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?
Republicans are so good at lying, Bush dropped the ball on 9-11 and with this financial crisis.
I guess, Mr. Shelton, you did not read the blog or the links. But feel free to have an opinion
The subprime mess was enabled by four bits of legislation that 1. Undermined depression-era protections and 2. Allowed for the unregulated swapping of commoditized debt.
The Republicans at large, and conservatives, in general, have their fingerprints all over this. Phil Gramm, chief McCain advisor was, himself the author of two of these bills.
For you to push the blame away from the unregulated swaps which resulted in the collapse and wholly onto Fannie and Freddie (which, for their part didn’t help the crisis) is a gross misrepresentation of the facts.
Conservatives need to fess up to their failed ideology. It didn’t work in the 1920s. It didn’t work for Savings and Loans. And it’s not working now. How many more economic collapses must we endure before you stop lying?
This posting was whether banking deregulation in 1999, specifically the Gramm-Leach-Bliley Act , caused the mortgage meltdown. Most all securitized loan assets and CMO’s come with credit enhancements or discounts to bring the tranche of assets into a rate, risk balance. Without a collapse of the real estate market, the value of the security could effectuate a loan workout. If any one is interested, check out: Did the Gramm-Leach- Bliley Acy cause the housing bubble? at:
http://www.marginalrevolution.com/marginalrevolution/2008/09/glass-steagall.html
I don’t understand all of this financial language, but it seems to me that this kind of scenario is inevitable when we have a government,
Republican or Democratic, that has for years looked out for the far ends of the economic spectrum. The very rich and the very poor will always be with us, but to train a society by example to spend more than it earns is lunacy. We the people have deceived ourselves into thinking that we can do what our government does. We can spend more than we earn with NO intention of ever paying it back or being debt free. It is very painful, frighteningly so, to speculate how bad this crisis might be. Maybe we should let this run it’s course now, for I believe that sooner or later we will have to pay for our foolishness. Maybe better noe than later.
In response to Jeff Shelton:
I just love when irrational, ultra leftists such as you attempt to make a point. This was an excellent blog, well researched, complete with references.
However, as the typical, uninformed, and probably uneducated leftist, you are quick to pass blame and make judgments based on whatever miniscule processing power is possible in your cerebral cortex.
You made two claims, about Republicans being liars and that Bush dropped the ball. Care to enlighten us with your pearls of wisdom that back up your claim? Where is the empirical evidence? Or do you not know that meaning?
I will agree with another Ken Moyes blog, that Democrats are better politicians than Republicans. One reason for that, in my opinion, is that Republicans attempt to use logic and reason, as evident in Ken’s blog articles. Democrats, on the other hand, use fear and emotion to appeal to the uneducated, the dimwits, lowlifes, and general riffraff out that. Say, I guess that describes you Jeff!
Jeff First of all you say Bush dropped the ball on 9/11. You should read a little more history and understand that Democrat Clinton had chances at Osama twice BEFORE 9/11. The first major deregulation was during the Clinton Administration. Bush’s approval rating may be low but the Democratic leaders of Congress have even lower approval ratings. I guess we will never know what Obama’s vote would have been on the war resolution in 2001. Obama says he wants change but his only change wanted is from Republican to Democrat. He doesn’t want to change how government is conducted. Obama has been being groomed for this run for the Presidency since the year 2000. McCain has been fighting for the chance since then, even willing to take on his own party to get there. If middle class is $250,000 a year then what the hell is $25,000. To say someone making $250,000 a year is struggling to put gas in their car is and insult. What we desperately need in Washington are people who are there for us, the people, first, last, and always. McCain would be that and would start to push that same concept to all who are there. top listening to the smooth speeches and start doing your own research. Politicians like Obama and Clinton don’t want you to do the research, they just want you to believe them. McCain wants to cut foreingn aid while Obama wants to increase it. McCain wants to put more health care choices in your hands, Obama wants government to control it.
All of you are insane. Bush was in the White House 8 years – was he not minding the store? Wasn’t he warned a year ago? All of that aside, we need to take the politics out of this and really figure out what happened without all the bias. That’s why we can’t get to the bottom of it and nobody listens to you – too much political anger. You’re making my head hurt. Half truths and blame only move the opinions of the people who already agree with you. We need to stop all that nonsense and address the problem at hand. People don’t have jobs. People are losing their homes and savings. You need to get real.
Get it straight..Bank Deregulation Happened on Clinton’s Watch! | 186 k per second
Concerned Citizen, it seems to me that you are the one with political anger. The above posting adequately describes what happened and how, especially when you read and listen to the ancillary posts by simply clicking on the links.
I think that the deregulating of our banks and the need to increase profits to obscene amounts from our banks in combination caused the current banking crisis. I think that banks made a choice to ‘chase’ what they thought was easy money by exploiting and exacerbating the housing bubble. Then I think they got caught when SFAS 157 stipulated the mark to market fair value provision and they couldn’t hide the fact that they were lending without proper capitol. I think that it’s too easy to blame anyone or any bill or any political group without first holding the banks responsible for taking very high risks in order to turn a dollar. And we should all be mad as hell to hear that these same people are getting bonuses.
Get it straight..Bank Deregulation Happened on Clinton’s Watch!
