Are the Democrats responsible for the U.S. financial crisis?

[Kidlicious]

Originally posted by fed1943
Half of the posters are saying the other half doesn't understand the
crisis. It seems I am the only one not understanding it.
So, a poor buys a house with a loan and cannot pay it. But the house
is still there,right?
No loss, unless the house's price was very high, and even so...
True loss only comes when a "paper" has nothing behind or there are
several papers on the same thing.
Perhaps someone can enlight me.

Banks need to have a lot of cash on hand to operate. When the value of a banks assets decreases they need more cash. Therefore they can't lend money out. That's a credit crunch.

[Arrian]

Are the Democrats responsible for the U.S. financial crisis?

I don't really know. I suspect they are, in part, as are the Republicans. Seems to me this has been brewing for some time, and couldn't have happened without both sides being complicit.

-Arrian

[Kidlicious]

"Now the Democrats are blaming the financial crisis on "deregulation." This is a canard. There has indeed been deregulation in our economy -- in long-distance telephone rates, airline fares, securities brokerage and trucking, to name just a few -- and this has produced much innovation and lower consumer prices. But the primary "deregulation" in the financial world in the last 30 years permitted banks to diversify their risks geographically and across different products, which is one of the things that has kept banks relatively stable in this storm."

That's from the first article in the OP.

I think that's wrong. The financial system became steadily more risky since the 80s, when Reagan became president and appointed Alan Greenspan to the head of the fed. During that time the growth of complex derivatives grew substantially, and those are part of the problem. Without that part of the problem things wouldn't be near as bad and the system wouldn't need a bailout.

[Kidlicious]

Greenspan’s sins return to haunt us

Financial Times

By David Blake

Published: September 18 2008 18:39 | Last updated: September 18 2008 18:39

Back in 2002, when his reputation as “The Man Who Saved the World” was at its peak, Alan Greenspan, former chairman of the Federal Reserve, came to Britain to pick up his knighthood. His biggest fan, Gordon Brown, now the UK prime minister, had ensured that the citation said it was being awarded for promoting “economic stability”.

During his trip, Mr Greenspan visited the Bank of England’s monetary policy committee. He told them the US financial system had been resilient amid the bursting of the internet bubble. Share prices had halved and there had been massive bond defaults, but no big bank collapses. Mr Greenspan lauded the fact that risk had been spread, using complex derivative instruments. One of the MPC members asked: how could this be? Someone must have lost all that money; who was it? A look of quiet satisfaction came across Mr Greenspan’s face as he answered: “European insurance companies.”

Six years later, AIG, the largest US insurance company, has in effect been nationalised to stop it blowing up the financial world. The US has nationalised the core of its mortgage industry and the government has become the arbiter of which financial companies should survive or die.

Financial markets have an enormous capacity for flexibility, but market participants need to be sure that there are rules, and a referee willing to impose them. Permanent damage has been done to the financial system, despite the extraordinary measures of Messrs Henry Paulson, the US Treasury secretary, and Ben Bernanke, the Fed chairman, to address the problems that stem from the actions of their predecessors. As Mr Paulson has suggested, he is playing a hand dealt by others.

Many blame the Greenspan Fed for this mess. They are right, but not for the reason often cited. It is unfair to say low interest rates are to blame. In the past decade, there is no evidence the US suffered from excessive growth leading to inflation. The economy needed low interest rates and a fiscal stimulus to avoid a severe recession. The Fed was right to do its bit.

Where Mr Greenspan bears responsibility is his role in ensuring that the era of cheap interest rates created a speculative bubble. He cannot claim he was not warned of the risks. Take two incidents from the 1990s. The first came before he made his 1996 speech referring to “irrational exuberance”. In a Federal Open Market Committee meeting, he conceded there was an equity bubble but declined to do anything about it. He admitted that proposals for tightening the margin requirement, which people need to hold against equity positions, would be effective: “I guarantee that if you want to get rid of the bubble, whatever it is, that will do it.” It seems odd that since then, in defending the Fed’s inaction, he has claimed in three speeches that tightening margins would not have worked.

The second incident stems from spring 1998 when the head of the Commodity Futures Trading Commission expressed concern about the massive increase in over-the-counter derivatives. These have been at the heart of the counter-party risk in the crisis. Mr Greenspan suggested new regulation risked disrupting the capital markets.

At the turn of the millennium, with no move to tighten margin requirements, a feedback loop sent share prices into orbit. As prices rose, more brokers were willing to lend to buy more shares. As share prices went up the buying continued, until the bubble burst. To create one bubble may be seen as a misfortune; to create two looks like carelessness. Yet that is exactly what the Greenspan Fed did.

Bruised by stock market losses, Americans bought houses. The mortgage industry used securitised bonds to ensure that the people who initiated the mortgage did not worry about getting paid back; risk was packaged and sold to others. This time Mr Greenspan did not just stand aside. He said repeatedly that housing was a safe investment because prices do not fall. Home owners could wait out any downturn. Is it any surprise that so many people thought if the world’s financial genius held this view it must be all right?

