[spence]

Originally Posted by Fly Rod

Mortgage companies were the biggest culprit writing hundred percent loans or eighty-twenty percent loans, holding two mortgages.

I thought liberal ideology was to blame?

If you want to know the root cause of the current subprime crisis, there are three things you need to understand: First, the problem was caused by politicians (primarily Democrats) pushing their "entitlement" agenda in to the free market.

Oh good lord...

It started with "The Community Reinvestment Act" (CRA) which required banks to make high risk loans to minorities and others who could not have qualified for a home loan or business loan under normal circumstances.

The CRA was meant to keep banks from blindly discriminating against poor communities, but did not legally mandate they take actions that would harm their own operations. I believe studies have shown that lending in poor or minority communities isn't inherently any more risky when proper standards are in place.

I also remember reading a study that showed lending enhanced by CRA wasn't found to be any more risky than prime.

Second, Bill Clinton further liberalized the CRA and signed a bill to repeal the Glass-Stengal Act. This Act was put in place in the 1930s following the bank failures during the Great Depression. It was designed to keep banks out of the speculation business.

The repeal of parts of the Glass-Sengal Act was sponsored by three Republicans. I think Clinton struck a deal that he would sign it, and the Republicans agreed to let Clinton expand the reach of the CRA. I'm not sure how this is further liberalizing the CRA though, unless you think discrimination based on where someone lives is a good thing for development.

Third, George Bush proposed major changes in the CRA, FMAE and FMAC in 2003 that would have tightened requirements for these business loans and subprime home mortgages. The vote went along party lines, the Democrats won and the proposed changes were defeated.

I think you're mixing the 2003 and 2005 proposals. In 2003 given the scandals Bush wanted to move oversight to the Treasury department. Democrats didn't think there was economic risk and therefore didn't see the value. Being politicians I'm sure they didn't want to loose their oversight privileges as well. Frank has openly said this was a mistake.

I do question how serious Bush was about reform though. Considering in 2003 and 2005 the GOP was in control of Congress you'd think they could have gotten something passed if they really wanted.

Additionally, you can't ignore other regulatory changes to the SEC made in 2004 under Bush that allowed all the giant banks to increase their leverage as well. From everything I've read, this pretty much created a pump between F/F and the banks to crank out loans, obfuscate all the risk and make a hell of a lot of money in the process.

Why does Spence want to keep blaming Bush?

Because you just read what you want to hear. I've been pretty consistent that this was a systemic problem. Both sides have pushed for more lending to poor and minority communities. Both sides have opposed regulation and reform.

-spence