9.27.2008

Why the next 2-4 years are going to suck




Everything is dependant on the efficient flow of capital and from everything I’ve read it’s probably going to be at least 2 years for the markets (yes that’s markets not self-important halfwits that need glossaries for basic financial terms) to discover the actual values of mortgage backed securities so confidence can be restored. There are financial halfwits on both sides of the aisle but after what has happened in the last year democrats should be banished to the financial kiddie table permanently.

Why? Despite all the vagueness and allusions to vast complexity by the media (Are they stupid? In the tank for Dems? Both?) when describing the origins of this crisis it’s really pretty simple. Very much like today, in 1938 there was a glut of housing inventory of the market. Banks didn’t want to take them as collateral because they were essentially worthless. FDR nationalized this risk by creating Fannie Mae to buy up these risky loans and repackage them as risk free securities. Concerned about little more than appearances of his vastly growing government (war on poverty/war) LBJ turned Fannie Mae into a semi-private, for profit, “special purpose entity”. It was little more than a shell game which simply converted real liabilities into implied liabilities (think Enron). In 1977 the Carter Administration signed the Community Reinvestment Act which threatens banks with delays in regulatory approval if an insufficient number of loans are not made to poor (high risk) borrowers. In the early 90’s with the stated objective of “expanding lending to low-income, minority communities” the democratic congress passed bills that allowed Fannie Mae to only keep 2.5% of assets in reserve against liabilities (all banks are required to have at least 10%) and in 1994 the Clinton administration further expanded the Community Reinvestment Act forcing lending institutions to demonstrate they were actively engaged in finding subprime borrowers to lend to. Comparatively unburdened by oversight and asset requirements Fannie Mae purchased and bundled the vast majority of this risky loans. By 2007, Fannie Mae and Freddie Mac owned or guaranteed nearly half of the $12 trillion U.S. mortgage market.

All the while was happening Republican Congressional members and the Bush Administration repeatedly tried to bring Fannie Mae and Freddie Mac under control only only to be repeatedly resisted by Democratic house members.

2 comments:

Anonymous said...

Boy those republicans were all over that bailout vote weren't they? Dow drops 800 points, european banks start tumbling, asian financial markets start to plumet, and another major financial institution goes down (Wachovia, that is). Good thing the conservative voting bloc in the House stopped that fiscal irresponsbility!

Andrew said...

Wow.

First of all Republicans are the minority party in the house. One of the few benefits of being in the minority is that it is not your fault if a bill doesn’t pass. 40% of Pelosi’s own party members rejected the bill.

Secondly the bailout bill sucks. Something needs to be done to limit the market damage caused by the aforementioned bungled democratic market manipulation, but some pain, including a market downturn will be needed while the economy restructures. Creative destruction is painful but it is the single greatest factor in why we’re so much wealthier than the Europeans. We let our companies fail.