Sunday, September 21, 2008

Economic Credit Crisis - Who's To Blame?

There is no simple answer to the question of Blame. Politicians, Financial Institutions, Speculators ETC. It also includes the ignorant public, some of the homeowners, for instance. All have some reason to share at least some of the blame.

But, we elect officials (Politicians) to Serve and Protect us. Part of that responsibility is to protect us from ourselves. Since they had the opportunity and did not, it is correct to lay the lion's share of the blame at the feet of the Politicians.

Investors Business Daily (IBD) has a very interesting web page of IBD Editorials. One of these editorial pieces - Congress Lies Low To Avoid Bailout Blame - makes some very interesting points. Most of our Political Leaders are running for cover while denying any responsibility for our current Economic Crisis.
Until now, Congress has been surprisingly passive. As Sen. Majority Leader Harry Reid put it, "no one knows what to do" right now.

Funny, since it was a Democrat-led Congress that helped cause the problems in the first place.

When House Speaker Nancy Pelosi recently barked "no" at reporters for daring to ask if Democrats deserved any blame for the meltdown, you saw denial in action.

Pelosi and her followers would have you believe this all happened because of President Bush and his loyal Senate lapdog, John McCain. Or that big, bad predatory Wall Street banks deserve all the blame. [emphasis mine]
Most analysts agree that the problem began with the Sub prime Lending Practices. But, for a member of the US Congress, both the House and the Senate, to make the comments Harry Reid and Nancy Pelosi did is dishonest.
"The American people are not protected from the risk-taking and the greed of these financial institutions," Pelosi said recently, as she vowed congressional hearings
.But They Could Have Been, if they had been protecting and serving us - the people they serve. It is true that some banks made loans they should not have; and CEO's got ridiculous bonuses in the millions of dollars while ruining their companies.
...President Bush in 2003 tried desperately to stop Fannie Mae and Freddie Mac from metastasizing into the problem they have since become.
Who stopped President Bush 5 years ago? The Democrats in Congress and specifically Representative Barney Frank (D-MA).
Who stopped him? Congress, especially Democrats with their deep financial and patronage ties to the two government-sponsored enterprises, Fannie and Freddie.

"These two entities — Fannie Mae and Freddie Mac — are not facing any kind of financial crisis," said Rep. Barney Frank, then ranking Democrat on the Financial Services Committee. "The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing." [emphasis mine]
Five years ago Barney Frank claimed "..No Financial Crisis..." and "...People Exaggerate These Problems..." and was wrong. John McCain also tried to do something about Fanny Mae and Freddie Mac 3 years ago."If Congress does not act," McCain said in 2005,
"American taxpayers will continue to be exposed to the enormous risk that Fannie Mae and Freddie Mac pose to the housing market, the overall financial system and the economy as a whole."
Senator McCain's warning was again ignored by Congress.

Referring back to an earlier cited quote of Speaker of the House Nancy Pelosi "The American people are not protected from the risk-taking and the greed of these financial institutions," we can correctly conclude it was because they (and she) did not listen, let alone act to protect and serve the electorate - US

The root of this crisis goes all the way back to the Presidency of Jimmy Carter.
To hear today's Democrats, you'd think all this started in the last couple years. But the crisis began much earlier. The Carter-era Community Reinvestment Act forced banks to lend to uncreditworthy borrowers, mostly in minority areas.
The Community Reinvestment Act became US Law under Carter. It was well-intentioned, but not sound credit policy.
Age-old standards of banking prudence got thrown out the window. In their place came harsh new regulations requiring banks not only to lend to uncreditworthy borrowers, but to do so on the basis of race.

These well-intended rules were supercharged in the early 1990s by President Clinton. Despite warnings from GOP members of Congress in 1992, Clinton pushed extensive changes to the rules requiring lenders to make questionable loans.
Since these rules had the force of Law, the Lenders were REQUIRED to comply, regardless of the economics and prudent credit policy, or face the consequences of the Federal Government.
Lenders who refused would find themselves castigated publicly as racists. As noted this week in an IBD editorial, no fewer than four federal bank regulators scrutinized financial firms' books to make sure they were in compliance.

Failure to comply meant your bank might not be allowed to expand lending, add new branches or merge with other companies. Banks were given a so-called "CRA rating" that graded how diverse their lending portfolio was.
Banks and other financial credit sources were pursued and hounded under CRA Law and Rules aggressively by the Clinton Administration.
"We have to use every means at our disposal to end discrimination and to end it as quickly as possible," Clinton's comptroller of the currency, Eugene Ludwig, told the Senate Banking Committee in 1993.


