How the Democrats Created the Financial Crisis

Discussion in 'Money Talk$' started by Major B, Sep 22, 2008.

  1. Major B

    Major B
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    : Kevin Hassett
    Commentary by Kevin Hassett



    Sept. 22 (Bloomberg) -- The financial crisis of the past year has provided a number of surprising twists and turns, and from Bear Stearns Cos. to American International Group Inc., ambiguity has been a big part of the story.
    Why did Bear Stearns fail, and how does that relate to AIG? It all seems so complex.
    But really, it isn't. Enough cards on this table have been turned over that the story is now clear. The economic history books will describe this episode in simple and understandable terms: Fannie Mae and Freddie Mac exploded, and many bystanders were injured in the blast, some fatally.
    Fannie and Freddie did this by becoming a key enabler of the mortgage crisis. They fueled Wall Street's efforts to securitize subprime loans by becoming the primary customer of all AAA-rated subprime-mortgage pools. In addition, they held an enormous portfolio of mortgages themselves.
    In the times that Fannie and Freddie couldn't make the market, they became the market. Over the years, it added up to an enormous obligation. As of last June, Fannie alone owned or guaranteed more than $388 billion in high-risk mortgage investments. Their large presence created an environment within which even mortgage-backed securities assembled by others could find a ready home.
    The problem was that the trillions of dollars in play were only low-risk investments if real estate prices continued to rise. Once they began to fall, the entire house of cards came down with them.
    Turning Point
    Take away Fannie and Freddie, or regulate them more wisely, and it's hard to imagine how these highly liquid markets would ever have emerged. This whole mess would never have happened.
    It is easy to identify the historical turning point that marked the beginning of the end.
    Back in 2005, Fannie and Freddie were, after years of dominating Washington, on the ropes. They were enmeshed in accounting scandals that led to turnover at the top. At one telling moment in late 2004, captured in an article by my American Enterprise Institute colleague Peter Wallison, the Securities and Exchange Comiission's chief accountant told disgraced Fannie Mae chief Franklin Raines that Fannie's position on the relevant accounting issue was not even ``on the page'' of allowable interpretations.
    Then legislative momentum emerged for an attempt to create a ``world-class regulator'' that would oversee the pair more like banks, imposing strict requirements on their ability to take excessive risks. Politicians who previously had associated themselves proudly with the two accounting miscreants were less eager to be associated with them. The time was ripe.
    Greenspan's Warning
    The clear gravity of the situation pushed the legislation forward. Some might say the current mess couldn't be foreseen, yet in 2005 Alan Greenspan told Congress how urgent it was for it to act in the clearest possible terms: If Fannie and Freddie ``continue to grow, continue to have the low capital that they have, continue to engage in the dynamic hedging of their portfolios, which they need to do for interest rate risk aversion, they potentially create ever-growing potential systemic risk down the road,'' he said. ``We are placing the total financial system of the future at a substantial risk.''
    What happened next was extraordinary. For the first time in history, a serious Fannie and Freddie reform bill was passed by the Senate Banking Committee. The bill gave a regulator power to crack down, and would have required the companies to eliminate their investments in risky assets.
    Different World
    If that bill had become law, then the world today would be different. In 2005, 2006 and 2007, a blizzard of terrible mortgage paper fluttered out of the Fannie and Freddie clouds, burying many of our oldest and most venerable institutions. Without their checkbooks keeping the market liquid and buying up excess supply, the market would likely have not existed.
    But the bill didn't become law, for a simple reason: Democrats opposed it on a party-line vote in the committee, signaling that this would be a partisan issue. Republicans, tied in knots by the tight Democratic opposition, couldn't even get the Senate to vote on the matter.
    That such a reckless political stand could have been taken by the Democrats was obscene even then. Wallison wrote at the time: ``It is a classic case of socializing the risk while privatizing the profit. The Democrats and the few Republicans who oppose portfolio limitations could not possibly do so if their constituents understood what they were doing.''
    Mounds of Materials
    Now that the collapse has occurred, the roadblock built by Senate Democrats in 2005 is unforgivable. Many who opposed the bill doubtlessly did so for honorable reasons. Fannie and Freddie provided mounds of materials defending their practices. Perhaps some found their propaganda convincing.
    But we now know that many of the senators who protected Fannie and Freddie, including Barack Obama, Hillary Clinton and Christopher Dodd, have received mind-boggling levels of financial support from them over the years.
    Throughout his political career, Obama has gotten more than $125,000 in campaign contributions from employees and political action committees of Fannie Mae and Freddie Mac, second only to Dodd, the Senate Banking Committee chairman, who received more than $165,000.
    Clinton, the 12th-ranked recipient of Fannie and Freddie PAC and employee contributions, has received more than $75,000 from the two enterprises and their employees. The private profit found its way back to the senators who killed the fix.
    There has been a lot of talk about who is to blame for this crisis. A look back at the story of 2005 makes the answer pretty clear.
    Oh, and there is one little footnote to the story that's worth keeping in mind while Democrats point fingers between now and Nov. 4: Senator John McCain was one of the three cosponsors of S.190, the bill that would have averted this mess.
    (Kevin Hassett, director of economic-policy studies at the American Enterprise Institute, is a Bloomberg News columnist. He is an adviser to Republican Senator John McCain of Arizona in the 2008 presidential election. The opinions expressed are his own.)
    To contact the writer of this column: Kevin Hassett at [email protected]
     
