Martin L asked: The Federal Reserve, Fannie and Freddie have been actively encouraging high-risk behavior since the early 90s, and now it’s finally come back to hit all of us. The the Community Reinvestment Act of 1977 (CRA), the Fed’s “Guide to Equal Opportunity Lending” in the mid-90s (forcing lenders to lower their standards or be punished under the CRA) and Fannie and Freddie creating a market for bad loans (by buying and bundling them into securities as fast as lenders could underwrite them) all combined to bring this crisis about. Not to mention the “reforms” brought about in the wake of the Enron debacle (2002), which included the new “mark to market” accounting rules. These rules are among the many government-imposed factors serving to magnify a 6.4% mortgage delinquency rate into a system-wide financial crisis.
Now, Congress wants to give $700B to “regulators” to allow them, at their discretion, to buy up bad debt, print money, and bail out lenders, brokers and securities companies or their choosing.
All this intervention is to be done by unelected bureaucrats with extremely limited Congressional oversight…so that, when it all fails, they can point their collective finger at the current administration, whether Democrat or Republican.
Obama also thinks we need more government in the mortgage and banking industry: “Get rid of the do-nothing approach to our economic problem and put somebody in there who’s going to fight for you.”
(For his part, McCain doesn’t have much of a clue either.)
It was the feds “fighting for you” that got us into this mess in the first place. How do we tell the feds to stop “helping” us?
Celticagent, I disagree. Lenders, no matter how predatory, would not have taken on the risk of these high-risk loans if they could not turn around and sell them off, make a quick profit, and pass on the risk to Fannie, Freddie and, ultimately, the taxpayers.
Unrealistic borrowers would have no one to borrow from without the government stepping in and “encouraging” (i.e., forcing) lenders to lower their lending standards.
As for government legislators: based on the results so far, it would have been better if they had “looked the other way” and refrained from regulating the market.
Under a free market, investors (in this case, lenders) would have been forced to deal with the risk of its own transactions. They would have been much more careful as a result. And, those less prudent lenders would go under, without negative effect on the taxpayers.
We should all wish that those government legislators had looked
the other way.
David B, that’s one of my favorite sayings.
But when you apply it to the Fed, it might be re-written:
When the only tool you have is a printing press, every problem looks like a lack of paper money.
(Not as eloquent, but you get the point.)
TG, good summary of why the laws were enacted in the first place. But the problem of redlining would have taken care of itself in a free market, without the monumental damage done by the Community Reinvestment Act and the regulations that followed it.
True, Fannie and Freddie are not government organizations, but as you point out they are government sponsored and financed. If you don’t think that means they are government directed and driven, you are kidding yourself.
And, as described above (although not in sufficient detail, I admit), the Fed had a major role to play in all this. Their “guide to introducing risk into the system” (i.e., the “guide to equal opportunity lending”), published under the Cllinton administration, practically forced lenders to eliminate time-tested methods for determining credit-worthiness.
So I highly disagree that the government has done nothing to encourage high-risk lending. They had everything to do with it.
See the Fed’s paper entitled “Closing the Gap.” Its recommendations (which became mandates) outline the risk-inducing steps taken by the government that led to this mess.
http://www.bos.frb.org/commdev/commaff/closingt.pdf
Bold fresh piece of humanity, if I have terrible spending habits and welch on all my debts, the only people who suffer are my creditors and I.
But introduce the government into the equation, as described above, and the suffering is forcibly diffused throughout the taxpaying public.
This was the stated intent of the legislation. (OK, it was one of the stated goals of the legislation, not the only goal.)
So to say the government is not responsible and that we have only ourselves to blame is really letting the real culprits off the hook.
Greshnab, you are correct. The Senate not only gave it instruction to carry out these suicidal practices, certain Senators personally called officers of the Fed and screamed at them that they weren’t loaning out money fast enough to these high-risk borrowers.
And yes, I do realize that Greenspan warned the Senate about the risk. Read this from Bloomberg Press:
The clear gravity of the situation pushed the legislation forward. Some might say the current mess couldn’t be foreseen, yet in 2005 Alan Greenspan told Congress how urgent it was for it to act in the clearest possible terms: If Fannie and Freddie “continue to grow, continue to have the low capital that they have, continue to engage in the dynamic hedging of their portfolios, which they need to do for interest rate risk aversion, they potentially create ever-growing potential systemic risk down the road,” he said. “We are placing the total financial system of the future at a substantial risk.”
Here’s a link to the Bloomberg article:
http://www.bloomberg.com/apps/news?pid=20601039&refer=columnist_hassett&sid=aSKSoiNbnQY0
Thanks for your answer. I don’t know why people give you thumbs down without giving you a reasoned rebuttal. Guess some people don’t want to do their homework, just point fingers (or in this case, thumbs).
Scorpian S, I agree. But I also think the Federal Reserve Bank is only part of the problem.
Mark M, read the “Closing the Gap” paper put out by the Feds. No lender was forced to underwrite loans, but if they chose to do so, they were forced to abandon time-tested criteria for determining who was credit-worthy.
I agree with you that “if you remove that basic tenet of the rule to artificially increase demand across the board, the system is bound to implode.” But read above. Can you still say that you are “aware of no government rule or legislation that mandated the banking industry to make loans that were virtually certain to default”?
Can you at least see that the government regulation encouraged lenders to make these high-risk loans and even provided incentives to do so?
fast mortgage
