The Cause of the 2008 Financial Crisis
As someone who spent the majority of his life as an international bank analyst and executive, I learned, that to fix a problem, one needs to understand what caused it. It can be difficult to see because sometimes it takes time for the effects of bad decisions to manifest themselves. It also requires that we examine the facts rather than our emotional biases.
The facts are that approximately 6% of all mortgage loans in United States were in default in mid September 2008. Historically, defaults were less than one third of that, i.e., from 0.25% to 2%.
A huge portion of the increased mortgage loan defaults are what are referred to as ‘sub prime’ loans. Most of the sub-prime loans have been made to borrowers with poor credit ratings, no down payment on the home financed, and/or no verification of income or assets (Alt-A’s). Close to 25% of sub-prime and Alt-A’s loans are in default.
These loans increased dramatically as a 9/30/99 New York Times article explained, “In a move that could help increase homeownership rates among minorities and low income consumers, the Fannie Mae Corp. is easing the credit requirements on loans that it will purchase from banks and other lenders.”
Why would banks make such risky loans? The answer is that the Clinton administration pressured the banks to help poor people become homeowners, a noble liberal idea. Also the Clinton Justice Department threatened banks with lawsuits and fines ($10,000 per application) for redlining (discrimination) if they did not make these loans. Also ACORN (Obama’s, community service organization) was instrumental in providing borrowers and pressuring the banks to make these loans.
To allow Fannie Mae to make more loans, President Clinton also reduced Fannie Mae’s capital requirement to 2.5%. That means it could purchase and/or guarantee $97.50 in mortgages for every $2.50 it had in equity to cover possible bad debts. If more than 2.5% of the loans go bad, the taxpayers (us) have to pay for them. That is what this bailout is all about. It is not the government paying the banks for the bad loans, it is us!!
Principally Senate Democrats (and a few liberal ‘moderate Republicans) demanded that Fannie Mae & Freddie Mac (FM&FM) buy more of these risky loans to help the poor. Since the mortgages purchased and guaranteed by FM&FM were ostensibly backed by the US government, the loans were re-sold primarily to investment banks which in turn bundled most of them, taking a hefty fee, and sold the mortgages to investors all over the world as virtually risk free.
As long as the Federal Reserve (another government created agency) kept interest rates artificially low, monthly mortgage payments were low and housing prices went up. Many home owners got home equity loans to pay their first mortgages and credit card debt.
Unfortunately home prices peaked in the winter of 2005-06 and the house of cards started to crumble. People could no longer increase their mortgage debt to pay previous debts. Now, we taxpayers are being told we have to bail out the banks and everyone in the world who bought these highly risky loans. The politicians in Congress (mostly Democrats) do not want you to know they caused the mess.
During the past 8 years, the Bush administration made 17 attempts to reform FM&FM, having been made aware by whistleblowers that the books had been cooked by Clinton appointees, James Johnson and Franklin Raines (Barack Obama financial advisors) who gave large bonuses to themselves and other Clinton appointees by falsely showing huge profits.
In 2005, John McCain submitted a Fannie Mae reform bill. Democrats blocked it in Committee from getting to the Senate floor for a vote as were the other 17 attempts.
By 2006 there was enough evidence of malfeasance that Raines was forced out. He had paid himself over $90 million. The courts ordered him to pay back $40 million in fines, bonuses and stock options that he gave himself based on false financial statements of Fannie Mae profits.
In the 2006 elections, the Democrats took control of the House and Senate. There are plenty of videos on the internet showing many Democrats including Senate Banking Committee Chairman Democrat Christopher Dodd and House Banking Committee Chairman Barney Frank, responsible with overseeing FM & FM, assuring us that there were no problems with FM&FM right up to their collapse.
Not surprisingly, virtually all the investment banks that are in trouble and being bailed out are run by financial supporters of Obama and other Democrats. Secretary of the Treasury Paulsen was head of Goldman Sachs and has a close relationship with China, the largest holder of our mortgage debt. The new head of the $700 million bailout is also from Goldman Sachs. This is like letting the fox be in charge of hen house security.
It was announced that our government will infuse capital into the troubled banks. This gives whoever is in power of our government the ability to force the same kind of abuses that have caused this massive banking crisis in the first place.
Barack Obama received more campaign donations that any other politician in the past three years from Fannie Mae and Wall Street. FM&FM have been virtually private piggy banks of campaign contributions for Democrats for the past 10 years. Yes, a token amount went to some Republicans.
And there is plenty of blame to go around in this financial crisis, but the reason it happened was 100% caused by a government that forced a liberal policy initiated by President Clinton and reforms primarily blocked by Democrats. One would never know this by watching the news or reading newspapers.
Until the majority of our citizens understand whom (government liberals) and what (liberalism/socialism) caused this mess, we will allow our elected officials, through massive inflation, to lower the standard of living of those of us who are financially prudent and give our earnings to those who are not prudent.
The big excuse for the bailout is that credit markets had frozen up. But it is not true. The Federal Reserve’s own published data show that credit did not dry up, it leveled off, in that it started lending only to good credit risks, as it should have been doing all along.
The only way this can be rectified is to allow the people who made the mistakes to take their losses. It is called taking personal responsibility for ones actions.
Already we see that the bailout has had virtually no effect on the markets other than to cause huge sell offs because smart investors see that the USA is adopting failed liberal socialist policies. Our government is following in the footsteps of Hoover and Roosevelt.
We do not need to have another depression, but the government is taking the steps to make it happen. The taxpayer financed bailout should be reversed immediately as it will only encourage more irresponsible fraudulent behavior.
James F. Davis
23 Sourwood Lane
Hayesville, NC 28904
828 389 8971
jfd11@cornell.edu
Note: Mr. Davis spent most of his adult life as an international banker, having been head of various banks Latin American, European, and International Divisions. He lived and worked for Chase in New York, Europe and Latin America. He is a Director of Accuracy in Media.