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Yesterday I found myself in a political discussion that included my very lonely Republican friend. Eyes rolled when he claimed the Clinton administration was to blame for the mortgage fiasco. His argument is that during the Clinton era, lenders were pressured by the government, and by interest groups, to loosen loan standards in order to increase minority home ownership. This strategy reportedly worked splendidly while home prices were increasing. You know the rest of the story.

My Republican friend followed up with a link to an article that I have seen twice in the comments to this blog, so I hereby promote that link to my post:

http://www.nypost.com/seven/09242008/postopinion/opedcolumnists/house_of_cards_130479.htm?page=0


I'm not persuaded by the article, but neither do I discount it entirely. My problem, as always, is that I don't have enough knowledge to make a judgment about it. It sounds credible, but that doesn't mean much.

At best, the pressure to increase minority home ownership was only part of the problem. The executives in the mortgage industry must have known that the increased lending activity would make them even more stinkin' rich than usual, at least short term. In the long term, they would be living on their yachts. Without the greed angle, the executives might have better resisted what they knew was a risky path.

Second, as Warren Buffett said when he saw all the complicated financial derivatives based on mortgage activity, "My eyebrows are huge!" He didn't actually say that, but he did warn that trouble was brewing in the derivatives game long before it was obvious to people with normal sized eyebrows. So the exotic and complicated financial derivatives market made a bad situation worse, and that had nothing to do with the liberal agenda.

If there is any truth to the idea that the Clinton administration was a major cause of the mortgage crisis, you have to ask yourself why the media is mostly ignoring that angle. If it isn't true, does anyone have a link to a rebuttal?

 
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Sep 25, 2008
The subject comes up in this interview yesterday with Bill Clinton (withMatt Lauer:)
http://www.msnbc.msn.com/id/21134540/vp/26884852#26884852

As to who to blame: you, me, the people we elected and the "business" people that ignored basic fininacial risk control.
 
 
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Sep 25, 2008
@HarlDelos,

You raise some good points. We haven't had what I would call true fiscal conservatism running the show in years. I'd just add that 6 of Clinton's 8 years featured a Republican-controlled congress, as did 6 of W's 8 years. The Presidency might have been equally split the past 16 years, but the legislative branch was not.

I'm so tired of our two-party system, because I don't really like how either party governs. I've tended Deomcrat, because they do fewer things that make me want to poke my eyes out than the neo-cons with their pre-emptive doctrine and crony capitalism. I have much more faith that Obama will make reasonably good decisions than McCain at this point. I don't even know what the @#$@ McCain really stands for at this point.

 
 
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Sep 25, 2008
Left wing media bias = publishing anything at all not squarely behind the Republican propaganda of the day, ever.
I wonder if the Republicans would ver get up if those dumb enough to think the world is 6000 years old were barred from voting.
 
 
Sep 25, 2008
Your friend claimed "the Clinton administration was to blame for the mortgage fiasco". The linked article says that "The shift began in 1989, when Congress amended the Home Mortgage Disclosure Act"

That would have been the 1st Bush administration.
 
 
Sep 25, 2008
I believe most people are missing point when it comes to blame for current crisis. The blame is not republican, democratic or any of the presidents. Blame should be aimed at congress. Regardless of which party or when they served congressman and wowmen need to take some of the responsiblity for the mess. All of this pointing of fingers and name calling is doing nothing to fix any problem or restore the public's confidence. The joys of today.
 
 
Sep 25, 2008
The linkage of the current problems to the Clinton administration is less direct & less partisan. (i.e. the causes are more complicated & the blame much more diffuse than most observers acknowledge)

After the tech bubble burst, the sainted Alan Greenspan tried to avert a financial crisis at that time by injecting astounding amounts of liquidity (excess credit) into the economy. This "money" HAD to go somewhere. (and it wasn't going to go directly back into the stock market). It happened to catch the housing boom on the upswing & exaggerated a minor boom into a bubble.

The lesson is that we should allow the economy to punish the financial abusers (irrationally exhuberant?) at the time otherwise matters will get much, much worse, as they have.
 
 
Sep 25, 2008
You're right; that article IS persuasive.

However, the Community Reinvestment Act wasn't a product of the Clinton administration - it was passed in 1977, which was the CARTER administration. If ending redlining was a problem, wouldn't problems have popped up in the 1980s?

What's more, banks practiced redlining because they figured certain neighborhoods were at high risk for default. Those were NOT the posh neighborhoods; they always loved to write mortgages there. Instead, the neighborhoods that were redlined were typically minority neighborhoods with declining property values, poor police protection, high vandalism and violence rates.

