Love Making Stories

    We’re on the brink of an economic disaster and another Great Depression. This was not caused by Republicans. This was caused solely by Democrats.

    In 1977 Democratic President Jimmy Carter passed the Community Reinvestment Act to provide housing to poor people. In the 1990s Bill Clinton had Attorney General Janet Reno threaten banks under red lining rules into giving loans to people who could not afford them. Then in the last 8 years, the leftist group ACORN, which has ties to Barack Obama, went to banks and threatened them to relax their rules again. Banks had to give loans to people who had no jobs or no identification.

A sample email from the right wing

This is part of the continuing smear campaign of the hard right. Unwilling to accept the true responsibility for our current fiscal situation, “You have to hand it to them. In terms of bringing together the maximum number of Republican demons — Carter, Clinton, Reno, Obama — with the smallest amount of connecting narrative, this is a keeper.”

The Community Reinvestment Act and other red lining laws weren’t passed to force banks to make loans to African-Americans and other minorities. They were there to make the rules consistent. Previous to the passage of the CRA, minorities were often required to have better credit, and make larger down payments to get loans equivalent to those awarded whites. Nothing in these laws required that banks lower their lending standards, only that they be fair, consistent, and operate in a “safe and secure” way. There was no evidence then, and no evidence now, that minorities with the same initial credit rating as whites tend to default on their loans at any greater rate.

Want proof? Mortgage failure rate in 2000: 1%. 2001: 1%. 2002, 2003, 2004, 2005, 2006? One (1) as in ONE percent. But wait! Everything that Carter, Reno, and Clinton could do was already in there. The nefarious community organizers of ACORN had already grown their little oak trees of pressure. Carter’s poor people had been sitting in their new homes so long, that many of those initial mortgages were paid off and gone.

…

Subprime mortgages (and all mortgages, really) are a fraction of the current problem. The bailout would have been enough to buy out every subprime mortgage in foreclosure across the country. In fact, it was enough to do that several times over. So why not do that?

Let me repeat that, the bailout money would have been enough to buy out EVERY subprime mortgage in foreclosure across the country.

I wrote a blog when this mess first hit the headlines describing Credit Default Swaps, CDSs. Essentially they are insurance policies for loans. Before 1999 they were used to insure loans. They were regulated, meaning that they could only be used by those with vested interests in the actual loans, and there had to be visibility of the CDS, and money to back them. You know, like a real insurance company does.

In 2000 Republican economic hero, Phil Gramm, with the assistance of a small legion of lobbyists, created the Commodity Futures Modernization Act. Along with ushering in the Enron disaster, this bill provided the one thing that credit default swaps needed to grow and mutate — invisibility. Thanks to the CFMA, not only were credit default swaps unregulated, they were impossible to observe directly. Like black holes in deep space, you could only spot swaps by looking at how other things acted nearby.

Yes, Bill Clinton signed it into law, as part of a large spending bill, less than a month before Bush took office. And yes Democrats voted for it. But only Gramm had a wife working for Enron, the first large scale user of the deregulations ushered in by CFMA. Only Gramm himself went to work for a large investment bank in Europe shortly after passing the bill. So, again, only Gramm had a vested interest in deregulating this industry.

So, you may be saying, what’s the big deal? Lots of people have to get mortgage insurance to get a mortgage, what’s the difference.

Well, here is how the CDSs market got to be bigger than the world’s total GDP. The CFMA allowed investment banks to sell CDSs to people that did not have a vested interest in the loan. So, in other words, if you see someone next door that you don’t think can pay off their mortgage, you can get a CDS to cover their loan.

Not really on a personal level, but rather on a corporate, world wide level. So, a whole industry was created of GAMBLERS at investment banks that bought and sold CDSs. A loan can have more than one CDS, a bundle of loans can be covered by countless CDSs.

So, when 1% of mortgages fail in 2000, no big deal, but when 1% fail in 2006 when that loan is backed by several CDSs and no one has the money to back the CDSs, well, you have a 60 trillion dollar problem then with no way to know who, what, where, or when. There is no way to know anything about the CDSs, no oversight, all by design. Thank you Phil Gramm, and the administration that over the last 8 years sat on their hands and did nothing to rein this in.

Time and again, whether at the state level, in Congress or at the Securities and Exchange Commission under Bill Donaldson, those who tried to enforce the basic principles that would allow the market to survive were told that the “invisible hand” of the market and self-regulation could handle the task alone.

The reality is that unregulated competition drives corporate behavior and risk-taking to unacceptable levels. This is simply one of the ways in which some market participants try to gain a competitive advantage. As one lawyer for a company charged with malfeasance stated in a meeting in my office (amazingly, this was intended as a winning defense): “You’re right about our behavior, but we’re not as bad as our competitors.”

LINK 1

LINK 2

So if you want to argue the pro’s and con’s of the freemarket, just remember what it has wrought. Markets can never be truly free because of greed. The invisible hand is just that, invisible, fairmarket is where we need to go, where rules are enforced, and investors are treated fairly.

One final note, the bailout money, which was supposed to take the bad mortgages off the books, has not been used to do that, and has only been used to fund banks. Fund banks with no over sight, and no strings attached. This is crazy!

Peace,

J