cushion against losses. Problems are nipped in the bud. But complex securities require more sophisticated regulation than simple loans. Regulators basically waived the rule on adequate capital for the new wave of mortgage lenders who created sub-prime. Many mortgage companies were not banks. They made loans only to sell them off to the Wall Street sinners of Deadly Sin No. 1. So there was no loan portfolio to examine, and no real capital. The Democratic Congress anticipated this problem in 1994, when it passed the Homeownership Opportunity and Equity Protection Act. This prescient law required the Federal Reserve to regulate the loan-origination standards of mortgage companies that were not otherwise government-regulated. But Alan Greenspan, a free-market zealot, never implemented the law. And when Republicans took over Congress in 1995, they never called him on the carpet.

    Failure to Stop Excess Leverage. The financial economy is crashing today because so much speculation was done with borrowed money. A typical leverage ratio of a hedge fund or private equity company is 30 to one. That means $30 of debt for $1 of actual capital. If you make one serious miscalculation, you are out of business. And in the case of sub-prime mortgage companies, the leverage ratio was infinite, because they had no capital. The game was entirely based on creating debt. As long as times were good, financial firms could keep borrowing to finance their deals. But once investors looked down, they panicked. Some parts of the system are unregulated, such as hedge funds and private-equity companies. But they all ultimately get a lot of their funding from banks. And regulators do retain the power to look closely at banks’ books. Had they used that power to police the kind of highly risky stuff banks were underwriting, they could have shut it down.

  14. Allowing Mortgage Lending to Become a Casino. Until 1969, Fannie Mae was part of the government. Mortgage lenders were tightly regulated. Homeownership rates soared throughout the postwar era, from about 44 percent on the eve of World War II to 64 percent by the mid-1960s. Nobody in the mortgage business got filthy rich, and hardly anyone lost money. Fannie’s job was to buy mortgages from banks and thrift institutions, to replenish their money to make mortgages, and along the way to set standards. Fannie financed its operations by selling bonds. In the late 1970s, private Wall Street firms started emulating Fannie. They packaged mortgages, and converted them into bonds. Over time, their standards deteriorated, because they could make more money creating riskier products. In order to avoid losing market share, Fannie emulated some of the same abuses. Government did not step in to regulate the affair — which was a time bomb waiting for the creation of the sub-prime mortgage business.

    Allowing Unregulated Bond Rating Agencies to Decide What was Safe. Sub-prime is only the best known of a widespread fad known as “securitization.” The idea is to turn loans into bonds. Bonds are given ratings by private companies that have official government recognition, such as Moody’s and Standard and Poors, but no government regulation. These rating agencies have become thoroughly corrupted by conflicts of interest. If you want to package and sell bonds backed by risky loans, you go to a bond-rating agency and pay it a hefty fee. In return, the agency helps you manipulate the bond so that it qualifies for a triple-A rating, even if the underlying loans include many that are high-risk. Without the collusion of the bond-rating agencies, sub-prime lending never would have gotten off the ground, because it would not have found a mass market. Had regulators looked inside this black box, they would have shut it down. They might have needed new legislation, but they never asked for it. And public-minded regulators might have done a lot under existing law, since banks (which are regulated) were heavily implicated in the financing of sub-prime.

  15. The current carnage on Wall Street, with dire spillover effects on Main Street, is the result of a failed ideology — the idea that financial markets could regulate themselves. Serial deregulation fed on itself. Deliberate repeal of regulations became entangled with failure to carry out laws still on the books. Corruption mingled with simple incompetence. And though the ideology was largely Republican, it was abetted by Wall Street Democrats.

    Why regulate? As we have seen ever since the sub-prime market blew up in the summer of 2007, government cannot stand by when a financial crash threatens to turn into a general depression — even a government like the Bush administration that fervently believes in free markets. But if government must act to contain wider damage when large banks fail, then it is obliged to act to prevent damage from occurring in the first place. Otherwise, the result is what economists term “moral hazard”– an invitation to take excessive risks.

    Government, under Franklin Roosevelt, got serious about regulating financial markets after the first cycle of financial bubble and economic ruin in the 1920s. Then, as now, the abuses were complex in their detail but very simple in their essence. They included the sale of complex securities packaged in deceptive and misleading ways; far too much borrowing to finance speculative investments; and gross conflicts of interest on the part of insiders who stood to profit from flim-flams. When the speculative bubble burst in 1929, sellers overwhelmed buyers, many investors were wiped out, and the system of credit contracted, choking the rest of the economy.

    In the 1930s, the Roosevelt administration acted to prevent a repetition of the ruinous 1920s. Commercial banks were separated from investment banks, so that bankers could not prosper by underwriting bogus securities and foisting them on retail customers. Leverage was limited in order to rein in speculation with borrowed money. Investment banks, stock exchanges, and companies that publicly traded stocks were required to disclose more information to investors. Pyramid schemes and conflicts of interest were limited. The system worked very nicely until the 1970s — when financial innovators devised end-runs around the regulated system, and regulators stopped keeping up with them.

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