  2. Crabtownboy

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    It is interesting that you and/or the article are blaming the Democrats. Why? Because the Republicians controlled both the Senate and the House of Representatives and the Presidency in 2005. So, while the three Democrats you mention were there, they were not in the majority party. It was Republicians under a Republician president that did the dastardly deed you mention. This smacks of the disinformation so common in this campaign. "Yes, we were in power, but nothing in our fault."
     
  3. NiteShift

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    "How can Obama go out with a straight face and say it was Republicans who made this mess, when it is his key advisers who ran the agencies that made the big mess what it is?" says a Democrat House member who supported Sen. Hillary Rodham Clinton. "It's his people who are responsible for what may well be the single largest government bailout in history. And every single one of them made millions off the collapse that are lining Obama's campaign coffers. If the McCain campaign lets this one go, they deserve to lose." - LINK
     
  4. Crabtownboy

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    And it was a Republican president and a Republician controlled congress who aided and encouraged them by further deregulating the system. We are now reaping the rewards and are now looking like France, a democratic socialist state ... all done under the Republicians. Phil Graham, the "Americans are whiners" was the chief architect of the plan that has come crashing down. He was McCain's chief advisor until he made that statementy.

    Frank Raines has stated that he has never been an advisor to Obama. Both candidates have ties to people who bear responsibility for this mess. There is enough blame to go all around in you want to talke about advisors. Johnson was tabbed to help Obama select a VP, but resigned or asked to withdraw from that position.

    However, the fact remains, Phil Gram, a Republician, was the chief architect of the plan that crashed, and the Republicians controlled both the Legislative and the Executive branches of the government.

    One thing I really liked about Trumen, he was honest enough to say, "The buck stops here."

    Today no one is honest enough to say, "Yes, I helped and I was wrong." No one from either party is that honest. Sad state of affairs.

    Neither candidate is clean!

    http://blogs.wsj.com/washwire/2008/09/19/mccain-attacks-obama-on-ties-to-former-fannie-mae-ceos/
     
  5. Major B

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    The law was blocked by a minority of the Senate (mainly democrats), as you should know, it takes 60 votes to force a vote on legislation in the Senate of the US.
     
  6. NiteShift

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    Deregulating? As you know, Pres. Bush attempted to put the brakes on the whole scam in 2003 - "The Bush administration today recommended the most significant regulatory overhaul in the housing finance industry since the savings and loan crisis a decade ago.

    Significant details must still be worked out before Congress can approve a bill. Among the groups denouncing the proposal today were the National Association of Home Builders and Congressional Democrats who fear that tighter regulation of the companies could sharply reduce their commitment to financing low-income and affordable housing."
    -NY Times, Sep 11, 2003

    In July the Washington Post said, "Franklin D. Raines has been quietly constructing a new life for himself. He...has taken calls from Barack Obama's presidential campaign seeking his advice on mortgage and housing policy matters."

    Neither Raines nor the Obama campaign denied it at the time. But now...

    Better tell that to Obama, ;) who is on the campaign blaming the entire mess on Republicans and saying, "They said they wanted to let the markets run free, but instead they let it run wild"
     
  7. Crabtownboy

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    Sounds like what the Republician minority has been doing the last two years. Would be nice if the two parties stopped worrying about who gets credit and does what is right for America.
     
  8. Major B

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    Are you serious? That idea went out with powdered wigs and three corner hats.
     
  9. KenH

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    Yes, it would. Senator McCain claimed that he was going to run that kind of campaign before he took it into the gutter. At least Senator Obama has stayed above the level of Senator McCain in this regard.
     
  10. LadyEagle

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    This thread is about campaigns now? How about debating about the OP. Perhaps the truth hurts.
     
