Published: October 31, 2008 02:54 pm            

Online Readers’ Forum: Assessing the blame game

In a recent letter Richard Hoffman blamed liberal Democrats for the current financial meltdown.

Hoffman’s letter responded to a feature article on the financial crisis authored by Tribune-Star letter writer Mark Bender.

Hoffman endeavored to clear up matters for Mark and every other liberal among us. “I believe if Mr. Bender would do some research (something most liberals don’t know how to do) he would find out the root of the problem actually falls at the doorstep of the Democratic Party.”

Really? Can that be true? Even though the Republican Party has been in charge of the country for 20 of the last 28 years, and totally in charge of the White House and Congress from 2000-2006, could those bleeding hearts be behind the free market’s free fall?

I decided to take up Mr. Hoffman’s challenge and see what I could find out.

I started with Mr. Hoffman’s belief that Jimmy Carter and his Community Reinvestment Act (“CRA”) and Bill Clinton’s meddling with it caused the 2008 financial collapse.

I continued by considering a more recent letter to the editor from Ruby Clapp written in the same vein. She blamed Fannie Mae and Freddie Mac and the Dems pushing those government sponsored entities to make more affordable loans.

I can’t blame either of them for arriving at their conclusions. I’m sure they’ve heard the talking heads at Fox News and other right-wing outlets sounding the “other side did it” refrain since the crisis became “the” news story.

Laura Ingram spun her version of events in The O’Reilly Factor’s “No Spin Zone”. “And Bill, the problem here is government intervention in the free markets….when Bill Clinton decided to tell…Robert Rubin to rewrite the rules that govern the Community Investment Act … That was a noble idea, perhaps, but wasn’t following free-market principles.” And so on.

The problem with the CRA angle is that, according to officials at the Federal Reserve Bank of San Francisco, banks falling under the purview of CRA accounted for only 20% of the recent sub prime mortgage activity.

Then there’s John McCain on the campaign trail, time after time, saying, “Fannie and Freddie are the match that lit the sub prime mortgage crisis.”

Muscled out by Wall Street during the bubble period, Fannie and Freddie’s market share of the mortgage market dropped from 60% to 25%. Following Enron and prior to the pertinent period regulators had clamped down on Freddie and Fannie, restricting their foray into the sub prime market.

Some will press the case that Fannie and Freddie contributed to the crisis because those entities, between 1980-2003, became such big players in the mortgage market. Too big to fail, the Federal Reserve would be forced to adopt the requisite policies to keep Fannie and Freddie solvent. That kind of thinking gave Wall Street confidence to barrel ahead.

Look. We are talking trillions of dollars of bad mortgages on the books of institutions worldwide. Even with little to no knowledge of the sub prime gambit or CRA or Fannie and Freddie, how could anyone, especially conservatives, believe any government program or any government-sponsored entity could be so diabolically effective in satisfying market demand?

And thanks to Alan Greenspan the world acquired an insatiable demand for fixed-rate-mortgage- backed securities. Thousands of U.S. residential mortgages were bundled. Investors essentially bought shares in the pool of interest and principal payments to be made by U.S. homeowners.

Greenspan, while Chairman of the Federal Reserve under Bush, lowered the federal funds rate to 1%, its lowest level in 45 years. It sent world fund managers in charge of $70 Trillion seeking fixed-asset investments scrambling to replace U.S. Treasury Bills. T-bills had historically been one of the money managers’ favorite investment vehicles.

Wall Street, not Freddie and Fannie, excelled in creating exotic debt instruments and packaging thousands of residential mortgages into Consolidated Debt Instruments (CDO’s). Worldwide investment managers couldn’t get enough.

Contrary to Laura Ingram’s accusation that the wheels fell off because government interfered with the free market, Wall Street remained relatively unfettered to ride the laissez-faire wave. Greed prevailed.

In the middle of the feeding frenzy, Bush appointee Christopher Cox, in keeping with Greenspan’s and the Bush Administration’s trust in the invisible hand philosophy, outsourced oversight of Wall Streets big investment banks. They were subjected to a voluntary regulatory program. In other words, they watched themselves.

Another result of the relaxation of regulations that occurred in 2004 was that restrictions on the amount of debt these firms could take on, protections put in place following the stock market crash of 1929 were eliminated.

This freed the big Wall Street investment banks like Lehman and Bear Stearns to take on a lot more debt. Some took on as much as $30 of debt for every dollar of equity. Many used that leverage to purchase billions of dollars in mortgages and packaged deals that generated millions in commissions.

The door opened wide for a multi-trillion dollar mortgage-backed security market and the even more exotic multi-trillion dollar credit default swap market. Due to space limits I’m not going to touch the latter. Nor am I going to get into how ratings companies like Moodys and Standard and Poors dramatically overrated so many of those mortgage-backed securities.

All the way up and down the CDO chain big money changed hands. At the local level mortgage brokers could earn $20K per deal. Area managers could earn $50-75,0000/month. At Wall Street level commissions could be a million a deal.

By 2003 nearly every person who needed and qualified for a mortgage loan had one. To keep up with the competition in the race for dollars companies lowered underwriting standards, then lowered them again and again until they got down to the NINA loan (no income no asset—a liar’s loan).

Wheeler-dealers made homeowners offers they couldn’t refuse. Some even got cash back at closing. Cash back? On the other side of the deal investors were promised a bump in their returns when mortgages reset.

Everybody was happy. A selective myopia descended upon the entire process so no one could see or wanted to see the endgame occurring when all those unqualified borrowers began to default on loans.

Government didn’t push bad mortgages onto the market. Demand pulled them through an unregulated system.

An anything goes ethos to win the race to bundle trillions of dollars worth of U.S. mortgages into an investment vehicles for the world to buy sits at the heart of the current crisis.

Will Mr. Hoffman now be satisfied that I have done “something most liberals don’t know how to do”—research? Probably not.

I intended to include quotes from notable economists to verify my findings. But because I have been so slow responding to Mr. Hoffman’s comments I was able to find what I sought on cable today.

Federal Reserve Alan Greenspan, former secretary of the treasury John Snow and current head of the Securities and Exchange Commission, Christopher Cox just all testified before Congress that Fannie and Freddie and the CRA were not the primary causes of the debacle.

Is even that enough? Science says no.

Recent studies from Yale, Georgia State and Duke indicate the likelihood that faced with reality-based rebuttals Mr. Hoffman and Ms. Clapp and Laura Ingram will more probably cling more tightly to their long held beliefs. It’s called the “backfire effect”, most pronounced in those on the right side of the political spectrum.

It makes me wonder how the right/left divide, enlarged by the self-serving manipulations of Karl Rove and others, can close before our nation divided falls.

— John R. Bischoff

Terre Haute

        

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