How did we get into this situation in the first place?

[BeAChooser]

ROTFLOL! Meadmaker "stumbles" upon the "American Dream Downpayment Act" and wonders if it was bipartisan. And apparently doesn't know what it was all about. He's just thinks he has a "gotcha". But he doesn't.

First of all, this Act was small potatoes. The Act authorized up to $200 million annually for fiscal years 2004 - 2007 (http://www.hud.gov/offices/cpd/affordablehousing/programs/home/addi/ ). Barely half a billion dollars over 4 years. Meanwhile, corrupt democrats like Franklin Raines and Jamie Gorelick stole almost $100 million out of the system at Fannie Mae while cooking the books and selling hundreds of billions of dollars in mortgages that would never have been sold (because they were sure to fail at the first downturn in the economy) had the democrats gone along with the various bills that republicans submitted calling for increased oversight and regulation of Fannie and Freddie.

Furthermore, this Act didn't authorize the giveaway of houses to poor and minorities with zero down payment, which is essentially what the democrats were routinely doing to buy votes. Nor was it intended to help greedy people (like the woman I noted earlier) who were buying multiple homes or flipping houses in risky get-rich quick schemes. As the above link states: "ADDI will help first-time homebuyers with the biggest hurdle to homeownership: downpayment and closing costs. ... snip ... The amount of ADDI assistance provided may not exceed $10,000 or six percent of the purchase price of the home, whichever is greater." And some of this assistance was also aimed at rehabilitation of properties to remove lead paint and other home health hazards. The Act actually sounds like admirable legislation ... not a *gotcha*.

Which is why it passed unanimously in both houses.

 

[BeAChooser]

So, why did it happen during this decade, when previously, it hadn't?

As noted before, this decade saw a sharp downturn in the economy whereas that didn't happen in the previous decade. Meadmaker is right in that a number of people saw it coming around 2000-2005. Mostly republicans. And democrats mostly refused to listen then. So the answer to the OP is contained therein.

 

[Meadmaker]

ROTFLOL! Meadmaker "stumbles" upon the "American Dream Downpayment Act" and wonders if it was bipartisan. And apparently doesn't know what it was all about. He's just thinks he has a "gotcha". But he doesn't.

I want you to reexamine your worldview for just a moment, and consider the possiblity that sometimes, a person asks a question because he wants to know the answer. This may take some time to wrap your mind around, but it has been known to happen.

This legislation was part of "America's Home Ownership Challenge", and if the White House press releases related to it are to be believed, it was anything but small potatoes. President Bush's goals were 5.5 million new homeowners and 1.1 trillion dollars in new loans. (I don't know exactly how that was measured. I remember the figure of 1.1 trillion from a White House press release.)

My question is what did he do to accomplish that. Legislation like the ADDI is indeed "small potatoes", so what was he doing to achieve the goals?

 

[Meadmaker]

Meadmaker is right in that a number of people saw it coming around 2000-2005. Mostly republicans. And democrats mostly refused to listen then. So the answer to the OP is contained therein.

In the press release for the signing of ADDI, President Bush was bragging about the 2.5 trillion dollars in new equity Americans had achieved. Apparently, President Bush wasn't one of the people who saw this coming. He thought it was just great.

 

[BeAChooser]

Mr. Frank. ... snip ... Are we in a crisis now with these entities?

Secretary Snow. No, that is a fair characterization, Congressman Frank, of our position. We are not putting this proposal before you because of some concern over some imminent danger to the financial system for housing; far from it.

Well obviously, there wasn't an imminent crisis (i.e., GSEs weren't going to fail in the next day or month) but that doesn't mean Secretary Snow was wrong about the need for the legislation. History has proven him absolutely right and Frank absolutely wrong. Had that legislation been passed, we probably wouldn't be in the mess we are right now and almost certainly Fannie and Freddie would not have collapsed.

And isn't it ironic that democrats, who chastised Bush for Iraq saying it was not an imminent threat (which, by the way, Bush never did claim), are here trying to make excuses for Barney Franks (who did indeed profit from GSEs) by using a statement from Secretary Snow's saying this crisis wasn't imminent. Now if Secretary Snow could be right about the need to do something about GSE's because of concerns about where we'd be a few years down the road, then why couldn't Bush have been right about the need to do something about Saddam because of concerns of where we'd be if we didn't a few years down the road?