In the name of diversity, banks began making huge numbers of loans that they previously would not have. They opened branches in poor areas to lift their CRA ratings. [emphasis mine]
In other words, the Clinton White House waged a war on discrimination by making credit available to homeowners who did not deserve and could not afford it by foolishly ignoring prudent fiscal policy. And the Congress was fully complicit in this policy.
Meanwhile, Congress gave Fannie and Freddie the go-ahead to finance it all by buying loans from banks, then repackaging and securitizing them for resale on the open market.
In retrospect, it is surprising that it took this long to collapse.
Fannie Mae and Freddie Mac grew to become monsters, accounting for nearly half of all U.S. mortgage loans. At the time of their bailouts this month, they held $5.4 trillion in loans on their books. About $1.4 trillion of those were subprime.

As they grew, Fannie and Freddie grew heavily involved in "community development," giving money to local housing rights groups and "empowering" the groups, such as ACORN, for whom Barack Obama once worked in Chicago.
The Democrats were on a roll. They kept reassuring us that everything was OK.
Warning signals were everywhere. Yet at every turn, Democrats in Congress halted attempts to stop the madness. It happened in 1992, again in 2000, in 2003 and in 2005. It may happen this year, too.
Why would Congress and Democrats in particular ignore the warnings? The Answer is not Surprising, it's MONEY.
Since 1989, Fannie and Freddie have spent an estimated $140 million on lobbying Washington. They contributed millions to politicians, mostly Democrats, including Senator Chris Dodd (No. 1 recipient) and Barack Obama (No. 3 recipient, despite only three years in office).
Besides Money for Congress, look at who made the Money while holding positions in Fanny and Freddie.
The Clinton White House used Fannie and Freddie as a patronage job bank. Former executives and board members read like a who's who of the Clinton-era Democratic Party, including Franklin Raines, Jamie Gorelick, Jim Johnson and current Rep. Rahm Emanuel. [emphasis mine]
Are there any Republicans in the money pit? Sure there are, but take a look at the list of the top 25 receipitents of Fanny Mae and Freddie Mac campaign contributions.
All Recipients of Fannie Mae and Freddie Mac Campaign Contributions, 1989-2008

Name Office State Party Grand Total Total from
PACs Total from
Dodd, Christopher J S CT D $165,400 $48,500 $116,900
Obama, Barack S IL D $126,349 $6,000 $120,349
Kerry, John S MA D $111,000 $2,000 $109,000
Bennett, Robert F S UT R $107,999 $71,499 $36,500
Bachus, Spencer H AL R $103,300 $70,500 $32,800
Blunt, Roy H MO R $96,950 $78,500 $18,450
Kanjorski, Paul E H PA D $96,000 $57,500 $38,500
Bond, Christopher S 'Kit' S MO R $95,400 $64,000 $31,400
Shelby, Richard C S AL R $80,000 $23,000 $57,000
Reed, Jack S RI D $78,250 $43,500 $34,750
Reid, Harry S NV D $77,000 $60,500 $16,500
Clinton, Hillary S NY D $76,050 $8,000 $68,050
Davis, Tom H VA R $75,499 $13,999 $61,500
Boehner, John H OH R $67,750 $60,500 $7,250
Conrad, Kent S ND D $64,491 $22,000 $42,491
Reynolds, Tom H NY R $62,200 $53,000 $9,200
Johnson, Tim S SD D $61,000 $20,000 $41,000
Pelosi, Nancy H CA D $56,250 $47,000 $9,250
Carper, Tom S DE D $55,889 $31,350 $24,539
Hoyer, Steny H H MD D $55,500 $51,500 $4,000
Pryce, Deborah H OH R $55,500 $45,000 $10,500
Emanuel, Rahm H IL D $51,750 $16,000 $35,750
Isakson, Johnny S GA R $49,200 $35,500 $13,700
Cantor, Eric H VA R $48,500 $46,500 $2,000
Crapo, Mike S ID R $47,250 $40,500 $6,750
Frank, Barney H MA D $42,350 $30,500 $11,850
Bean, Melissa H IL D $41,249 $34,999 $6,250
Bayh, Evan S IN D $41,100 $16,500 $24,600
McConnell, Mitch S KY R $41,000 $40,000 $1,000
Maloney, Carolyn B H NY D $39,750 $16,500 $23,250
Dorgan, Byron L S ND D $38,750 $30,500 $8,250
Miller, Gary H CA R $38,000 $31,500 $6,500
Rangel, Charles B H NY D $38,000 $14,750 $23,250
Tiberi, Patrick J H OH R $35,700 $32,600 $3,100
Bunning, Jim S KY R $33,802 $29,650 $4,152
Stabenow, Debbie S MI D $33,450 $32,000 $1,450
Chambliss, Saxby S GA R $33,250 $22,500 $10,750
Menendez, Robert S NJ D $31,250 $30,500 $750
Enzi, Mike S WY R $31,000 $27,500 $3,500
Van Hollen, Chris H MD D $30,700 $11,000 $19,700
Landrieu, Mary L S LA D $30,600 $20,000 $10,600
Murray, Patty S WA D $30,000 $23,000 $7,000
Clyburn, James E H SC D $29,750 $26,000 $3,750
Crowley, Joseph H NY D $29,700 $25,500 $4,200
Sessions, Pete H TX R $29,472 $24,000 $5,472
McCrery, Jim H LA R $29,000 $26,000 $3,000
Hooley, Darlene H OR D $28,750 $19,500 $9,250
Royce, Ed H CA R $28,600 $4,000 $24,600
Renzi, Rick H AZ R $28,250 $28,000 $250
Lieberman, Joe S CT I $28,250 $11,500 $16,750
Baucus, Max S MT D $27,500 $21,000 $6,500
Moore, Dennis H KS D $26,550 $25,500 $1,050
Coleman, Norm S MN R $24,690 $12,000 $12,690
Matheson, Jim H UT D $24,500 $24,000 $500
Schumer, Charles E S NY D $24,250 $1,500 $22,750
Durbin, Dick S IL D $23,750 $14,000 $9,750
Rogers, Mike H MI R $22,750 $21,000 $1,750
Lynch, Stephen F H MA D $22,500 $13,500 $9,000
Rockefeller, Jay S WV D $22,250 $5,000 $17,250
Smith, Gordon H S OR R $22,000 $20,000 $2,000
Mikulski, Barbara A S MD D $21,750 $16,500 $5,250
McCain, John S AZ R $21,550 $0 $21,550 [source:]
As you can see, and IBD confirms, Congress got the money, we got the bill.


