Update: March 2, 2009:
Watch almost any political talk show and you will hear a Democratic strategist or campaign person enthusiastically state that the deregulation of the banking industry meant that no one was watching Wall Street for you. Barack Obama has even used the refrain “deregulation by the Republicans” to point a finger about the mortgage crisis.
Well deregulation did occur and it did change things in the banking industry. First some background. Until 1999, banks were restricted to certain businesses, Bill Clinton and a Republican Congress jointly deregulated the banking business. An example is that previously they could not enter into the insurance or brokerage business. Other factors were at play, such as interstate banking and states’ deregulation of banking. Non-bank insurance companies and brokerage houses were actively offering money market checking accounts. The sum of these changes placed banks at a disadvantage, since other non-regulated companies were divvying up the limited areas where bankers could operate. For a more detailed read try The Case for Banking Deregulation or The Real Effects of U.S. Banking Deregulation.
Thus deregulation. Did this mean that banks would no longer be regulated? No. Did this mean that bank regulators would go away? No. It simply meant that banks could enter brokerage, insurance, and other businesses to a modest degree, with restrictions. This deregulation had nothing to do with the mortgage businesses of any bank or non-bank financial lending company.
Either the Democrats know this and choose to mislead you – not good, or do not know this and do not know what they are talking about – worse. The real problem, about which no one talks, was the intensity to which Democrats and with a modicum of Republican support fell in love with Fannie Mae and Freddie Mac.
Watch: Saving Our Economy: What’s Next? to see just how much the Democrats were involved in causing this problem.
This seemed like the perfect vehicle for helping people of low income obtain a home. This was the populists’ greatest tool. Not only did Fannie and Freddie have an appetite for mortgage paper with lower credit requirements, they also had an appetite for lower equity requirements and to buy securitized mortgage assets. Thus the subprime mortgage lending business was born. The Achilles Heel of the subprime business was value of collateral. As long as the collateral remained valued at or higher than the loan, it could be liquidated easily with minimum loss.
As the subprime lending business began to not only heat up, but to overheat, the demand for homes began to become intense, raising the sale prices and values precipitously. Now the good part. Lenders using collateral guidelines began to anticipate the future value of homes and created zero down lending with borrowed down payments, via a line of credit – ingenious, except that if the value of real estate faltered with a faltering economy, the house of cards would come tumbling down. It happened. This problem became so accute that the Bush administration five years ago asked Congress to reign in their twin prodigies, Fannie and Freddie, with regulation – the Democrats in the House and Senate blocked the effort. Now let’s look at a primary cause of today’s financial meltdown. Bad mortgage paper, due to undercollateralized loans, bought by investment houses and resold to investors as securitized mortgage assets represents nearly 2+% of our GDP. The government had no choice but to step in or our economy, our dollar, and our standard of living would follow the bad mortgages down the proverbial tubes.
How did this happen? Look to the Democrats more than to Republicans. Democrats were in love and some were in bed with Fannie and Freddie. Barack Obama cannot explain away the league leading MVP type of the size of contributions his campaigns received – now and in the past, from both of the these institutions and their leadership. Chris Dodd has much explaining to do about his personal sweetheart mortgage, especially considering his position on the Senate Committee on Banking, Housing, and Urban Affairs.
Please note that when the Democrats get their hand caught in that political cookie jar, their standard procedure for being Teflon, is to loudly blame a target scape goat. They did this when their environmental positions about drilling for oil placed this country into an energy vise. Then they blamed big oil. They are now screaming about deregulation causing the mortgage meltdown. 1999 banking deregulation had nothing to do with the mortgage crisis. Yet, the new target scape goat is Republican deregulation of the banking industry. Remember, the banking industry was deregulated in a bipartisan way between the Republicans and Bill Clinton. That deregulation had nothing to do with the type of mortgages being made.
Some, so eager to point to banking deregulation as the cause of the mortgage crisis, fail to understand that the The Commodity Futures Modernization Act of 2000, was the act that mostly affected these swaps. This bill was signed into law in 2000 by President Bill Clinton. Read more on this at The Commodity Futures Modernization Act of 2000.
The International Herald Tribune has a good article on credit swaps. It can be found at Obscure, large and arcane, credit default swaps face a big test.
Read about who is responsible for the melt down at: https://brokengovernment.wordpress.com/2008/10/05/democrats-out-politician-the-republicans-with-our-financial-crisis/
To read about how we can get beyond this meltdown, try Why isn’t the Housing Bailout Effort Working?