  11. YOUTUBECANBESAVED

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    The OP is disingenious, why do Republicans run from blame? answer politics

    Bingo! The OP is clearly intended for idealouges or meat for the choir, does not paint a fair and balanced picture and clearly like you said CTB the Republicans have been in power for 8 years with a Bush administration practicing the worst cronyism in our nations history with billions missing in Iraq and billions mis spent and the regular Iraqi cannot get the basics yet.

    Jared Bernstein

    You hear that implosion reverberating through financial markets? It's the sound of decades of conservative ideology collapsing.

    This raises many pressing questions, both short- and long-term. What's the deal with the Paulson deal? There's a lot of well-aimed skepticism about this plan, and myself and my EPI colleagues will be commenting on it all week (I'm not liking what I'm seeing--not enough safeguards to protect taxpayers from banks perfectly happy to dump toxic debt on the government; not enough quid pro quos for Main Street). But for now, I'd like to focus on an even more important question: what next?

    The week that just ended revealed the myth of market fundamentalism: the notion associated with mainstream, Milton Freidman'esque economics, and amplified by anti-government conservatives that unfettered markets will provide society with the best outcomes. Such simplicity, such elegance...such nonsense.

    (I think Milton Freidman would apologize for all the abuses if he were alive and revise his philosphy.)

    For many of us, it didn't take a market failure of the magnitude we've witnessed in recent weeks to believe this myth. We've been documenting the slow bleed of much subtler market failures for decades. Most recently, we've stressed that despite years of growth before the recent downturn, the real income of middle-class working-age families fell $2,000. Poverty rose. The share of the population without health coverage went up. For the first time in years, the rate of homeownership declined.

    If that's Bush's ownership society, please don't sign me up (in truth, it's too late to refuse membership: as taxpayers, we're now proud owners of a growing pile of toxic debt--thanks, George).

    (Bush is the worst leader in history, his legacy is sealed his mantra of spend!spend! spend! is borne out and reveals who he is after 9/11 by telling Americans to show their patriotism to just "Go Shop" he has been absent and uninterested the whole time but if a crony needed help he was all ears. but he still has his defenders on this board, perhaps they are the 30* percenters who still approve of him) * may be less than that

    But slow bleed or sudden shock, the idea that I've described as YOYO (you're on your own) economics is seriously on the ropes. I still encounter some old school ideologues on the CNBC airwaves, but they're fewer and more contrite, and, interestingly, they generally support the bailouts. Apparently, their mantra is actually "you're on your own; we're lookin' for a bailout." It's privatize the profits, socialize the losses; patriotism for the masses, socialism for the rich.

    http://www.huffingtonpost.com/jared-bernstein/watching-history-unfold_b_128116.html
     
  12. carpro

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    No they didn't.

    If you can't get that small detail straight, you can hardly be expected to get the larger picture.


    2003

    January: Freddie Mac announces it has to restate financial results for the previous three years.

    February: The Office of Federal Housing Enterprise Oversight (OFHEO) releases a report explaining that "although investors perceive an implicit Federal guarantee of [GSE] obligations," "the government has provided no explicit legal backing for them." As a consequence, unexpected problems at a GSE could immediately spread into financial sectors beyond the housing market. ("Systemic Risk: Fannie Mae, Freddie Mac and the Role of OFHEO," OFHEO Report, 2/4/03)

    September: Fannie Mae discloses SEC investigation and acknowledges OFHEO's review found earnings manipulations.

    September: Treasury Secretary John Snow testifies before the House Financial Services Committee to recommend that Congress enact "legislation to create a new Federal agency to regulate and supervise the financial activities of our housing-related government sponsored enterprises" and set prudent and appropriate minimum capital adequacy requirements.

    September: House Financial Services Committee Chairman Barney Frank (D-MA) strongly disagrees with the Administration's assessment, saying "these two entities – Fannie Mae and Freddie Mac – are not facing any kind of financial crisis … The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing." (Stephen Labaton, "New Agency Proposed To Oversee Freddie Mac And Fannie Mae," The New York Times, 9/11/03)

    October: Fannie Mae discloses $1.2 billion accounting error.

