This was sent to me by my friend itazuke:The BEST explanation of the current crisis I've read.JAMES H. WARNER
20511 Bent Willow Road
Rohrersville, Maryland 21779
(301) 432-4935.
http://www.pownetwork.org/bios/w/w063.htmThe Democrats are correct. The financial crisis was caused by "failed policies," including a refusal to permit meaningful regulation of financial institutions. However, they are deliberately lying when they associate these policies with President Bush. Since taking the oath of office, President Bush has called, 18 times, for adequate regulation of the financial institutions which have done the most to create this crisis: two government-sponsored entities (
GSE's), the Federal Home Loan Mortgage Corp. ("Freddie Mac") and the Federal National Mortgage Corp. ("Fannie Mae"). Each time it was Democrats, not Republicans, who willfully blocked regulation. Why?
The Democrats have been protecting the failed policies of Bill Clinton and Jimmy Carter. In 1977, under Jimmy Carter, the Democrat controlled Congress passed the Community Reinvestment Act (
CRA), which was designed to stop the practice of "redlining" by forcing banks to invest in low income neighborhoods. In 1995, the Clinton administration rewrote the regulations governing the manner in which the
CRA ratings were applied to banks. The new regulations require banks to make mortgage loans to borrowers who would not normally qualify – “
subprime” mortgages. Frequently these
subprime loans were made without a down payment or any documentation from the borrower.
The
CRA, with the new regulations, gave “community organizers” a powerful tool with which to pressure banks to do their bidding. Before any bank can open a new branch, or merge with another bank, it has to petition the bank regulatory authorities for permission. This calls for a review which includes review of the bank’s
CRA compliance. Complaints, even if spurious, by "community organizers" could threaten permission for the proposed move. In order to prevent such complaints, banks began to buy off the “community organizers.” By the year 2000 these groups had received nearly $10 billion from the banking industry. In that year, the banking industry came up with a proposal under which “community organizers" would receive funding over the next several years. For example, ACORN Housing was scheduled to receive $760 million. (ACORN, the Association of Community Organizations for Reform Now, has been investigated repeatedly for fraudulent voter registration attempts.) While this is legal, it bears a very close resemblance to extortion.
Freddie Mac and Fannie Mae bought
subprime mortgages and created "
securitized" packages -- bundles of mortgages which included some of the sub primes and some sound mortgages. These are the dubious investment instruments which are leading to the failures of so many financial institutions. Freddie and Fannie themselves failed because their portfolios were very heavily invested in
subprime mortgages. When Andrew
Cuomo was Secretary of Housing and Urban Development (HUD) he stated that he wanted these mortgages to be 50% of their portfolios. As they were two of the largest financial institutions in the country, it was clear to observers that the situation posed a serious threat to the economic stability of the country.
The need for regulation was made clearer when the CEO of Fannie Mae, Franklin
Raines, was forced to step down in 2004. The Office of Federal Housing Enterprise Oversight (
OFHEO) accused him of being complicit in accounting irregularities, which resulted in overstating earnings by more than $6 billion, making it possible for the senior executives of Fannie Mae, including
Raines himself, to receive huge performance bonuses. He is reported to have received more than $100 million during his five years as CEO of Fannie Mae.
When a congressional subcommittee investigated this, the Democrats on the subcommittee saw nothing wrong and saw no need for regulation over Freddie Mac and Fannie Mae. This at a time when other banks were required to have 10% reserves behind their mortgages, and Freddie Mae back and Fannie Mae were required to have only 2 1/2%.
The failed policies that led to the current crisis were the policies of Democrats, not Republicans. It was Democrats, not Republican, who blocked regulation. In 1933, when FDR took office, banks were failing all over the country. Roosevelt proposed, and Congress enacted, a number of regulatory measures designed to prevent a repeat of the events that led to the economic collapse. Roosevelt recognized that the greater the economic enterprise, the greater the threat to the country if it should collapse, and for this reason felt that regulation was absolutely necessary to protect the country against foolish speculation by such institutions. Thus, FDR asked for the creation of the Federal Deposit Insurance Corporation (FDIC) and the Securities and Exchange Commission (SEC). The same reasoning led President Bush repeatedly to request meaningful regulation of the
GSE's. It also led Sen. John McCain, in 2005, to introduce legislation to create a body with authority to exercise oversight over these
GSE's. The legislation failed because Democrats blocked it.
It was Democratic policies that forced banks to grant
subprime mortgages to people who were not creditworthy, and in amounts that could not help but put the country at risk ( in 2006, banks were forced to issue $600 billion in
subprime mortgages). Rational economists, but not Democrats, trembled to contemplate what might happen if these mortgages started to turn bad.
The only argument Democrats have that the
subprime mortgages issued pursuant to
CRA were not the cause of the crisis is the fact that a large number of these loans were made by independent mortgage brokers who are not subject to
CRA. This is irrelevant since the independent mortgage brokers were acting as agents for banks or sold the mortgages they issued to banks, which needed to have them in their portfolios in order to show compliance with
CRA.
I agree with the Democrats that greed was a contributing factor to this crisis. It was greed on the part of the Democratic executives at Fannie Mae that caused them to lie about their earnings in order to be granted large multimillion-dollar bonuses.
I agree with the Democrats that foolish speculation helped cause the crisis. Forcing banks to grant
subprime mortgages was every bit as foolish as any speculations made by financiers during the roaring twenties.
I agree with the Democrats that the people whose failed policies caused this crisis should not be trusted to fix it -- they are the failed policies of Democrats. I agree with the Democrats that it was a lack of effective regulation that permitted the two largest holders of
subprime mortgages to fail -- it was congressional Democrats, including
Barack Obama, Harry Reid, and Nancy
Pelosi who blocked John McCain’s attempt to impose regulations and who failed to heed President Bush when he warned the Congress about the risk of these entities failing.
If, 85 years after the multiple bank failings of 1933 pushed the country deeper into the Great Depression, the Democrats do not have the same good sense that Franklin Roosevelt had to recognize that large financial entities should be regulated and should not take such foolish gambles as granting billions of dollars of
subprime mortgages to people who are not credit worthy, then they cannot be trusted to govern. Furthermore, when they lie about their own complicity, one wonders if it is even worthwhile to continue to listen to them.
James H. Warner is a retired attorney. He served as a domestic policy advisor to President Ronald Reagan from 1985 until 1989.
