I won’t claim that this will explain the whole mortgage mess, which has led us to this point–the brink of an economic collapse–but things are becoming clearer as time passes.
Tammy Bruce wrote a great post on this. It’s clear to me now that both Republicans and Democrats helped create this problem, but I am getting the sense that the Democrats are more culpable for our current mess. The timeline goes like this:
1977 – The Community Reinvestment Act (CRA) is enacted into law, during the Carter Administration. The law incintivizes banks to make home loans to lower income borrowers, and allows lawsuits against banks for “discriminating” against low-income people. The intent is to enable affordable housing–home ownership–for low-income homeowners.
Edit 9/29/08: I messed up the timeline a bit here. 1995 was the year when bank lending thresholds were reduced. 1999 was the year when Glass-Stiegel was repealed.
1995 – The CRA is revised by the Clinton Administration, along with a Republican congress, which lowers the standards banks use for making home loans.
1999 – The Clinton Administration, along with a Republican congress, repeals the Glass-Stiegel Act, a law passed in the Great Depression era to prevent ordinary banks from coupling with investment banks and their activities. This was done, once “the horse left the barn”, to prevent the kind of bank failures that occurred leading up to the Depression. The reason given to get rid of it at the time was the Act made U.S. banks less competitive in the global marketplace, since apparently foreign banks did not have to deal with this restriction. This deregulation, however, would later prove fatal to banks, since it allowed them to buy the toxic mortgage bonds that Fannie Mae and Freddie Mac produced. In 2008 this has once again caused ordinary banks to fail.
2002 – The Fed lowers interest rates to historic lows in response to the 2001 recession, and the 9/11 attacks which deepened the recession. This causes home mortgages to become more affordable to a wider market.
2003 – The Bush Administration tries to create an oversight board for Fannie Mae and Freddie Mac, citing a history of shady accounting practices, and unfettered risky lending. The Democrats in congress blocked this measure. The Bush Administration capitulated on the plan.
2004 – The SEC grants waivers to Lehman Brothers, Merrill Lynch, Goldman Sachs, and a few other investment banks, to allow them to increase the amount of leverage they can have against their assets.
As the economy recovers, the Fed gradually raises interest rates, affecting the rates people pay for their existing subprime and interest-only loans.
2005 – Sen. John McCain joins with 3 senators to try to reform the government’s involvement in lending, but efforts are blocked.
Gateway Pundit has a more detailed timeline of the Bush Administration’s many efforts to reform the oversight and regulation of Fannie Mae and Freddie Mac, through 2008. Pundit also details the many collapses of financial institutions that have taken place this year.
2008 – The @#$% hits the fan. Treasury Secretary Paulson puts forward a rescue plan of $700 billion to restore liquidity to the credit markets, saying it’s necessary to avert a financial and economic depression panic.
A common theme that’s coming to light is that whenever there were efforts by Republicans to reform Freddie Mac and Fannie Mae, the Democrats consistently opposed it, saying that it would take away the ability of poor people to obtain home loans. The two main names I’ve heard so far who have blocked these efforts are Chris Dodd, the Democratic senator from Connecticut, and Barney Frank, the Democratic House member from Massachusetts. Further, Sen. Barack Obama has received the 2nd highest amount of campaign contributions from Freddie Mac and Fannie Mae, second only to Sen. Chris Dodd. Yet these people want you to believe that the Bush Administration is totally responsible for this problem.
Sen. Obama claims that he raised the alarm about Fannie and Freddie a while ago. I’ve tried looking this up, but I haven’t been able to find anything on it. If someone has a reliable source on this, please let me know and I’ll update this post. I want to give him his due if he deserves it.
We need to ask ourselves who’s fooling whom this election. It’s obvious to me that some are trying to do a snow job on the American people on this, avoiding blame for this problem.