From who did Obama "inherit" the economic mess?

[Fly Rod]

Originally Posted by Jim in CT

I think it's important to figure out "what" broke it, so that we don't repeat the mistake. And "what" broke it is subprime mortgages (which in many cases banks were pressured to write by liberal social engineering policies) and a de-regulated financial sector that came up with crazy ways to rate those mortgages as "safe" investments, and then sell them and leverage them.

When you say banks, you make it sound like all banks when it was the big banks.

Local banks were not pressured to write sub prime loans. Most local banks would not write a loan without twenty per cent down. Mortgage companies were the biggest culprit writing hundred percent loans or eighty-twenty percent loans, holding two mortgages.


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. 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.

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.

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.

Why does Spence want to keep blaming Bush?

[Jim in CT]

Originally Posted by Fly Rod

Why does Spence want to keep blaming Bush?

Because he's aliberal, and liberalism is a mental disorder. I cannot provide better evidence than his last post.

[RIJIMMY]

Originally Posted by Fly Rod

When you say banks, you make it sound like all banks when it was the big banks.

Local banks were not pressured to write sub prime loans. Most local banks would not write a loan without twenty per cent down. Mortgage companies were the biggest culprit writing hundred percent loans or eighty-twenty percent loans, holding two mortgages.


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. 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.

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.

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.

Why does Spence want to keep blaming Bush?

You're missing the biggest piece. There was a market for the bunding of these loans. Global cash needs to go somewhere and the US housing market was the place to be. The more demand for mortgages resulted in more demand to sell mortgages and it created a vicous cycle. Big banks were packaging and selling, but sophisticated investors were BUYING. Everyone should have known better but, its like fishing in an endless bluefish blitz, eventually you lose all your plugs. Funs over.
Was it Bush's fault? Not directly, but he was the president at the time so he'll get the blame. Was it republican policies? I have seen NO reregulation initiated by repubs that had any impact to the recession. None.

[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

[RIJIMMY]

Originally Posted by spence

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.



-spence

Phil Gramm, a democrat, was responsible for pushing this through. See my link above.

[spence]

Originally Posted by RIJIMMY

Phil Gramm, a democrat, was responsible for pushing this through. See my link above.

Huh? He switched parties in 1983.
Posted from my iPhone/Mobile device

[fishpoopoo]

Guess I am late to the thread.

In my opinion, which I'd be happy to back up with a !@#$load of facts , President Obama did indeed inherit this mess.

Culprits: Jimmy Carter, Bill Clinton and Alan Greenspan.

[scottw]

Originally Posted by fishpoopoo

Guess I am late to the thread.

In my opinion, which I'd be happy to back up with a !@#$load of facts , President Obama did indeed inherit this mess.

Culprits: Jimmy Carter, Bill Clinton and Alan Greenspan.

great article:

January 11, 2011

Let Them Eat Widescreen TVs and I-Phones
Monty Pelerin

The disparities in income between the lower and middle income Americans and those doing well continues to widen. In addition to the debt time-bomb, these income disparities represent another potential explosion.

Ambrose Evans Pritchard provides some data:
The retail data can be quirky but it fits in with everything else we know. The numbers of people on food stamps have reached 43.2m, an all time-high of 14pc of the population. Recipients receive debit cards - not stamps -- currently worth about $140 a month under President Obama's stimulus package.

The actual number of jobs contracted by 260,000 to 153,690,000. The "labour participation rate" for working-age men over 20 dropped to 73.6pc, the lowest the since the data series began in 1948. My guess is that this figure exceeds the average for the Great Depression (minus the cruellest year of 1932).

The US Conference of Mayors said visits to soup kitchens are up 24pc this year. There are 643,000 people needing shelter each night.

Jobs data released on Friday was again shocking. The only the reason that headline unemployment fell to 9.4pc was that so many people dropped out of the system altogether.

This schism continues to widen in American society. The well-off are doing just fine thank you. Many of the rest continue to descend into the abyss of joblessness, hopelessness, homelessness, poverty and bankruptcy. Social cohesion will not hold on our current path.

A thesis that I offered several years ago is that the credit expansion was a deliberate attempt to cover up America's structural decline. Ironically, by not facing up to the structural and incentive problems ten to twenty years ago when they were tractable (economically if not politically), the political elite created this current crisis. It was not their intent to create a crisis, merely to avoid hard decisions. They did so by "kicking the can down the road" using credit as their vehicle.

This "solution" enabled people to live beyond their means. "Let them buy widescreen TVs and I-phones" was the modern version of "bread and circuses." Pritchard points out a similar view:

Raghuram Rajan, the IMF's former chief economist, argues that the subprime debt build-up was an attempt - "whether carefully planned or the path of least resistance" - to disguise stagnating incomes and to buy off the poor.

