I'm sure the only surprise to most of us here is that the NYT, even back then, saw fit to print that.

The Democratic Party effectively "put their finger on the scale" to enable loans to be given to people with sub-marginal credit credit-worthiness, so they could become homeowners. Not an altogether unworthy goal, but the unintended consequence was that sharp operators saw that slackening of diligence as an opportunity to game the housing market with other peoples' money. The bubble had to burst sooner or later.

I'd like to see John McCain run an ad, simply him reading that self-same article from the NYT.

The scary thing about leveraging, derivatives, low quality collateral, swaps, ect;

Self perpetuating, going up.
Self perpetuating, going down.

We need that little Dutch boy now to stop the liquidity lake from draining dry.

This is a liquidity problem, through and through. Watch high quality, blue chip & money market funds soar ^ (Once the fear subsides)

Long story short: capitalism is not at fault, so why should it take the blame for the sins of government?

Senator Ron Paul saw this coming, and said so.

Did not the money loaned go back into the banks by the home sellers for investing?

Sorry for the long post, but it seems to illustrate the core of the problem:

09/25/08
Before you go blaming "bad capitalism" for the subprime mess, dig a little deeper and you'll find that politics was the driving force.

Blame Fannie Mae and Congress For the Credit Mess

Many monumental errors and misjudgments contributed to the acute financial turmoil in which we now find ourselves. Nevertheless, the vast accumulation of toxic mortgage debt that poisoned the global financial system was driven by the aggressive buying of subprime and Alt-A mortgages, and mortgage-backed securities, by Fannie Mae and Freddie Mac. The poor choices of these two government-sponsored enterprises (GSEs) -- and their sponsors in Washington -- are largely to blame for our current mess.

How did we get here? Let's review: In order to curry congressional support after their accounting scandals in 2003 and 2004, Fannie Mae and Freddie Mac committed to increased financing of "affordable housing." They became the largest buyers of subprime and Alt-A mortgages between 2004 and 2007, with total GSE exposure eventually exceeding $1 trillion. In doing so, they stimulated the growth of the subpar mortgage market and substantially magnified the costs of its collapse.

It is important to understand that, as GSEs, Fannie and Freddie were viewed in the capital markets as government-backed buyers (a belief that has now been reduced to fact). Thus they were able to borrow as much as they wanted for the purpose of buying mortgages and mortgage-backed securities. Their buying patterns and interests were followed closely in the markets. If Fannie and Freddie wanted subprime or Alt-A loans, the mortgage markets would produce them. By late 2004, Fannie and Freddie very much wanted subprime and Alt-A loans. Their accounting had just been revealed as fraudulent, and they were under pressure from Congress to demonstrate that they deserved their considerable privileges. Among other problems, economists at the Federal Reserve and Congressional Budget Office had begun to study them in detail, and found that -- despite their subsidized borrowing rates -- they did not significantly reduce mortgage interest rates. In the wake of Freddie's 2003 accounting scandal, Fed Chairman Alan Greenspan became a powerful opponent, and began to call for stricter regulation of the GSEs and limitations on the growth of their highly profitable, but risky, retained portfolios.

If they were not making mortgages cheaper and were creating risks for the taxpayers and the economy, what value were they providing? The answer was their affordable-housing mission. So it was that, beginning in 2004, their portfolios of subprime and Alt-A loans and securities began to grow. Subprime and Alt-A originations in the U.S. rose from less than 8% of all mortgages in 2003 to over 20% in 2006. During this period the quality of subprime loans also declined, going from fixed rate, long-term amortizing loans to loans with low down payments and low (but adjustable) initial rates, indicating that originators were scraping the bottom of the barrel to find product for buyers like the GSEs.

The strategy of presenting themselves to Congress as the champions of affordable housing appears to have worked. Fannie and Freddie retained the support of many in Congress, particularly Democrats, and they were allowed to continue unrestrained. Rep. Barney Frank (D., Mass), for example, now the chair of the House Financial Services Committee, openly described the "arrangement" with the GSEs at a committee hearing on GSE reform in 2003: "Fannie Mae and Freddie Mac have played a very useful role in helping to make housing more affordable . . . a mission that this Congress has given them in return for some of the arrangements which are of some benefit to them to focus on affordable housing." The hint to Fannie and Freddie was obvious: Concentrate on affordable housing and, despite your problems, your congressional support is secure.

