From who did Obama "inherit" the economic mess?

[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.

[justplugit]

"It's too far into the future to worry about."

And there in lies the problem.

Politicians only look out over 4 years
and what they need to do to get re-elected,
afraid to take bold and courageous stands for the benefit of the country.

Not even a 5 year plan.

[scottw]

[COLOR="Red"]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


ask yourself: has the "weight of structural changes created by government trade, regulatory and social policies —
increased...or decreased.....and what does that mean for the future and real consumer income growth

[spence]

Originally Posted by fishpoopoo

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.

Here's the Barney Frank response to this point...

I've not found a video of the testimony to assess the context, but I do know that David John is a die hard conservative in the Heritage Foundation. I'd like to see a detailed analysis of this...

Conservatives who push an anti-regulatory agenda on America are trying to avoid blame for the financial crisis brought about by that lack of regulation.

Turning reality on its head, they are claiming that it was caused by too much government intervention -- specifically liberal opposition to unfair discrimination in bank lending. In their myth, the Community Reinvestment Act, enacted in 1977, forced institutions to make the irresponsible subprime loans that are a major factor in this crisis.

In fact, the CRA mandates no such thing, and covers only those regulated banks which were not the institutions which made the subprime loans. Every bank regulator, including those in the Bush administration, repudiated this idea.

But myths die hard when they are in the service of an ideology. It’s therefore important to note that in the Financial Services Committee hearing on how best to protect consumers from unfair financial practices, the witness selected by the Republican members of the committee, from the conservative Heritage foundation, reaffirmed his repudiation of this fallacy.

Congressman Brad Miller of North Carolina, who has done a good deal of research on this subject and who has been a leader in opposing unfair lending practices, asked the Republicans’ witness, David John, if he agreed with a statement he had made in a previous hearing, in which John said that the CRA had a negligible effect on the financial crisis.

John’s answer – “Absolutely.”

See the entire exchange below.



Mr. Miller: Thank you Mr. Chairman.

Mr. Castle said in his opening statement that the worst sub-prime loans, the bulk of the bad sub-prime loans, were not made by depository institutions that were fairly closely regulated but by non-depository institutions, independent lenders.

Mr. John, you testified earlier, a few months ago, before the Investigation and Oversight Subcommittee of the Science and Technology Committee which I chair, on the role and ne issue that came up was the role of the Community Reinvestment Act. Mr. Castle is right. A relatively small number of the bad sub-prime loans were made by depository institutions subject to the Community Reinvestment Act, and in fact, a study by the Federal Reserve Board found that only about 6% of all the sub-prime loans were made in “assessment” areas, or in the neighborhoods where CRA encouraged lending, or to borrowers that CRA encouraged lending to.

You agreed then that CRA had a negligible effect on the sub-prime crisis and the financial crisis generally. Is that still your view?



Mr. John : Absolutely.

-spence

[scottw]

been waiting for a follow up to this...not sure I've seen the loans as a result of the expansion of the CRA cited as the cause of the crash but the expansion of the CRA is certainly the turning point that can be cited as the beginning of government forcing banks to abandon long held lending practices in order to expand home ownership and in order to not be punished by the government...lenders became creative and translated that to the rest of the market, the government was essentially insuring their risk.....Fannie and Freddie became a repository for questionable loans...the sheer number of loan writing institutions and the risky instruments grew exponentially out of that...

as your friend Thomas Sowell said recently...banks were doing fine for nearly a hundred years prior with established lending practices...

"Prior to the rapid escalation of home prices, federal bank regulators began using the 1977 Community Reinvestment Act (CRA) to press for racial equality. The issue was the statistical difference in approval rates, not a claim that most blacks could not get mortgage loans. New regulations required that the banks not just look for qualified buyers, but make a requisite number of loans to low and moderate income buyers (quotas). Then, when legislation was proposed in 1999 to permit banks to diversify into selling investment securities, the Clinton White House urged "banks given unsatisfactory ratings under the CRA be prohibited from enjoying the new diversification privileges." The Congress happily obliged. Another factor was HUD's beginning legal action in 1993 against mortgage bankers that declined a higher percentage of minority applicants. HUD also set a 42% target for Freddie Mac and Fannie Mae (FM & FM) to buy mortgages for people whose income were less than an area's median. Banks, sensing that FM & FM were implicitly guaranteed, where only too happy to not only issue these mortgages, but to buy FM & FM debt as well. (In 2003, about 3,000 banks held FM & FM debt for 100% of their capital requirements.) The "icing" was FM & FM's creative accounting that misclassified $11 trillion of sub-prime assets. Then in 2002, Bush II urged Congress to pass the American Dream Down Payment Act, subsidizing down payments of prospective buyers with incomes below a certain level.