But we're not in this crisis because people are unable to make the mortgage payments on cheap housing. The crisis is because people bought too much house, because ARMs with low initial interest rates made the payment initially affordable.

Whenever there's a crisis, people always ride in on their hobby horses, trying to get their pet projects enacted into law by making some tenuous connection to the crisis.

People who own have a darned good reason to protect their investment. Renters don't. Redlining guaranteed that downscale neighborhoods would deteriorate into full-fledged slums that needed to be razed. It is good public policy to not allow redlining. Conservatives, who look at the long-term costs of a policy, supported the Community Reinvestment Act. Neo-cons, who are penny-wise and pound foolish, would like to repeal it.

The basic reason everything cratered is because the Fed dropped interest rates to nearly zero in order to stimulate the economy, then allowed interest rates to rise again because of the precipitous drop in the value of the dollar. Why did the dollar drop? Because the current administration vastly increased the size of government (about 28% per term under Bush43 versus about 13% per term under Clinton) at the same time that they dramatically reduced taxes.

Conservatives always promoted a balanced budget, while neo-cons don't care how much is spent as long as nominal tax rates are lowered, but it's actually spending that matters - when Uncle Sam consumes resources, it's either paid for with taxes or else it's paid for with inflation.







 
 
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Sep 25, 2008
I have seen many people blaming this on Clinton and on the Democratic Congress, but only a few have noted that Clinton was dealing with a Republican majority for most of this time in office. I am not saying that Clinton era policies are not partially to blame for this mess, but there is equal blame to throw at the right and alot of that can go back to Reagan era policies that started these boom times for the rich. There has been very little oversight from Congress, the SEC, the Fed, etc over the past 3 decades, and they have only gotten more hands off under the Bush administration coupled with the Republican majority. As others have noted, the problem is not really the mortgages, it is the proliferation of unregulated deriviatives and lax oversight by governement regulators that have allowed the bankers (not the banks) to create huge profits out of almost imaginary value. To compare, the stock market is essentially sound becaue the value, generally, of the stocks is based on the value of a company and its assets, but the derivatives market that the bankers have been playing in for the last 3 decades is built on a firm foundation of !$%* and quicksand.
 
 
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Sep 25, 2008
I always find it interesting when right-wing conservatives point to media bias when they don't get their way. I truly find it hard to believe that with the vast competition breaking news and attention grabbing headlines in this country, people honestly believe all of those news organizations (including the online news sources and blogs) have gotten together to suppress stories that make the left wing look bad. In the words of Scott, that doesn't pass the "sniff test"

Secondly, there's a distinction in this current crises that's being left out. The banks that have fallen through so far have been INVESTMENT banks. Mortgages are issued by COMMERCIAL banks, which have been doing reasonably well in the current market. The fact is that the people who play Russian Roulette with our money everyday took a gamble and lost. And now we're going to bail them out. And if we don't we'll all go broke anyway.
 
 
Sep 25, 2008
There is blame enough to go around. Every president has to compromise with congress, even if it is controlled by the same party. And decide which advisors to trust.

When blaming President Bush (on this and other economic issues) I don't hear anyone mentioning the distraction and tremendous expense of dealing with the post 9/11 situation. Surely you are not assuming that he had control over those planes? Surely you remember the huge economic disruption afterwards?

In hindsight, should he have put all that on the back burner and focused on mortgage problems that might occur in the future? We don't seem to have agreement now, so what are the chances that his (or Clinton's, or Abraham Lincoln's) advisors were in agreement back then?

I sure don't understand it all... but I know it is a lot more complicated than many of us want to believe. Certainly more complicated than is likely to be covered in the main stream media. And if they can make it sound scarier, they will. That's what sells.
 
 
Sep 25, 2008
The real problem is the Gramm-Leach-Biley Act, passed in 1999 by McCain's senior economic advisor (!)

http://en.wikipedia.org/wiki/Gramm-Leach-Bliley_Act

The gist of the bill is that insurance companies are allowed to own a stake in the banks they are insuring.. which leads to massive conflict of interest.. which leads to widespread ignorance about just how bad these derivatives really are.
 
 
Sep 25, 2008
I recommend reading this as an alternative to that self serving NY post op ed. There is plenty of blame to go around, but Wall Street certainly let greed overcome all sense of restraint. It didn't help that the SEC was asleep at the switch and the Bush administration was demanding effectively no regulation of the markets.

http://www.time.com/time/business/article/0,8599,1841981-1,00.html

 
 
Sep 25, 2008

Your lonely Repulican friend and that article are both right and wrong.
Yes, Clinton wanted to increase minority home ownership.
Yes, Banks said "How can we do this?", and figured out how to create riskier but affordable mortgages.
Yes, this increased demand, which in turn increased the price of homes.