In light of the collapse of Fannie and Freddie, both John McCain and Barack Obama now criticize the risk-tolerant regulatory regime that produced the current crisis. But Sen. McCain's criticisms are at least credible, since he has been pointing to systemic risks in the mortgage market and trying to do something about them for years. In contrast, Sen. Obama's conversion as a financial reformer marks a reversal from his actions in previous years, when he did nothing to disturb the status quo. The first head of Mr. Obama's vice-presidential search committee, Jim Johnson, a former chairman of Fannie Mae, was the one who announced Fannie's original affordable-housing program in 1991 -- just as Congress was taking up the first GSE regulatory legislation.

In 2005, the Senate Banking Committee, then under Republican control, adopted a strong reform bill, introduced by Republican Sens. Elizabeth Dole, John Sununu and Chuck Hagel, and supported by then chairman Richard Shelby. The bill prohibited the GSEs from holding portfolios, and gave their regulator prudential authority (such as setting capital requirements) roughly equivalent to a bank regulator. In light of the current financial crisis, this bill was probably the most important piece of financial regulation before Congress in 2005 and 2006. All the Republicans on the Committee supported the bill, and all the Democrats voted against it. Mr. McCain endorsed the legislation in a speech on the Senate floor. Mr. Obama, like all other Democrats, remained silent.

Now the Democrats are blaming the financial crisis on "deregulation." This is a canard. There has indeed been deregulation in our economy -- in long-distance telephone rates, airline fares, securities brokerage and trucking, to name just a few -- and this has produced much innovation and lower consumer prices. But the primary "deregulation" in the financial world in the last 30 years permitted banks to diversify their risks geographically and across different products, which is one of the things that has kept banks relatively stable in this storm.

As a result, U.S. commercial banks have been able to attract more than $100 billion of new capital in the past year to replace most of their subprime-related write-downs. Deregulation of branching restrictions and limitations on bank product offerings also made possible bank acquisition of Bear Stearns and Merrill Lynch, saving billions in likely resolution costs for taxpayers.

If the Democrats had let the 2005 legislation come to a vote, the huge growth in the subprime and Alt-A loan portfolios of Fannie and Freddie could not have occurred, and the scale of the financial meltdown would have been substantially less. The same politicians who today decry the lack of intervention to stop excess risk taking in 2005-2006 were the ones who blocked the only legislative effort that could have stopped it.

Mr. Calomiris is a professor of finance and economics at Columbia Business School and a scholar at the American Enterprise Institute. Mr. Wallison, a senior fellow at the American Enterprise Institute, was general counsel of the Treasury Department in the Reagan administration.

By CHARLES W. CALOMIRIS and PETER J. WALLISON

I watched so many ads on TV from American channel said buy our seminare and become millinar within a year or two
by invest in house today and next month resell it again

I was thinkging this method may kind of strange and can bring price of house strangly high and made thos people over night so many 1000 dollare profit can not right

like so many ads of sweekticke we got from USA buy this magazine and you win 1 million
I never buy that trick

the same trick Canda may go under Nafta if they do not know what they are signing or enter to Afgan while Canda is not ready is kindo
of cultre of USA who take your hate out of your head and trick you

buy and sell house next day with no renovation and no time frame pass caused so many
today problmes for American

in America only like to become rich over night
like palin came with not enough hard job like to run all United state and made fun of all money she may get it

even Obma has not enough experince know detail of their country and all cultur of USA is corruption

how ugly CLinton embrased all nation used his power to go with his assitatn that is discuting
and real embrasing for USA as some one can be trust him for doing honest job

poliican is only oppoutunist while they must firs quaifty before they go candidate for this job

today problems in USA is simlare like Russia is
that they are use money with no proirity and not care abotu people need of USA nad try to made certain peopel rich under table with conspircy nothing else
otherwise if USA like
tommorrw can pay off all the debt and stop war in middl east and star all over again from stock market

stokc of market of USA is also sometimes is only song from long distance if you see them hier stock not worth that much they are gaing ing
like their oil company in USA who made so much profit

rich in USA made so much profit illegaly some times will affect all chain in the country get corrputed do anything for power and money

you should not let this culture transfer here by free trade any more

It all started with Carter:

CLICK HERE for the start of it all with Carter's community investment act as revealed by Newsbuster.