 

[BeAChooser]

Maybe Bush just thought he could play nice with the democrats and minorities and they'd like him. Maybe Bush decided to trade supporting a democrat agenda (CRA) for his own (Iraq and the WOT). Or maybe Bush was just as dumb as you democrats have claimed for 8 years. But what was Obama's excuse? Since we're told he's soooooooo smart.

 

[Darat]

Interesting to see even on a forum like this how the support for Bush has fallen away as he is consigned to the past.

 

[boloboffin]

BeAChooser, is it at all possible that this had something more to do with this crisis than what you're exercised about?

Not only did the Bush administration do nothing to protect consumers, it embarked on an aggressive and unprecedented campaign to prevent states from protecting their residents from the very problems to which the federal government was turning a blind eye.

Let me explain: The administration accomplished this feat through an obscure federal agency called the Office of the Comptroller of the Currency (OCC). The OCC has been in existence since the Civil War. Its mission is to ensure the fiscal soundness of national banks. For 140 years, the OCC examined the books of national banks to make sure they were balanced, an important but uncontroversial function. But a few years ago, for the first time in its history, the OCC was used as a tool against consumers.

In 2003, during the height of the predatory lending crisis, the OCC invoked a clause from the 1863 National Bank Act to issue formal opinions preempting all state predatory lending laws, thereby rendering them inoperative. The OCC also promulgated new rules that prevented states from enforcing any of their own consumer protection laws against national banks. The federal government's actions were so egregious and so unprecedented that all 50 state attorneys general, and all 50 state banking superintendents, actively fought the new rules.

But the unanimous opposition of the 50 states did not deter, or even slow, the Bush administration in its goal of protecting the banks. In fact, when my office opened an investigation of possible discrimination in mortgage lending by a number of banks, the OCC filed a federal lawsuit to stop the investigation.

Eliot Spitzer published that in the Washington Post the day after he visited the prostitute in Washington, the one that drug down his administration. How about that?

 

[BeAChooser]

BeAChooser, is it at all possible that this had something more to do with this crisis than what you're exercised about?

Boloboffin, I'm not here to defend the actions of the Bush administration. I'm sure they have ties to special interests in the banking and housing areas. All politicians do. And Bush isn't running for President.

I'm here to point out that Obama LIED when he said McCain and republicans had done nothing before this latest crisis to deal with the problems that led to the collapse of Fannie and Freddie and other lenders. They did, as I clearly showed. Many experts agree that if the legislation they proposed back in 2003 through 2006 had been passed, Fannie and Freddie would probably not have collapsed and we wouldn't be in the mess we are right now. Now do you have anything to indicate that McCain was involved in this scandal that Spitzer alleges?

But as always, when dealing with a democrat, there are two sides to a story. Here's the other side.

http://www.occ.gov/ftp/release/2008-16.htm

Comptroller of the Currency John C. Dugan issued the following statement today, responding to comments from New York Governor Eliot Spitzer:

Almost everyone who has paid attention to the subprime lending crisis has concluded that OCC-regulated national banks were not the problem. Instead, the worst abuses came from loans originated by state-licensed mortgage brokers and lenders that are exclusively the responsibility of state regulators.

However, comments from today assert that the OCC and national bank preemption have prevented the states from taking action against predatory or abusive lenders. That’s just plain wrong.

The OCC extensively regulates the activities of national banks, including mortgage lending. The OCC established strong protections against predatory lending practices years ago, and has applied those standards through examinations of every national bank. As a result, predatory mortgage lenders have avoided national banks like the plague. The abuses consumers have complained about most — such as loan flipping and equity stripping — are not tolerated in the national banking system. And the looser lending practices of the subprime market simply have not gravitated to national banks: They originated just 10% of subprime loans in 2006, when underwriting standards were weakest, and delinquency rates on those loans are well below the national average.

Nothing the OCC has done has prevented the states from regulating and preventing abuses among the lenders that they license – lenders that are the source of most of today’s problems. The states have ample authority – as well as clear responsibility – to set standards for these lenders and enforce them. It defies logic to argue that preemption was an impediment. National banks are bound to obey the strict standards enforced by the OCC everywhere they operate – even in states that had far less rigorous standards. The states should have applied equally rigorous standards to the non-bank lenders that were responsible for the bulk of the problems.

 

[Meadmaker]

So I've been doing some research, and I stumbled on some stuff. I was trying to figure out whether deregulation caused this mess. If so, there would have be examples of regulation that was repealed.

