History repeats in housing disaster
We all await word from Washington, D.C., concerning our new president’s plan to fix the economy.
We’re told to expect bags of money to be distributed by the federal government soon. We’re expected to believe the generosity of Washington will save us from our current circumstances. Really? Let’s take a look at what brought us to the current situation.
Research begun immediately after the stock market crash of 1929 found that a major factor in the market crash of 1929 was a sudden downturn of real estate prices (a housing bubble burst). Does this remind us of recent events?
In 1932 Senator Glass and Representative Steagall co-sponsored a bill to preclude a recurrence of what happened in 1929. This bill, intended to keep commercial banks from selling loans to investment banks, was known as the Glass-Steagall Act. President Roosevelt signed the bill into law in 1933. The deepest significance of the new law was to require mortgage lenders to pay close attention to the viability of every loan they were considering. Since new loans could no longer be sold to investment banks each lender was strongly motivated to be sure a borrower was capable of repaying the loan.
In 1938 the Federal Government created FNMA (known as “Fannie Mae”), a Federal agency whose purpose was to make more money available to lower-income citizens for purchasing of homes.
In 1968 the Feds acted again. The structure of Fannie Mae was changed to public corporation. Known as a Government Sponsored Enterprise (GSE) this revised structure enabled citizens to invest in mortgage lending markets by buying stock in Fannie Mae. Later that same year Uncle Sam created “Freddie Mac” as a GSE. The Feds were working to make even more money available to lower-income folks for the purchase of homes.
In 1977 the Community Reinvestment Act (CRA) was enacted to “encourage” lenders more aggressively to make money available to home buyers, primarily in the inner-city neighborhoods. There has been a long-established concern in Washington about home ownership and lower-income people. This is not necessarily a bad thing.
Early in the Clinton administration Attorney General Janet Reno announced that the Justice Department would start investigating lenders who were not meeting the “aims” of the CRA.
To avoid being charged with misconduct alleged by the attorney general, many mortgage lenders began granting loans to applicants who otherwise might not qualify for a standard loan. The so-called “sub-prime market” was born. Paying higher loan fees and higher interest rates on these loans, low-income borrowers were helped to access home ownership.
1999: In its infinite wisdom, Congress repealed Glass-Steagall. Now mortgage lenders could once again sell their loans to investment banks (Wall Street). With many questionable loans now on their books there was great motivation to do so. Upon purchasing loans from lenders, investment banks would package them as investments (known as Collateralized Mortgage Obligations or CMOs) and then promote them to mutual fund companies. This is how this all got into your 401k !
Early in the current decade there were numerous reports to Congress about the questionable dealings at Fannie Mae and Freddie Mac. Regulators’ voices were heard in Congress urging immediate investigation. Each time the voices were silenced with strong retort from the likes of Senator Christopher Dodd and Congressman Barnie Frank. No investigation was ever conducted.
Where are we now? We are expected to believe that the Federal Government can “save our economy.” Do you believe that? You can’t be serious. The Federal Government created this mess.
Last week Mr. Obama stated he had only recently become aware of how bad our economy is. Are you kidding me? We are supposed to look to this guy for real leadership and real change? This is absurd !
Write your Congressman. Demand that a new Glass-Steagall Act be put in force immediately.
Peyton – You own something alright but it isn’t anyone else.
The CRA argument is baseless since 50% of subprime loans were made by mortgage service companies not subject comprehensive federal supervision and another 30% were made by affiliates of banks.
http://74.125.45.104/search?q=cache:TcA9Tzx4aqgJ:www.house.gov/apps/list/hearing/financialsvcs_dem/barr021308.pdf+subprime+University+of+Michigan%27s+Michael+Barr&hl=en&ct=clnk&cd=1&gl=us&client=firefox-a
Gramm-Leach-Bliley Act===All 3 were Republicans. Republicans should take the blame too.
