Democrats like to point to the bogeyman of deregulation as the cause of the financial crisis. Some Republican politicians are pointing to the Community Reinvestment Act.
Here's a real short rundown on what happened.
Relaxed lending standards from the Clinton era changes to CRA led to the erosion of all lending standards. Prior to this, the lending practices for a bank were built on safety. As banks lowered standards to get more subprime borrowers into homes, the lending practices were corrupted, as you can't have one set of rules for some people and not for others. If the government said it was okay to do no money down, low interest ARM's for one group, how can the bank not give them to all groups?
Speculators jumped all over these subprime loans, and with Fannie/Freddie buying up the loans from places like Countrywide (who gave sweetheart mortgage deals to Democratic Senators like Chris Dodd and Democratic Congressman like Rahm Emmanuel) as they reaped in profits and diversity awards, the states with restrictive land zoning saw huge spikes in prices. Basically, if anyone can buy a house, places where land is at a premium will see a price spike. This explains why my cousin's ghetto house in Anaheim was 175,000 in 2000, 275,000 in 2002, and 500,000 in 2004.
So to say that CRA loans caused the problem is untrue. Poor people are not responsible for the crisis. It is correct, however, to say that CRA lending practices urged by the government and backed with the full faith and credit of the US Treasury are responsible in large part for this mess.
Banks then worked on securitizing these mortgages - banks like Wells Fargo, BofA, US Bank, Citibank (and others that were located in St Louis trading desks) - which makes sense. Take good loans with bad loads and combine them together, and if some bad ones fail, the good ones will still be worth something.
But some banks, primarily the investment ones in New York, got real greedy. They payed billions in bonuses (as opposed to the mere hundreds of millions in bonuses given out by Fannie and Freddie), and then got caught as the housing market begin to falter. Banks that were overleveraged failed, and either went under or were bailed out. The diversified banks that survived did so because of the deregulation in banking championed by Phil Gramm (JP Morgan, BofA, Wells Fargo).
As for the CDS market - it's so incredibly complex, and still sitting out there at $52 Trillion (we guess), that if it explodes, so does all of global banking. No one really knew how to regulate it - which is why Greenspan said it was a good thing, as only the smartest people with the best software would be running such a risky gambit. The good news? It hasn't happened yet, and there's a point where you realize that $52 Trillion in CDS isn't like $52 Trillion in cash, goods, or even stocks. It's an interlocking system of checks and balances, which is why it dropped over $10 Trillion in the space of a month with no ill effects.
It may still explode, but it's a separate crisis from subprime mortgages, as much as anything can be separate in this day and age.
But deregulation? That's a political talking point used to great effect in an election where up to half of the $600 million the Obama campaign raked in was unregulated. There's a debate talking point McCain missed.
Senator Obama, you keep saying that deregulation is the cause of our problems, and yet when it comes to the money you've accepted in this campaign, almost half of it is unregulated. If you hadn't broked your promise to me and to the campaign to accept public financing, you wouldn't be able to run all those fancy commercial with ill-gotten deregulated campaign funds.
Comments