Just a reminder... when did the Financial mess start?

The present economic mess has to be the one of the greatest displays ever of greed by an astouonding number of people.

People greedily took out mortgages they knew they would never pay for.

Speculators greedily took out mortgages on properties they intended to flip.

Politicians greedily sought to buy votes by enthusiastically supporting "liar loans"  programs.

Loan brokers greedily made bad loans they knew they could sell.

Bankers greedily packaged garbage loans they knew they could sell.

Large investors greedily bought up packaged loans thinking they were making a quick buck.

How is this Ponzi scheme any different from Mr. Madoff's? Everyone wanted something for nothing and at someone else's expense. Unrestrained greed is never a pretty thing.

The Market was working fine before the Fed, Congress, DOJ, the Clinton Admin, and actions like Obama suing Citibank for ACORN. All of those things changed the rules for mortgage lending. There is a document called "Closing the Gap" published by the Federal Reserve Boston that served as the blueprint for changing the MOrtgage standards. This quote is from there:  

"Management should ensure that any policy statements regarding the institution’s commitment to its local community, and to minority and lower–income customers, are included in all marketing materials.Marketing plans should be reviewed to ensure that they are effective in reaching minorities and reflect the racial and ethnic composition of the service area. This may mean using local newspapers, electronic media, and foreign language advertisements; advertising through informal channels such as religious institutions and community service agencies; and encouraging feedback from community groups on product awareness and suitability. Call programs should also be reviewed to ensure that brokers and realtors who operate in minority neighborhoods are included. Consideration should be given to the development of home buyer education seminars; these can be held in–house or in conjunction with community organizations or local government. (See the section on Buyer Education.)"

The plan was to flood the minority areas with marketing and other communications to let those folks know that there's new rules in place to get loans.  

“The regulatory issues in the 1990s will not be limited to safety and soundness, but will increasingly emphasize fairness: whether or not banks are fulfilling the needs of their communities.” Lawrence B. Lindsey Member Board of Governors of the Federal Reserve System Address to the California Bankers Association May 11, 1992

“We will pursue every avenue – mortgage lenders, community groups, builders and developers, housing finance agencies, mortgage insurers, and federal, state, and local governments – to find partners that will help us fulfill our corporate objective of providing viable financial products and services that will increase the availability and affordability of housing for low–, moderate–, and middle–income Americans.” FANNIE MAE Federal National Mortgage Association Lender Letter January 24, 1992 (Source: Public Information Office)

So all of that began to tear down all standards of lending. I've made these arguments before, and some defender of these policies will say that well only x% of loans were made under these specific programs. It doesn't matter! Once the standards were destroyed, they were destroyed across the board. They never would have done that if the government didn't begin the process. So then , the next phase was the repeal of Glass-Steagall. We're told this a consequence of evil Republican deregulation. What no one ever says is that the Democrats insisted on these additions to Gramm's reform bill: (This comes directly from a document on Congress' website about the bill)

•  The Federal Reserve may not permit a company to form a financial holding company if any of its insured depository institution subsidiaries are not well capitalized and well managed, or did not receive at least a satisfactory rating in their most recent CRA exam.
• If any insured depository institution or insured depository institution affiliate of a financial holding company received less than a satisfactory rating in its most recent CRA exam, the appropriate Federal banking agency may not approve any additional new activities or acquisitions under the authorities granted under the Act.
• Clarifies that nothing in the act repeals any provision of the CRA.
• Requires full public disclosure of all CRA agreements.
•  Requires each bank and each non-bank party to a CRA agreement to make a public report each year on how the money and other resources involved in the agreement were used.
•  Directs the Federal Reserve Board to conduct a study of the default rates, delinquency rates, and profitability of CRA loans.
•  Directs the Treasury, in consultation with the bank regulators, to study the extent to which adequate services are being provided as intended by the CRA
• Expresses the sense of the Congress that individuals offering financial advice and products should offer such services and products in a nondiscriminatory, nongender-specific manner.

Going back to the mid 90s. HUD directed Fannie Mae to start purchasing CRA loans. This created a market for puchasing of CRA and Subprime loans. Defenders say the CRA loans were more sound than other private loans.

It doesn't matter. Fannie Mae opened the door and created a market for bad loans to get sold to third parties.  

This was a Government -created policy.

And then also, the US Govt had its Trade Reps around the world marketing for the mortgage backed securities , telling China, for instance, that they were as safe as cash.

Government created this entire disaster. To blame the markets for doing what the Government WANTED them to do is absurd. The CDS and other instruments are a huge giant problem, but not because they were flawed on their own merits, but because they were used on a broken model, the mortgages themselves.

People who blame Wall Street for being "Greedy" seem to me to be dim thinkers. Of course they're Greedy! It's their job to be greedy.. Do you blame your lungs for breathing?

The Government was depending upon Wall Street Greed to have Fannie Mae make a lot of money selling debt and then buying the debt from loan originators using "Standards" the Government collapsed.

And now we're collapsed. All in the name 'Fairness" and "helping the poor"

The poor doesn't need a mortgage!

The Democrats who build this entire edifice are now empowered even more. The folks who destroyed the world's money are now even more powerful than ever.  

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