Yes, the above is true to an extent. But we need to remember that greed and excess happened on Bush’s watch. You can blame the rules if you want but it’s how we follow or exploit those rules that are the true measure. Why didn’t Bush or his people see what was going on? Maybe he was too busy with his own agenda and had terrible people working for him that led to the banking fiasco and the free spending and big government go on. Looking requires you to actually see what’s there. You can’t hold so tight to an idea that you don’t see what’s really there. Listen for the spin…
Actually it did start with them. People are responsible for their own actions.
Well I guess we can follow what you’re saying instead and round up all the Democrats and poor people and stone them in the middle of the town square. That would solve the problem as you have laid it out. Then the republicans can live in peace and harmony with no irritations.
It’s interesting how you blame President Clinton for The Commodity Futures Modernization Act of 2000. You forget to mention that it was embedded in an omnibus spending bill and that it was a Republican Bill which included some of the same authors of the Gramm-Leach-Bliley Bill. Instead you make it seem like Clinton did all the dirty work. That’s really dirty! I think I would tend to agree with your position more if you weren’t trying to blame people in your argument. Both political groups are just as guilty. And YES I read your comments.
I intend on reading more of what you wrote. You’ve just had a lot to say so I may need some time. Thanks for responding.
I am a Republican and have worked on Wall Street 25 years.All the things that have been mentioned are a products of banks being given preferance over the tax payers.They have been able to invest in everything from junk bonds to all these complicated Wall Street morgage junk.You want true deregulation then get rid of the Fed so interest rates on treasuries will pay investors a real rate of return.Get rid of the FDIC because it’s really there to benefit banks not investors.Citizens can invest in treasuries and without the Fed get better returns.Let the banks raise their own money on their own credit worthiness.They own both parties.Have one agency to regulate their ethical practices .The new regs have done nothing to address the conflicts of interest with the rating agencies.It is stupid to allow issuers to have anything to do with them let alone pay them.They should work for investors and be held to federal fiduciary laws.This Fannie and Freddie bs is getting old.It is also only 25% of the problem because that is the portion of origination they wrote.They were also a public company but they owned both parties.I am tired of people blaming the lower classes for taking out morgages they could not afford.Who are the financially educated?They need better education but socalled prfessional in the realestate industry can trick the public.Look at all the sophisicated investors that were fooled by Wall Street.Thre is more I could say but I will wait for you,Mr. Moyes.
To Patrick, are you a secrectary on Wall Street? well over 50% of all mortgages are owned or guaranteed by Fannie and Freddie. Not sure where you came up with that 25% number.
I have heard the message and I would tend to believe the one who can provide extra and sometimes essential reference material to view and decide for myself. To allow either political party, who should have known better, yet thought they might be doing good by their constituents, to escape from responsibility is the wrong thing to do.
We the People are the only ones to blame for the wreck we have allowed career politicians and their political hacks to run over us to the extent that they have done. When the people of the US wake up and take back their Institutions and their constitutional responsibilities, only then will we manage to escape from this nightmare.
Keep reelecting these nimrods and we have no one else to blame except ourselves. Leave your party today and become and Independent and mean it when you tell the person who is looking for your vote to “Show me.”
My last bit is, quit shooting at the messengers unless you know for a fact that they are lying to you and the rest of us. Go after the ones who put us in this position and send them home, all of them…ED
Well written and sourced blog post.
We could blame anyone we want, but if we ignore the fundamental fact that increasingly “risky” loans caused this crisis, then we will never get to the bottom of it.
And so far, the Financial Crisis Inquiry Commission charged with getting to the bottom of it seems all too willing to ignore Fannie Mae’s and Freddie Mac’s roles in designing, underwriting, insuring and selling the “risky” loans, as the outcome would be to show the American people that our government is most responsible for the risky loans, the deregulation, and therefore the financial crisis.
What are the chances our government will be honest enough to investigate and condemn itself? Not very good, but we should demand better, and settle for nothing less. Otherwise, we are certain to repeat this.
To blame the bank failures on freddie mac and fannie mae is idiotic and fox news propaganda once again, re packaging poor loans and selling them as safe investments was the problem. It was republican legislation that Clinton signed in 1999 and could have been repealed at any time under Bush if he disapproved of it. The fact is deregulation is a nice word for stealing, by regulating businesses, what ever it may be, are simply laws to prevent dishonest behavior. So why is that republicans feel its so important to deregulate everything, greed I suspect. deregulation is a republican philosophy to increase profits at the consumers expense, and in this case it bit them too in the butt.
One other thing for the Fox news groupies, Income redistribution In my mind is dropping your employees retirement plan, insurance plans, lowering wages, sending jobs over seas, and hiring illegal immigrants, thats income redistribution and the republicans have been doing it for the last 40 years, so the next time you look at your generous health insurance policy that is non taxable income, feel fortunate and grateful, don’t belittle the people who don’t have health insurance
methinks you just outed yourself Mr Moyes.
If you can say…
“Generally Fox is the only news channel that is presenting ALL sides of the issues”
with a straight face then you are quite clearly NOT an independent thinker.
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To say de-regulating the banks was bipartisan is a stretch. Sure, Clinton could’ve vetoed the bill, but he was under a lot of pressure from the Republican majority. Remember that outstanding freshman class that came in on Clinton’s midterm. Newt and the gang. Although their legislation posted short term gains, it was stupendous. Simply the worst congress ever elected. Lets hope we don’t make ther same mistake this November, and if we do, I hope Obama has a heavy hand when it comes to his veto power.