There weren't many such regulations. On the other hand, there seems to have been an absence of effective regulatory changes to reflect changes in the market. Also, a few regulatory changes seem to have been key.

In particular, the bailout of AIG was prompted when it collapsed, which collapse was caused largely through a huge loss in "credit default swaps", which were basically a means of insuring against losses in mortgage backed securities. Phil Gramm et. al. had managed to push through a bill, signed by President Clinton in the final days of his administration, that specifically prohibited regulation of credit default swaps.

That struck me as odd. A bill that specifically prohibited future regulation? Something didn't smell right. I can understand why you might not want regulation, but to actively prohibit future regulation seemed like something a bit odd for a legislative action. What was the deal with these things, that would make them outside the realm of future regulation.

Some research led me to the concept of "market discipline". That's just a term that meant that the market would punish bad business decisions. Run you business badly, and your stock goes down. However, this crowd seems to have gone farther than that. It seems there is a great deal of academic theory, some of which seems to have crept into regulatory agencies and legislative agendas, that says that market discipline can actually be a substitute for regulation.

Here's how it works. Suppose a company issues a bond. They'll want that bond to be high priced. The value of a bond will be based on its coupon, plus a factor based on a risk of default. When investors think the company may default, the bond price goes down. So, the theory goes, there's no need for a regulator to go in and audit the company, such as a bank, to see if it might fail. The "free market" is already doing that. Bond traders will wisely make sure they are accurately pricing the bonds issued by the bank, and the yield on the bonds will be a sure signal to investors that there is a risk of default. Furthermore, the bank will do anything in their power to prevent that.

Credit default swaps were another place where "market discipline" was supposed to work. If it was costly to insure your bonds against failure, there must be something wrong with your bonds. If the feds were to impose regulation on the issuance of credit default swaps, that would interfere with the operation of the free market in imposing market discipline.

I learned a lot in this investigation. Try to work through what "subordinated debt" is, it's role as a tool in "market discpline", and why it was allowed to be counted as capital. You'll learn a lot, too.

So there's no need to regulate banks, or securities, because the free market will provide all the regulation necessary.

How's that theory working out?

 

[Darat]

...snip....

So there's no need to regulate banks, or securities, because the free market will provide all the regulation necessary.

How's that theory working out?

Actually I think it would work very well if the various governments didn't keep trying to meddle with it. Very quickly many banks and financial companies and institutions worldwide would go under, a few would pick up some very cheap assets and then sit on them.

Of course that might mean most people lose all their savings and so on but hey that's the free-market working!

Quite seriously what we are seeing is the one thing that "free market" fanatics (note I do not mean people like me that think that a free market approach can often be the optimal if not the best way, but those that want a totally unfettered, unregulated free market for everything) blithely ignore - the human cost of the free market - the free market does not value people in the way we like to be valued!

 

[GreyICE]

It's interesting that the OCC says that their standards are so much more stringent when the 2003 change prevented states from applying their laws to the national banks. If their rules were so much more stringent, what was the problem?

 

[Meadmaker]

Actually I think it would work very well if the various governments didn't keep trying to meddle with it. Very quickly many banks and financial companies and institutions worldwide would go under, a few would pick up some very cheap assets and then sit on them.

Of course that might mean most people lose all their savings and so on but hey that's the free-market working!

Quite seriously what we are seeing is the one thing that "free market" fanatics (note I do not mean people like me that think that a free market approach can often be the optimal if not the best way, but those that want a totally unfettered, unregulated free market for everything) blithely ignore - the human cost of the free market - the free market does not value people in the way we like to be valued!

You had me going there with your first paragraph.

That is indeed the whole problem of the free market. It's all very well to say that your neighbor's bankruptcy is the fault of poor decisions, and just a natural consequence of the free market at work, but it makes for a lousy neighborhood. And if your neighbor happens to be 72 years old when she makes the bad decisions, saying "too bad for you" just doesn't seem to be an adequate response.

 

[BeAChooser]

That is indeed the whole problem of the free market.

Well at least the liberals here aren't pretending to believe in the free market system any longer. At least Obama's run has gotten them to be honest about that. They must be confident he's going to win. And maybe he will given that the media is clearly on his side and how foolish/gullible Americans seem. Wonder what that portends for the future, folks. Utopia? I sort of doubt it, looking at history. I rather think it will be a bad case of Beggars and Choosers with the Beggars in charge. Sweet nightmares.

 

[Meadmaker]

Well at least the liberals here aren't pretending to believe in the free market system any longer.