But at some point, the price should have been unaffordable. When I sold my home, I knew that I could not not have afforded to buy it from myself!!!

But the banks probably would have let me. Or let me refinance for the value of the equity, which is essentially the same thing. And THAT is the lack or regulation, during the Bush administration, that ultimately got us into this mess.

I've found that Republicans, even 7 years later, are still trying to blame everything on Clinton.
I'm sure that Democrats will be blaming everying on Bush (and McCain, if he wins) for the next decade.

I'm sick of the partisanship.

That's what disappointed me in the Dilbert Economic Survey, that economists are no better than the general population at discovering an objective reality over wishful thinking of how the world should be. Of not being able to let go of their own prejudices.

Cognitive dissonance indeed!.
 
 
Sep 25, 2008
The cause is real but the fault is fully bipartisan. You should read this.
http://isteve.blogspot.com/2008/09/2002-bushs-speech-to-white-house.html
 
 
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Sep 25, 2008
Here's my original post without the annoying and unnecessary html mark-up as well as a correction. Sorry I'm a little new to this. Also I'm still trying to get an understanding on the whole thing so if anyone has any feedback on how accurate my understanding is I'd appreciate it.

My understanding is that this is bad argument for several reasons.

1. Republicans had control of congress and the executive branch for most if not all of the run-up in housing prices. The party of accountability never seems to be accountable for anything.

2. As the quotes below show, GWB supported or at least took credit for some of the expansion of the mortgages to minority borrowers. Remember the "ownership society." These quotes were made in October 2002 at a minority homeowner conference.

"I set an ambitious goal. It's one that I believe we can achieve. It's a clear goal, that by the end of this decade we'll increase the number of minority homeowners by at least 5.5 million families."

"Homeownership is also an important part of our economic vitality. If -- when we meet this project, this goal, according to our Secretary of Housing and Urban Development, we will have added an additional $256 billion to the economy by encouraging 5.5 million new home owners in America; the activity -- the economic activity stimulated with the additional purchasers, the additional buyers, the additional demand will be upwards of $256 billion. And that's important because it will help people find work."

3. The actual amount of subprime loans in default is only $250 billion. It's the derivatives based on these loans that are the problem. Deregulation is not the problem from my understanding since these derivatives were never regulated in the first place, which is one of the reasons they were created.

I've been trying to understand this also and so far this is the short version of what I've come up with.

For various reasons mortgage standards were relaxed. This relaxing of standards along with people's belief that home prices would always go up resulted in about 1.5 trillion in subprime mortgages.

The problem was not so much the mortgages but the derivative instruments created based on those
mortgages such as the credit-swaps. Many financial institutions bought these instruments without
understanding them. Freddie and Fannie are sometimes blamed for this since they helped to create
a market for these instruments by buying them. Financial institutes liked these derivatives because
they could avoid regulations that were placed on the actual mortgages.

When home prices started to decline, and subprime mortgages started to default, the market for these
instruments started to dry up because they turned out to be far riskier than the financial institutions and the credit rating agencies realized and no one could really understand how to value them. In financial parlance, they became illiquid.

The fact that these derivative instruments no longer traded is a problem because under accounting rules passed a few years ago, banks have to mark their assets to market. In other words, they have to value these instruments by the price at which they trade, but with no market, they weren't trading.

Therefore the the actual asset base of the banks became unknown. This is important because the amount of money banks can lend is based on their amount of capital. With the amount of capital being unkown, the solvency of individual banks was also unknown so everyone became very hesitant to lend to everyone else. Also the credibility of credit rating agencies such as Moodys came into doubt. Hence the drying up of credit which some compare to an engine running without oil.

Paulson, instead of shoring up the underlying 250 billion in default subprime loans, which would be relatively inexpensive, wants to buy the derivatives off the banks balance sheets. The problem is Paulson comes from the same class of people who foolishly bought these things without understanding them in the first place. He also wants to buy them for the value that banks now claim they are worth which almost everyone agrees would be far more than they're worth. I personally think he will knowingly or unknowingly be ripped-off by the financial institutions.

Warren Buffet has suggested selling a little bit of each banks derivatives on the open market, and then buying the remainder of the derivatives at the market price. The Treasury would probably make money on this approach but of course this won't happen because the banks lose out.