Anonymous said...

Wow! You say "the Democrats were on a roll..." yet you ignore the fact that George H. W. Bush and the Republicans in the present administration (and Ben Bernanke) had a hand in all of it as well back in 1989...

From Wikipedia:

The Financial Institutions Reform Recovery and Enforcement Act of 1989 (FIRREA) was enacted by the 101st Congress and signed into law by President George H. W. Bush in the wake of the savings and loan crisis of the 1980s. As part of a general reform of the banking industry, it increased public oversight of the process of issuing CRA ratings to banks. It required the agencies to issue CRA ratings publicly and written performance evaluations using facts and data to support the agencies' conclusions. It also required a four-tiered CRA examination rating system with performance levels of "Outstanding," "Satisfactory," "Needs to Improve," or "Substantial Noncompliance."[11]

According to Ben Bernanke, this law greatly increased the ability of advocacy groups, researchers, and other analysts to "perform more-sophisticated, quantitative analyses of banks' records," thereby influencing the lending policies of banks. Over time, community groups and nonprofit organizations established "more-formalized and more-productive partnerships with banks."[5][12]

Bernanke also stated that CRA was affected by changes in the financial services sector. One was the preemption of usury laws on home loans.[13] The United States Congress also passed the Federal Housing Enterprises Financial Safety and Soundness Act of 1992. This act required the Federal National Mortgage Association, commonly known as Fannie Mae, and the Federal Home Loan Mortgage Corporation, commonly known as Freddie Mac, to devote a percentage of their lending to support affordable housing. This in part, contributed to increased Fannie Mae and Freddie Mac pooling and selling of such loans as securities, (i.e. securitization), and expanded the secondary market for those loans.[5]

Murky Research said...

"... George H. W. Bush and the Republicans in the present administration (and Ben Bernanke) had a hand in all of it as well back in 1989 ..."
While Gerrge H. W. Bush was the President in 1989, the present administration has only been in the White House since 2001. Ben Benanke entered Government Service in 2002. What do they have to do with 1989?

Moreover it was 1994 when President Clinton greatly expanded the 1977 CRA. It was also at the insistance of Clinton that Pres. Clinton's Attorney General, Janet Reno, actively pressured lending institutions to increase their CRA Scores.

It was in 2004 that Franklin Raines, President Clinton's Director of the Budget, was forced to resign as the CEO of Fannie Mae due to an accounting scandal. Raines kept his $90 Million "Golden Parachute".

It was the Democrats, Barney Frank and Maxine Waters who praised Mr. Raines Leadership at Fannie Mae right up to the Scandal.

Another Fannie Mae CEO, Jim Johnston, was the Chairman of the Obama Campaign to select a VP.

While not based on sound Accounting Principles, the 1977 CRA did not create a serious problem until the act was expanded and agressively enforced by the Clinton Administration starting in 1994.