YEAs: 53 Republicans——–37 Democrats
NAYs: 1 Republicans———7 Democrat
http://www.senate.gov/legislative/LIS/roll_call_lists/roll_call_vote_cfm.cfm?congress=106&session=1&vote=00354
REAL occurrence and HOW this mess happened:
Here are some of the specific regulations of the financial system that the Bush administration has eliminated:
- State Laws Against Predatory Lending: In 2003, the Office of the Comptroller of the Currency (OCC) issued regulations that exempted national banks from state laws against predatory lending. As Slate reported, “with the state laws nullified, national banks were free to engage in the sharp practices the states were hoping to stamp out.”
http://query.nytimes.com/gst/fullpage.html?res=9904E2DA153EF932A3575BC0A9659C8B63
http://www.slate.com/id/2182709/pagenum/2/
- The Net Capital Rule: In 2004, the SEC loosened the “net capital” rule, which required “that broker dealers limit their debt-to-net capital ratio to 12-to-1.” The five investment banks that qualified for an alternative rule – Bear Stearns, Lehman Brothers, Merrill Lynch, Goldman Sachs, and Morgan Stanley – were allowed “to increase their debt-to-net capital ratios, sometimes, as in the case of Merrill Lynch, to as high as 40-to-1.”
http://www.nysun.com/business/ex-sec-official-blames-agency-for-blow-up/86130/
- The Uptick Rule: In July 2007, the Securities and Exchange Commission (SEC) eliminated the “uptick rule,” which “made it hard for speculators to push the price of a stock down after betting it would fall.” “Since then, legions of short sellers have progressively hammered Wall Street, contributing greatly to the current stock market crisis.”
http://www.thestockbandit.net/2007/07/03/short-selling-uptick-rule-ends/
http://thinkprogress.org/wonkroom/2008/09/18/sec-short-selling/
The CRA argument is baseless since 50% of subprime loans were made by mortgage service companies not subject comprehensive federal supervision and another 30% were made by affiliates of banks.
http://74.125.45.104/search?q=cache:TcA9Tzx4aqgJ:www.house.gov/apps/list/hearing/financialsvcs_dem/barr021308.pdf+subprime+University+of+Michigan%27s+Michael+Barr&hl=en&ct=clnk&cd=1&gl=us&client=firefox-a
Gramm-Leach-Bliley Act===All 3 were Republicans. Republicans should take the blame too.
YEAs: 53 Republicans——–37 Democrats
NAYs: 1 Republicans———7 Democrat
http://www.senate.gov/legislative/LIS/roll_call_lists/roll_call_vote_cfm.cfm?congress=106&session=1&vote=00354
REAL occurrence and HOW this mess happened:
Here are some of the specific regulations of the financial system that the Bush administration has eliminated:
- State Laws Against Predatory Lending: In 2003, the Office of the Comptroller of the Currency (OCC) issued regulations that exempted national banks from state laws against predatory lending. As Slate reported, “with the state laws nullified, national banks were free to engage in the sharp practices the states were hoping to stamp out.”
http://query.nytimes.com/gst/fullpage.html?res=9904E2DA153EF932A3575BC0A9659C8B63
http://www.slate.com/id/2182709/pagenum/2/
- The Net Capital Rule: In 2004, the SEC loosened the “net capital” rule, which required “that broker dealers limit their debt-to-net capital ratio to 12-to-1.” The five investment banks that qualified for an alternative rule – Bear Stearns, Lehman Brothers, Merrill Lynch, Goldman Sachs, and Morgan Stanley – were allowed “to increase their debt-to-net capital ratios, sometimes, as in the case of Merrill Lynch, to as high as 40-to-1.”
http://www.nysun.com/business/ex-sec-official-blames-agency-for-blow-up/86130/
- The Uptick Rule: In July 2007, the Securities and Exchange Commission (SEC) eliminated the “uptick rule,” which “made it hard for speculators to push the price of a stock down after betting it would fall.” “Since then, legions of short sellers have progressively hammered Wall Street, contributing greatly to the current stock market crisis.”
http://www.thestockbandit.net/2007/07/03/short-selling-uptick-rule-ends/
http://thinkprogress.org/wonkroom/2008/09/18/sec-short-selling/
References :