- Jul 1, 2004
:laugh: This information is readily available to anyone with half a brain that doesn't have their head up their ass and isn't willing to swallow the drivel the government says.Originally posted by: Evan
If someone thinks something other than free markets was the main reason for collapse (after all, AIG, Bear, Lehman, etc. were not run by the gov't, they were private), those people will first have to actually address specifically what the gov't did. Uh oh, time for bamacre to wimp out. :laugh:
And I just happen to have Thomas Wood's Meltdown in front of me...
1. Fannie Mae and Freddie Mac
Both created by Congress, both Government Sponsored Enterprises (GSE's).
FNMA was privatized in 1968, and FHLMC was created in 1970 to presumably compete with FNMA. But even though both are private, both receive "special tax and regulatory privileges." "Their securities are designated as "government securities," and they have a line of credit through the Treasury. Not exactly free market is it? Even worse, investors knew that if these companies ever got into trouble, they'd be bailed out by the government. And right they were, as both were placed into conservatorship, and at that time they held almost half of the country's mortgages. They also had a big hand in the political drive to lower lending requirements, so people who (in a free market) wouldn't be able to afford a home, were able to, gasp, "afford" a home.
2. The CRA and "affirmative action in lending
The CRA under Clinton "opened up banks to crushing discrimination suits if they did not lend to minorities in numbers high enough to satisfy the authorities."
Stan J. Liebowitz in Oct 2008...
These changes in lending herald what we refer to as mortgage innovation. (My emphasis) One man?s innovation can be another man?s poison, in this case a poison that infected the entire industry. What you will not find, if you read the housing literature from 1990 until 2006, is any fear that perhaps these weaker lending standards that every government agency involved with housing tried to advance, that congress tried to advance, that the presidency tried to advance, that the GSEs tried to advance?and with which the penitent banks initially went along and eventually enthusiastically supported?might lead to high defaults, particularly if housing prices should stop rising.
3. "The government's artificial stimulus to speculation"Within a few months of the appearance of the Boston Fed study, a new manual appeared from the Boston Fed. It was in the nature of a ?Nondiscriminatory Mortgage Lending for Dummies?3 booklet. The president of the Boston Fed wrote in the foreword:
The Federal Reserve Bank of Boston wants to be helpful to lenders as they work to close the mortgage gap [higher rejection rate for minorities]. For this publication, we have gathered recommendations on ?best practice? from lending institutions and consumer groups. With their help, we have developed a comprehensive program for lenders who seek to ensure that all loan applicants are treated fairly and to expand their markets to reach a more diverse customer base.
Early in the document, the Boston Fed gracefully reminds its readers of a few possible consequences of not paying attention:
Did You Know? Failure to comply with the Equal Credit Opportunity Act or Regulation B can subject a financial institution to civil liability for actual and punitive damages in individual or class actions. Liability for punitive damages can be as much as $10,000 in individual actions and the lesser of $500,000 or 1 percent of the creditor?s net worth in class actions.
The increase of home ownership, the relaxed lending standards, all spilled into the the rest of the market, higher income and speculators. Flip houses, make money. No need to get a job, just buy a house, wait a few months, then sell it for a huge profit.
And the Federal Reserve's Greenspan was pushing and recommending ARM's (adjustable rate)...
And here's the trick, the majority of the ARM's were prime compared to subprime mortgages.
4. "The 'pro-ownership' tax code
Government at all levels encouraged people to buy a home. On the federal level, if you rent, or buy a home outright (with no mortgage), then you get nothing, the government taxes you more. And then developers were getting even free land and tax privileges just to build new homes. And on the local levels, for example, in Washington, DC people received a $5k tax credit for buying a first home. And in 1997, a new law dropped capital gains taxes for houses...
So, you buy $100K worth in stock, sell it for $200K, and you pay capital gains tax on the profit. But a $100K house, sell it for $200K, and pay NO capital gains tax on the profit.
5. "The Federal Reserve and artificially cheap credit
The biggest factor in creating the bubble. Because of course, the answer to the question, "where did all the money come from?," is the Federal Reserve. Artificially low interest rates, easy money, easy credit, fueling the entire mess.
Greenspan, after 9/11, in an attempt to fuel the economy set rates very low, 1% for an entire year. More dollars were "created between 2000 and 2007 then in the rest of the Republic's history."
Under a free market, with sound money and no central bank, interest rates would naturally rise as the amount of available capital is loaned out. Supply and demand. But with an unlimited supply of new money created by the Fed, all the rules are tossed out the window, and chaos occurs. It encourages speculation, fuels massive borrowing and creates malinvestment. Sound familiar? It should.
6. "Too big to fail mentality"
"Greenspan solidified a reputation for himself among investors as Mr. Bailout, what with his 1994 bailout of the Mexican peso, the special rate cuts meant to ease the distress of the Long Term Capital Management hedge fund, and the flooding of the banking system with fresh reserves."
From Feb 2000...Since Alan Greenspan took office, financial markets in the US have operated under a quasi official charter, which says that the central bank will protect its major actors from the risk of bankruptcy. Consequently, the reasoning emerged that when you succeed, you will earn high profits and market share, and if you should fail, the authorities will save you anyway.
Under the protective shield provided by the central bank, the US financial system has became tilted toward relentless expansion. In a process that began as early as 1987, Greenspan's monetary policy has transformed the American economy toward the predominance of the financial sector.
After just two months in office as Fed chairman, Greenspan set the standard when facing the stock market crash of October 19th, 1987, and he famously declared: "The Federal Reserve, consistent with its responsibilities as the nation's central banker, affirmed today its readiness to serve as a source of liquidity to support the economic and financial system."
Greenspan's prime monetary policy rule has remained the same since then. It is a rule which he formulated when referring to the response to the stock market debacle in 1987: "It wasn't a question of whether you would open up the taps or not open up the taps. It was merely how you would do it, not if."
"Greenspan Urges Congress To Fuel Growth of Derivatives"
So there you have it. One massive FUBAR'd mess created, fueled, and encouraged by our wonderful government. And paid for by US taxpayers.