Sowell has now set the stage, and readers have no problem understanding what happened. Interest-only teaser rate ARMs rose to counter rising prices and down-payments. By 2005, interest-only mortgages had risen to 31% of all new mortgages, up from less than 10% in 2002. In Denver, Seattle, and Phoenix it was 40%, and 66% in the S.F. Bay area. Speculators jumped into the fray (28% in 2005, 22% in 2006) adding further fuel to the fire, and happy homeowners took out $1.13 trillion in home equity loans in 2007. However, the storm on the horizon was the rise of interest rates to avoid inflation (1% in 2004, to 5.25% in 2006), making monthly payments more expensive and reducing the demand and prices for housing, and everyone takes a loss - including the banks (about $40,000 per foreclosed house), and especially speculators, minorities, and those with ARMs and interest-only loans. (Interesting Note: As of October, 2008, 7% of Bank of America's mortgages were CRA lendings, and 24% of its defaults.) Bailing out FM & FM, with their sub-prime laden inventories, cost the government more than that for all the private banks put together.

Sowell also has no problems believing that many sub-prime loans were foisted upon unaware and uninformed buyers by predatory lenders - especially involving contracts for repairs or remodeling on credit.

Bottom Line: The law of unintended consequences strikes again - helping minorities was a good intention, but backfired. We're all to blame, though admittedly some more than others. Deregulation was not the problem, rather misguided regulation.

the government is now doing the same thing for healthcare

[fishpoopoo]

Originally Posted by spence

Here's the Barney Frank response to this point...

I've not found a video of the testimony to assess the context, but I do know that David John is a die hard conservative in the Heritage Foundation. I'd like to see a detailed analysis of this...



-spence

Barney is full of mancustard. As one of the fiercest proponents and protectors of affordable housing, he of course has a vested interest in passing the blame.

The CRA itself was a fairly innocuous law signed by Jimmy Carter in '77. It wasn't until the Boston Federal Reserve came out with a flawed study in 1992 (late in Bush I's term) that banks were discriminating against Black people re: home loans, that it began to be enforced.

There were a slew of lawsuits that accelerated after that Fed report came out, under the auspices of the CRA.

For example, AG Reno (Clinton I) sued several banks in 1993 (First National Bank of Vicksburg and Blackpipe State Bank for racial discrimination and in 1994 sued Chevy Chase Federal Savings Bank.

Furthermore, the fed was under pressure to use CRA as a stick for banks seeking to open new branches and ATM machines and merge with other banks. For example, in 1993, the federal reserve denied an application by Shawmut to acquire New Dartmouth Bank. The transaction was only allowed to proceed after it paid a million fine to compensate minority applicants who may have been denied loans. This arrangement was squeezed out of the bank by AG Reno.

And so on (I won't list all the lawsuits and enforcement actions here).

Most people don't know this, but in 1995, at the behest of Pres Clinton, CRA regulations were revamped to give it more teeth.

The rules became more performance-based and established clearer and more objective performance standards for determining whether a bank was in compliance with CRA standards. “The new rules went into effect January 31, 1995 and featured: strictly numerical assessments to get a satisfactory CRA rating; using federal home-loan data broken down by neighborhood, income group, and race; encouraging community groups [like ACORN – FWW] to complain when banks were not loaning enough to specified neighborhood, income group, and race; allowing community groups that marketed loans to target to groups to collect a fee from the banks (as of 2000 $9.5 billion had been paid to such nonprofit groups). The new rules, during a time when many banks were merging and needed to pass the CRA review process to do so, substantially increased the number and aggregate amount of loans to low- and moderate-income borrowers for home loans, some of which were ‘risky mortgages.’” Clinton Administration Changes of 1995

I could on and on and on ... but the enforcement of CRA, that really began in earnest with Clinton, basically bullied banks into lending to deadbeats.