    October: Senator Thomas Carper (D-DE) refuses to acknowledge any necessity for GSE reforms, saying "if it ain't broke, don't fix it." (Sen. Carper, Hearing of Senate Committee on Banking, Housing, and Urban Affairs, 10/16/03)

    November: Council of the Economic Advisers (CEA) Chairman Greg Mankiw explains that any "legislation to reform GSE regulation should empower the new regulator with sufficient strength and credibility to reduce systemic risk." To reduce the potential for systemic instability, the regulator would have "broad authority to set both risk-based and minimum capital standards" and "receivership powers necessary to wind down the affairs of a troubled GSE." (N. Gregory Mankiw, Remarks At The Conference Of State Bank Supervisors State Banking Summit And Leadership, 11/6/03)

    2004

    February: The President's FY05 Budget again highlights the risk posed by the explosive growth of the GSEs and their low levels of required capital, and called for creation of a new, world-class regulator: "The Administration has determined that the safety and soundness regulators of the housing GSEs lack sufficient power and stature to meet their responsibilities, and therefore…should be replaced with a new strengthened regulator." (2005 Budget Analytic Perspectives, pg. 83)

    February: CEA Chairman Mankiw cautions Congress to "not take [the financial market's] strength for granted." Again, the call from the Administration was to reduce this risk by "ensuring that the housing GSEs are overseen by an effective regulator." (N. Gregory Mankiw, Op-Ed, "Keeping Fannie And Freddie's House In Order," Financial Times, 2/24/04)

    April: Rep. Frank ignores the warnings, accusing the Administration of creating an "artificial issue." At a speech to the Mortgage Bankers Association conference, Rep. Frank said "people tend to pay their mortgages. I don't think we are in any remote danger here. This focus on receivership, I think, is intended to create fears that aren't there." ("Frank: GSE Failure A Phony Issue," American Banker, 4/21/04)

    June: Treasury Deputy Secretary Samuel Bodman spotlights the risk posed by the GSEs and called for reform, saying "We do not have a world-class system of supervision of the housing government sponsored enterprises (GSEs), even though the importance of the housing financial system that the GSEs serve demands the best in supervision to ensure the long-term vitality of that system. Therefore, the Administration has called for a new, first class, regulatory supervisor for the three housing GSEs: Fannie Mae, Freddie Mac, and the Federal Home Loan Banking System." (Samuel Bodman, House Financial Services Subcommittee on Oversight and Investigations Testimony, 6/16/04)

    2005

    April: Treasury Secretary John Snow repeats his call for GSE reform, saying "Events that have transpired since I testified before this Committee in 2003 reinforce concerns over the systemic risks posed by the GSEs and further highlight the need for real GSE reform to ensure that our housing finance system remains a strong and vibrant source of funding for expanding homeownership opportunities in America… Half-measures will only exacerbate the risks to our financial system." (Secretary John W. Snow, "Testimony Before The U.S. House Financial Services Committee," 4/13/05)

    July: Senate Majority Leader Harry Reid rejects legislation reforming GSEs, "while I favor improving oversight by our federal housing regulators to ensure safety and soundness, we cannot pass legislation that could limit Americans from owning homes and potentially harm our economy in the process." ("Dems Rip New Fannie Mae Regulatory Measure," United Press International, 7/28/05)
     
  13. Crabtownboy

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    I do not see how you can remotely believe that the Republicians did not control Congress in 2005. Here is a breakdown of the Senate and then the House:

    US Senate:

    Republicans 55
    Democrats 44
    Independent 1

    Anyway you look at this number Republicians outnumber Democrats ... thus they Control the Senate.

    House of Representatives

    This number changes fairly often because of death or other reasons a representative leaves office and often there are vacent seats.

    During 2005 the Republicians held a majority. The most Republicians in office at any one time was 232, the least number was 229. During 2005 the number of Democrats was always either 201 or 202. The number of vacent seats ranged between 0 and 3.

    Again, the Republicians were always in the majority, thus they controlled the House of Representative.

    By controlling both houses they controlled the Legislative Branch of the government.

    Bush is a Republician, thur the Republicians also controlled the Executive Branch.

    It was their watch, they were the majority and they take the blame or the praise.

    The number above come from:
    http://en.wikipedia.org/wiki/109th_United_States_Congress

     
  14. Major B

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    The rule in the Unitied State Senate is that no legislation can be brought up for a vote unless there are 60 votes to allow it to come to the floor.

    In the reform acts that McCain was sponsoring and pushing, he was blocked from bringing them up for a vote because the Democrats blocked the bill.

    Throughout our history, a lot of legistlation has been blocked by a minority in the Senate, some good, some bad. Some eventually got passed, others, like McCain's reforms, did not.

    Is Civics no longer a required course?
     
    #14 Major B, Sep 22, 2008
    Last edited by a moderator: Sep 22, 2008
  15. Crabtownboy

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  16. Bro. Curtis

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    Sam Rayburn helped give us the "New Deal". Was that a good thing ?

    Bipartisanship is gutless. It takes fortitude to stand by a principle.
     

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