I have a family friend who penned an excellent email, the gist of which was his anger over the Mark Levin Radio Show and others trying to blame the Bush administration for this financial disaster. He is absolutely spot-on.
Since he didn’t have access to much of the history, I will lay out the important events I think led us to this point. This is explained in much greater detail in my upcoming book "From Your Wallet to Their Pockets: Privatizing Profits and Socializing Losses".
It is government intervention in private markets that got us here. Now, some say, "it's the government's responsibility to get us out". That’s just a much larger perpetuation of the problem, an adrenaline like boost for the cancer that’s sapping the life out of the victim. The “fix” should fall squarely upon the private markets.
The History of Government Intervention
1977 - The Community Reinvestment Act of 1977 (CRA), President Jimmy Carter – Up until this time, banks would only lend to qualified borrowers. Many “unqualified borrowers” were obviously in lower income neighborhoods, and in lower paying jobs, with poor or no credit history.
Since this was not serving the social engineering goals of government and congress at the time, this act was passed to force banks to lend to these previously unqualified borrowers. It created a bank CRA rating and the bank risked losing its cherished bank charter if it did not achieve the government’s goals and qualify for a good CRA rating. The more loans and investments to unqualified borrowers, the better the rating.
Since Usury Laws, laws that capped the interest rates lenders could charge for their loans, were in place at the time, these loans were made to risky borrowers for the same price they were made to highly qualified borrowers. Government forcing private markets into bad loans, bad decisions and unprofitable loans.
1980 - The Depository Institutions Deregulatory and Monetary Control Act of 1980, President Jimmy Carter - This act eliminated the caps on interest rates lenders could charge for loans. Eliminating these caps allowed lenders to charge rates that allowed them to meet their profit requirements. This change had the positive effect of making credit accessible by people who could not qualify for loans previously. It was also the engine that begins to drive subprime lending.
The combination of CRA and this act begin to force, then open the spigot for subprime lending in an attempt to meet the governments goals of creating a private market to replace public housing.
1982 - Garn - St. Germain Depository Institutions Act of 1982, President Reagan – Deregulates the Savings and Loan Industry. Title VIII of the act allows for Adjustable Rate Mortgages. At the time bankers, appropriately, owned the credit and interest rate risk on the loans they made. This act allowed the banks to transfer interest rate risks (the rise, fall and management of interest rate moves) to the borrower. These are a significant portion of the delinquent mortgages today.
1986 - The Tax Reform Act of 1986, President Reagan - Eliminates the interest deduction on all loans (credit cards, automobile loans) other than mortgage loans. This change, in turn, made mortgages more attractive to borrowers. Instead of taking out mortgages to purchase the home they occupied, borrowers rushed to take out first or second mortgage loans for major purchases such as automobiles, vacations, home improvement, and investments.
In my personal opinion, this piece of legislation was a major contributor to the popularity of home equity extraction (commonly referred to using one’s home as an automated teller machine). It practically dared borrowers to move past their previous discomfort about high loan-to-values (which the reader should interpret as lower equity positions) in their homes.
1999 - Gramm-Leach-Bliley Financial Services Modernization Act of 1999, President Clinton – Allows commercial banks (B of A, Citi, Wells Fargo etc.) and investment banks (Smith Barney, Shearson etc.) to consolidate. Accelerates higher leveraged lending activities and increases risk taking in the banking system.
Adding to the Pile
These pieces of legislation, combined with government’s creation of Ginnie Mae, Fannie Mae, Freddie Mac and FHA, are the root of this problem. The Federal Reserve Bank has whipsawed the markets. This government’s social engineering ala China under the blanket of “free market capitalism” is a primary driver of our problems today. Securitizations and greed are the other, enabled by these pieces of legislation.
So where is President Bush to blame in all of this? He’s not. He certainly will be if this bailout goes through; it is a travesty and should not be allowed.
On a final note, our congress sits high in their chairs berating Paulson and Bernanke asking why they didn’t see it coming, and it's still happening under their watch.
FHA
Well folks it’s still happening today in a little talked about area of government owned mortgage lending which is FHA. With the demise of other subprime lenders in the market, this entity is currently (right this minute) approving and insuring massive amounts of subprime loans that are secured through another government owned entity, Ginnie Mae.
Right under every ones righteous noses in congress, the government (we the people), continue to accelerate our ownership of the subprime business.
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