The whole executive compensation thing is a smokescreen. Executive pay is peanuts compared to the overpayment of the derivatives. The banks are going to make out like bandits and down the road these executives will be paid handsomely for their ability to get the taxpayer to pay for their mistakes. Banks that were not foolish enough to buy these derivatives will be punished by having to compete with banks that were recapitalized at taxpayer's expense.

Markets hate uncertainty and this is basically a story of uncertainty brought on by the creation of complex financial derivatives. The end of this story is special interests using fearmongering to obtain taxpayer money to enrich themselves even though far less costly solutions were available.
 
 
Sep 25, 2008
YOU have a Republican friend???? Of all the things you've ever posted, THAT one is the hardest to swallow. But I digress.

It isn't all Clinton's fault, but his actions in expanding certain federal acts pertaining to home ownership for low-income minorities did set the stage for what eventually happened. I'd blame the Democrat Congress more, though, because they blocked (as Bill Clinton said today on GMA) any attempts for reform, largely because of the money contributed to their campaigns and the amazing amount of money Clinton staffers and other Dems made when they were appointed to run Fannie Mae (Jamie Gorelick - she of the 'wall' between the CIA and FBI, as AAG under Clinton, made $26 million; Franklin Raines, Clinton's OMB Director, pulled down over $90 million, but had to pay $24.7 million back to avoid being prosecuted; James Johnson, the dismissed vice-presidential vetter for Barack Obama, who only pulled down $21 million in a single year).

And don't forget that the second-biggest recipient of Fannie/Freddie campaign contributions (Chris Dodd is #1, John Kerry is #3) is Barack Obama. Even though he's only been in the Senate for less than four years.

In any case, if you'd like to read a pretty good non-partisan discussion of the whole mess, I'd recommend Ric Edelman's overview, which can be found at http://www.ricedelman.com/cs/education/article?articleId=762&titleParam=Update Regarding the Financial Markets . Ric talks about all the reasons this happened, why the actions being recommended are not all that bad but need to be temporary (otherwise, the government will own a huge chunk of the financial markets' firms), and what might happen next.

You might also take a look at some of the Wall Street Journal articles on this; they're well-written and understandable. I'd recommend that everyone get up to speed on this issue, so you can understand what's going on as well as give some input to your elected representatives. The government's power comes from the people. Don't shirk your responsibility. A free people can only remain free if they take responsiblity and provide input to their government, as well as demanding accountability. Otherwise, you invite totalitarianism into your life and into the lives of all your fellow citizens. Talk to someone who lived under the old Soviet Union if you'd like to know what that's like. It wasn't pretty.
 
 
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Sep 25, 2008
Clinton was on the Daily Show a couple days ago talking about this exact problem. If anyone can find the footage, they should post a link to it.
 
 
Sep 25, 2008
Um, did anyone *else* notice that Clinton isn't mentioned in the article Scott linked to?

Also, I agree with the people who point out that 7.5 years of George Bush running the show was ample opportunity to gut any Clinton-era regulation he liked. It's not as though the Bush administration arrived in office and said, "Damn, we could do so much good, but we're powerless to revisit anything that Clinton has done."

After all, he's the decider, no?
 
 
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Sep 25, 2008
It is interesting to note in many cases of "non-reporting" of information, both personal and public, it is because the conclusion is not favorable to the person reporting it, or in this case, it disagrees with the notion that Bill Clinton did no wrong other than have sexual relations with that woman.

I also think it is interesting to note the true legacy of ANY president of this country is the state of the union in the 10 years AFTER their term. Pull out your history books or wiki and research this point, you will find it quite interesting and revealing. I'll summarize, this holds water.

So, where will be 10 years from today? Still cleaning up this mess and significantly weaker as a country. Sad, but true.
 
 
Sep 25, 2008
I'm no genius, but I think Liebowitz only has it half right:

http://www.recordcourier.com/article/20071204/NEWS/71204004

Roughly 60% of foreclosed homes in the Vegas area are not owner-occupied. I imagine this is fairly consistent across the nation? Let's assume it is. Then, to me, the logical conclusion is that people took advantage of a situation. Who started it is moot.

Looking at it from another angle, the lax rules benefitted whom? Low-income minorities certainly benefitted, but so did greedy rich folks. Since the housing split between whites and minorities has been steady since before 1995 when home-ownership took off (look it up), it would seem to me that everyone got equally greedy, regardless of which party they belonged to, and they all benefitted equally (at least for the short term).

That, to me, is why there is the apparent bipartisan push for a fix. People in glass houses...
 
 
 
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