Even as things went completely wild, Mr Greenspan dismissed those who warned that a new bubble was emerging. It was just a case of a little “froth” in a few areas. Later, after waiting until 2007, two years after he left office, he conceded that “froth” had been his euphemism for “bubble”. “All the froth bubbles add up to an aggregate bubble,” he told the Financial Times.

This time, as with the equity bubble, the mistake was not to set interest rates too low; it was to stand back as wildly imprudent policies were pursued by mortgage lenders. Indeed, any lender would have been encouraged by his words in April 2005: “Where once more-marginal applicants would simply have been denied credit, lenders are now able to quite efficiently judge the risk posed by individual applicants and to price that risk appropriately. These improvements have led to rapid growth in subprime mortgage lending.” Well, he was right about the rapid growth in subprime lending.

Mr Greenspan was in charge of supervising and regulating much of the banking industry for two decades. The Fed says it is responsible for ensuring “safe and sound banking practices”. It is right that other regulators should have stepped in, too – the US regulatory structure has not kept pace with market changes . But given the Fed’s institutional importance and Mr Greenspan’s personal stature, does anyone doubt that the Fed could have used its limited powers to ensure a closer examination of what was going on?

Mr Greenspan realises that something big has happened and describes it as a “once in a hundred years” event. But then, you do not get Alan Greenspans coming along every day.

The writer is an executive in an asset management company. He writes in a personal capacity
Copyright The Financial Times Limited 2008

Greed.

[Whoha]

Re: Are the Democrats responsible for the U.S. financial crisis?

Originally posted by Naked Gents Rut

http://online.wsj.com/article/SB122212948811465427.html

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aSKSoiNbnQY0

While this certainly isn't a non-partisan viewpoint (it appears to be a coordinated AEI pushback), they do make a strong case. Why exactly are the Democrats benefiting politically from a financial crisis that they could have headed off in 2005 if they hadn't been bribed by the heads of Freddie Mac and Fannie Mae? Is the issue just too complex for the American public to understand?

Government distortion is responsible, and the Republicans who touted "their" ownership society share guilt. Though the fact that McCain supported something that could have averted this particular crisis is pretty damning to the Democrats.

[Patroklos]

but last time I looked the problem comes from the fact that these bad loans were then bundled with other mortgages and bonds issued based on this bad debt. The story says nothing about this bill that would have made doing that harder. And then buyers bought insurance on these bad loans, and then those instruments get sold, then bought on credit, then even more credit, and so forth.

If the loans were not made in the first place Gepap, they can't be bundled and sold.

No one forced Wall Street to buy what they should have seen as risky assets, and no one forced them to continue selling and reselling these and insurance on them.

Fighting the symptons instead of the disease. Gepap

1. Fannie and Freddie were clearly not the major problem. They acted quite a bit more responsibly than their non-GSE competitors, mostly staying out of the subprime mess, etc.

Ramo, you are on crack. Freddie and Fannie were the entities most exposed to sub prime mortgages. Furthermore, because the government gave F&F the wink and nod and everyone saw this, Fannie Mae loan practices became the standard for nearly all home loan offering entities. Have you looked at a home lone application this decade?

The legislation that you referred to did nothing about the rest of the market.

It didn't have to, because without the loans in the first place none of the rest would be possible.

Government distortion is responsible, and the Republicans who touted "their" ownership society share guilt.

Every party when in power loves to crow about home ownership numbers, but it was the Democrats from Carter on who legislated that banks must have a certain percentage of their loans be made to sub prime borrowers. They created the very concept in the first place, and this is the logical conclusion.

This is only one piece of the puzzle of course, but to pretend the Democrats are not at the heart of this problem is fantasy.

[Vanguard]

Almost all the blame lies with the Republicans. This financial crisis stems from the Republican tax cuts and the huge budget deficits that have resulted from them.

Basically what the tax cuts do it borrow money in the name of the United States and give it to rich people. That's what happens, isn't it?
The US debt goes up and rich people have more money. They don't get that extra money by working harder, do they? No. Of course not. They simply steal it from the United States.

And what do rich people do with this extra money? Do they invest in productive enterprises in the United States? No. That would be stupid. It would be like embezzling money from a company and then using the money you embezzle to buy stock in it. Dumb.

You would be far better served to take the money you embezzle and use it to sell the company's stock short. Instead of investing in the company the best play is to speculate against it.

And this is what is happening in this crisis. Speculation has trumped investment. The people of the United States can no longer afford to buy houses at any price that allows housing investors to make a profit. So people who speculate against housing investors make money. So they keep doing it.

The result is a collapse of productive market activity.

[Vanguard]

Almost all the blame lies with the Republicans. This financial crisis stems from the Republican tax cuts and the huge budget deficits that have resulted from them.

Basically what the tax cuts do it borrow money in the name of the United States and give it to rich people. That is really the full effect in a nutshell, isn't it? US debt goes up and rich people have more money. They don't get that extra money by working harder, do they? No. Of course not. They simply steal it from the United States.