Or, if "bad capitalism" is blamed for the subprime mess, all you need to do is dig a little deeper and you'll find that politics was the driving force:
CLICK HERE for the footprints of further government culpability.

Houston, I believe we've found our smoking gun.

This is the most telling line:

"From the perspective of many people, including me, this is another thrift industry growing up around us," said Peter Wallison a resident fellow at the American Enterprise Institute.

"If they fail, the government will have to step up and bail them out the way it stepped up and bailed out the thrift industry."

NewsBusters has this story right now: State Run Canadian Media Corp. Apologizes for Palin-Smearing Article.

Report from the National Post.
http://www.nationalpost.com/news/story.html?id=845234

Hi Kate,

Perhaps your readers will want to view this short video. Seems like Bambi has some later involvement with this messy affair also.
click

Is there a way to block "new" as I can't stand poor english, grammar and punctuation in academic debate? Not only that, from what I can understand from the ramblings, the poster is a loon.

The real issue has been clouded by the Sub-Prime Melt down. The Financial Market has LOST credibility with Investors in all sectors.

The dot.com fad of the 90's sucked trillions of dollars from individual investors, the wonderful experts (economists) fixed that problem by reducing Margin rates on Commodities (including OIL) to 10% (The 1930's level that resulted in the Great Depression) to encourage Speculation.

When you get an Order of Magnitude (X10) return on your Money invested, that same order of Magnitude distorts the Market into a rising trend. The instability is compounded when the prices drop (shorting) because Speculators lose more than 10X what they can really Pay. They default into Bankruptcy or load themselves into unsecured debt

The other Shoe will drop!

Is there a way to block "new" as I can't stand poor english, grammar and punctuation in academic debate? Not only that, from what I can understand from the ramblings, the poster is a loon.

Posted by: jckirlan
.........................

And here I thought the term was 'New Moon', rather than 'New Loon'. ;-)

The Powerline guys have a video of this:

http://www.powerlineblog.com/archives2/2008/09/021622.php

RCGZ

If anyone is really interested in the background leading up to this mess they should go to IBD Editorials at ibdeditorials.com.

Thanks, after listening to all the BS here and elsewhere it lays everything out very clearly in a series of articles by Terry Jones Sept,18,22,23,25 and one by Fred Smith Sept24/08.

Fannie Mae CEO calling Obama and the Dems the "Family" and "Conscience" of Fannie Mae
http://www.youtube.com/watch?v=usvG-s_Ssb0

Yeah it's all Klinton's fault...not like Bush didn't have 8 years to put a lid on this policy...naww Bush is a real conservative...NOT!

WL Mac
Your comment shows a complete Lack of understanding of how the US system works and knowledge of Bush's warnings about Freddie and Fanny.

Off to work.

Still trying to find someone in this thread defending Bush WL. You suffering from BDS?

And don't expect anything different from McCain. He is about as conservative as Harper, if either of them ever understood the concept.

Waters et el have been trying to get control of the
Federal Reserve Bank for years. Can you imagine her as Chairman?

Thanks for the tip Western Canadian.

Thanks Mississauga Matt - great video from Powerline

I wonder if McCain will start to increase the heat in the presidential debates - he needs to really start pushing his economic knowledge, no matter how strong it actually it.

At this point, nobody cares what he thinks about Waziristan - everyone wants to know if their job is safe, and if they can heat their house and drive their car like they used to be able to.