"The inevitable bill could be postponed into the future. Cynical as it might seem, easy credit has been used throughout history as a palliative by governments that are unable to address the deeper anxieties of the middle class directly," he said.

Now, "let them eat widescreen TVs and I-phones" appears to be the solution. It is equivalent to the "let them eat cake" remedy, with the same potential ending.

The clock is ticking on the debt burden. It is only a matter of time before we are openly recognized as just another version, albeit a very large one, of the PIIGS. Just as important, however, is the ticking clock on social cohesion in this country.

The sense of entitlement cultivated by government over the years may be as intractable as the debt problem. It has corrupted the spirits and souls of men. It has destroyed the family structure. It has left a generation or two without skills and no reason to obtain them. It has transformed human beings into zombie-like creatures with little purpose in their lives. Removing them from the government teat is equivalent of separating a new-born from its mother.

There is no way out, as Pritchard alludes:

There is no easy solution to creeping depression in America and swathes of the Old World. A Keynesian `New Deal' of borrowing on the bond markets to build roads, bridges, solar farms, or nuclear power stations to soak up the army of unemployed is not a credible option in our new age of sovereign debt jitters. The fiscal card is played out.


The government is insolvent, both financially and morally.

[fishpoopoo]

Originally Posted by scottw

great article:
A thesis that I offered several years ago is that the credit expansion was a deliberate attempt to cover up America's structural decline. Ironically, by not facing up to the structural and incentive problems ten to twenty years ago when they were tractable (economically if not politically), the political elite created this current crisis. It was not their intent to create a crisis, merely to avoid hard decisions. They did so by "kicking the can down the road" using credit as their vehicle.

I don't think this entirely the case. Parts of it ring true.

History will show (has shown?) that Alan Greenspan's extraodinarily accommodative monetary policy was the fuel for the crisis (which, by the way, is not over). The dry tinder poised to set off the fuel was a dumbing down of lending standards via "Affordable Housing" goals, starting with the enforcement of the Community Reinvestment Act late in Bush I, and then even more aggressively through Clinton's term.

CRA and affordable housing ultimately led to bad loans being made. Low interest rates led to a lot of bad loans being made. And, low interest rates led to massive leverage in the corporate sector as well. But it started with housing and consumer spending.

As far as the Federal Reserve (which is neither, by the way), people have been trying to figure out why Alan Greenspan acted so recklessly, bringing interest rates to near zero percent from 2001-2004, even as the recession ended in 2001. Did he abandon his free market beliefs? Was he just plain dumb? Or was there another reason?

John Williams of Shadowstats posits an interesting theory, and it is worth posting here:

Shadow Government Statistics : Home Page

Crises Brewed by Federal Government and Federal Reserve Malfeasance.

The crises have been generated out of and are centered on the United States financial system, triggered by the collapse of debt excesses actively encouraged by the Greenspan Federal Reserve. Recognizing that the U.S. economy was sagging under the weight of structural changes created by government trade, regulatory and social policies — policies that limited real consumer income growth — Mr. Greenspan played along with the political and banking systems. He made policy decisions to steal economic activity from the future, fueling economic growth of the last decade largely through debt expansion. The Greenspan Fed pushed for ever-greater systemic leverage, including the happy acceptance of new financial products, which included instruments of mis-packaged lending risks, designed for consumption by global entities that openly did not understand the nature of the risks being taken. Complicit in this broad malfeasance was the U.S. government, including both major political parties in successive Administrations and Congresses.

As with consumers, the federal government could not make ends meet while appeasing that portion of the electorate that could be kept docile by ever-expanding government programs and increasing government spending. The solution was ever-expanding federal debt and deficits.

Purportedly, it was Arthur Burns, Fed Chairman under Richard Nixon, who first offered the advice that helped to guide Alan Greenspan and a number of Administrations. The gist of the wisdom imparted was that if you ran into problems, you could ignore the budget deficit and the dollar. Ignoring them did not matter, because doing so would not cost you any votes.

Back in 2005, I raised the issue of a then-inevitable U.S. hyperinflation with an advisor to both the Bush Administration and Fed Chairman Greenspan. I was told simply that "It’s too far into the future to worry about."

Indeed, pushing the big problems into the future appears to have been the working strategy for both the Fed and recent Administrations. Yet, the U.S. dollar and the budget deficit do matter, and the future is at hand. The day of ultimate financial reckoning has arrived, and it is playing out.

Takeaway: Alan Greenspan acted the way he did to foil the encroachment of increasing government regulation that was, in his mind, stifling economic growth.