And what do rich people do with this extra money? Do they invest in productive enterprises in the United States? No. That would be stupid. It would be like embezzling money from a company and then using the money you embezzle to buy stock in it. Dumb.

You would be far better served to take the money you embezzle and use it to sell the company's stock short. Instead of investing in the company the best play is to speculate against it.

And this is what is happening in this crisis. Speculation has trumped investment. The people of the United States can no longer afford to buy houses at any price that allows housing investors to make a profit. But people who speculate against housing investors make money. So they keep doing it.

Why can't housing investors make money? Because they have to borrow money to do so. Which means they have to compete for capital with the people who are speculating against them. But the speculators have a higher rate of return. And therefore attract more and more of the available capital.

The result is a collapse of productive market activity.

[Ramo]

Ramo, you are on crack. Freddie and Fannie were the entities most exposed to sub prime mortgages.

No. They weren't (unless you're using a bizarre definition of "exposed"). Because Fannie and Freddie were more regulated than the rest of the market, mortgages they offered required large down payments and for borrowers to document their incomes. They engaged in far less risky behavior than the rest of the market.

Every party when in power loves to crow about home ownership numbers, but it was the Democrats from Carter on who legestlated that banks must have a certain percentage of their loans be made to sub prime borrowers. They created the very concept in the first place, and this is the logical conclusion.

This is only one piece of the puzzle of course, but to pretend the Democrats are not at the heart of this problem is fantacy.

Utterly ridiculous spin. Subprime mortgages took off in the past few years because of legislation passed decades ago to stop banks from using race and marital status as proxies for risk. Yeah, right.

Are these really the right's new talking points?

[Kidlicious]

Why the bailout (not really just financial crisis) hurts McCain

As I've already said, mainstream america thinks of this banker class as the rich. While tax cuts for the rich don't offend as many americans as they should this bailout is welfare for the rich and people don't like it at all. In fact, the're red in the neck, literally.

These people made ungodly profit off of us for so many years, and now they expect a bailout. Well Bush said that it won't cost us anything, meaning that we are better off from it, but that doesn't make it fair. If they get a $700 billion dollar bailout (and that's what they get even if the govt gets some of it back through auctions) the regular Joe deserves something.

This will hurt McSame bad. I wouldn't be suprised to find that less people even feel the same about low taxes for the rich now.

Obama is going in the right direction with this, but he needs to do more to exploit this and make the republicans look worse. McSame has already tried to seperate himself from this, but it's going to be hard for him.

[Kidlicious]

Looks like Obama has stated that he opposes a stimulus package to go along with this bailout as some Democrats are proposing. He dropped the ball. It's becoming clearer and clearer that Democrats **** up the presidential election every time.

[Naked Gents Rut]

Originally posted by Ramo
Because Fannie and Freddie were more regulated than the rest of the market, mortgages they offered required large down payments and for borrowers to document their incomes.

Fannie Mae, the largest U.S. home funding source, is setting a single national standard for down payments on mortgages it buys, including areas where home prices are falling, in an effort to stimulate the housing market.

On loans it purchases, the company will accept down payments as low as 3.0 percent for single-family, primary residences in all U.S. markets starting June 1.

http://uk.reuters.com/article/bankingFinancial/idUKN1639060920080516

There's more where that came from.

[Ramo]

There's more where that came from.

Did you not notice the date in that article? That's just a few months ago. The credit crunch is due to the housing bubble, not efforts to slow its collapse.

Look at a longer time average, and make a comparison. Fannie and Freddie kept relatively high down payments while the rest of the market behaved extremely irresponsibly.

[Naked Gents Rut]

Originally posted by Ramo
Look at a longer time average, and make a comparison. Fannie and Freddie kept relatively high down payments while the rest of the market behaved extremely irresponsibly.

Article from 2005...

Freddie Mac plans to add a new suite of mortgage products aimed at boosting the buying power of low-and moderate-income people by eliminating all but $500 from the required down payment on the home loan, the company said.

http://www.signonsandiego.com/uniontrib/20050220/news_1h20freddie.html

Nice try.

[PLATO]

Originally posted by Ramo
No. They weren't (unless you're using a bizarre definition of "exposed"). Because Fannie and Freddie were more regulated than the rest of the market, mortgages they offered required large down payments and for borrowers to document their incomes. They engaged in far less risky behavior than the rest of the market.

Actually Freddie and Fannie were the largest purchasers of subprime mortgage MBS. It is not so much what they originated themselves as the MBS they purchased. Fannie's exposure is right at $338 billion right now.

Utterly ridiculous spin. Subprime mortgages took off in the past few years because of legislation passed decades ago to stop banks from using race and marital status as proxies for risk. Yeah, right.

You are on the right track here but are missing it. Ultimately it was government policy to force lenders into areas of lower income that spurred the boom in subprime starting around 2000. That was a Clinton era policy that threatened to sue banks for discrimination for not being geographically equal in the areas they were lending in. The areas they were avoiding were areas that had people with poor credit profiles and low incomes. Race and marital status had little impact as lenders could really care less about these things.