Don't think it can't happen here. Following is a statement from a CHRC sponsored study on the feasibilty of introducing "Social Condition" as a prohibited ground of discrimination in the Canadian Human Rights Act.

This is listed among the reasons why discrimination based on economic status should be part of the CHRA.

"We were told during our consultations that complaints were filed with the Commission on behalf of single mothers denied mortgages because they were on welfare or could not meet minimum income requirements."

The above quote is taken from the CHRC's first kick at the can at attempting to get "Social Condition" approved as it is part of Canada's obligations under a UN treaty - The International Covenant on Economic, Social and Cultural Rights.

The 1st CHRC effort got sidelined but as we learned from their 2007 annual report they want another shot at it.

http://tinyurl.com/3mgxez

AtlanticJim is not PMSH pass the course on economics 101 at the top of his class.

Thanks RCGZ for that piece, and Gary K for the video. They pretty well sum up my understanding of this fiasco.
As for Bush, it must be borne in mind that Bush is President, not King. His actions are constrained by the congress and the courts. Or as the French would say, "On fait ce qu'on peut" (usually with that Gallic shrug).

Wow, I've never seen a point be so cleary missed on SDA before. Note the critical sentence here:

"In addition, banks, thrift institutions and mortgage companies have been pressing Fannie Mae to help them make more loans to so-called subprime borrowers."

The first paragraph states that the government is trying to increase home ownership in middle and lower income families...and then it says the banks and mortgage companies are trying to press freddie and fannie to give out sub prime mortgages.

Those are two COMPLETELY different things. The WSJ (about as conservative as they come) found in 2006 that 61% of those who had received sub prime loans were actually eligible for regular mortgages. What does this tell us? That banks and other mortgage agencies PUSHED their own agenda regarding sub prime mortgages. Sub prime mortgages carry higher interest rates, which translates into higher profits for those companies. While the housing boom continued, their risk was minimal, which resulted in the "record profits" that the article notes. However, when the housing bubble popped, that risk (and defaults) flowed back in and destroyed many of those institutions.

I second the motion to keep "new" or "mos" or whatever nom du jour he/she is using, off the comments board. These lengthy comments are unintelligible and contribute nothing to the discussion. I admire Kate's tolerance, but enough is enough.

When government gets involved in business, and things go wrong (often), then taxpayers end up bailing them out (Fannie May). There is no way any taxpayers' dollars should be used to provide mortgages to poor credit risks (what utter stupidity). They should bite the bullet and take the higher rates.

When companies get stupid and greedy, too bad so sad. Yes, try to help the little guys, but the directors can take their hit, having enjoyed the profits before. That's capitalism.

Sadly, it doesn't work that way. Taxpayers are forced to bail out fat cats. That's why government and business shouldn't "cooperate."

Governments are poor at picking winners. Losers are good at picking government.

"Wow, I've never seen a point be so cleary missed on SDA before. Note the critical sentence here:" posted by bar_jebus at12:52 PM

The way I look at it, the US government planted the seed, harvested the fruit and offered it for sale. The banks, thrift institutions and mortgage companies bought the crop and resold it to the public.

Ergo the companies are guilty of selling rotten fruit, but government grew it and pushed the sale. That makes Congress/Senate and the Presidential the ultimate guilty party in my mind.

Yeah, it's the poor people's fault. Certainly not that of predatory lenders. Yup.

Aren't you ever tired of being wrong? Didn't you argue that this economic crisis was nothing more than a media construct?

When are conservatives ever going to accept responsibility for their mistakes?

Oh. Right. Never, because that would take a spine.

John, do some research and you will see that the Banks are not as much to blame as Congress. Why? Well for one thing corporate handouts to members of congress, mainly democrats. Its not Carters fault or Clinton or Bush, its CONGRESS. Clinton while still in office as well as Bush both called for some regulations on Freddie and Fanny. Go to the site I mentioned above, it explains a lot.

Yeah, it's the poor people's fault. Certainly not that of predatory lenders. Yup.

OK. Let's run with logic: if I buy illicit drugs, is it my fault or the dealer's?