The American Spectator : Wrestling With Capitalist Pigs

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Wrestling With Capitalist Pigs

By Philip Klein from the April 2009 issue

When capitalists are held to the same low standards as government, what kind of future can capitalism possibly have?

It was in the early part of this decade that I first wrestled with the phenomenon of capitalist pigs. In the public sphere, the wealthy businessman is constantly under attack. He is the cartoonish villain in movies and the scapegoat for opportunistic politicians. But I grew up in a household that celebrated individualism and entrepreneurship. In my family, the businessman was the Randian hero who, purely in pursuit of his own self-interest, invented new technologies, spurred productivity, and generated wealth for the economy—while envious looters and parasites tried to tear him down and bleed him dry.

However, working as a financial journalist from 2001 to 2004 forced me to reexamine this view when a wave of corporate accounting scandals rocked Wall Street, and the arrogance, stupidity, and corruption at a number of large American corporations and at the highest levels of its financial institutions made for an embarrassing display.

I began to ask myself: how will I be able to defend capitalism from those who seek to destroy it when actual capitalists are behaving so indefensibly? This is a question that free-market conservatives are now forced to grapple with on a much larger scale in the wake of the collapse of the financial markets.

This magazine, along with other conservative outlets, has rightly documented how a raft of government policies, some dating back decades, helped create the current economic crisis. The Community Reinvestment Act, which was originated during the Carter administration and updated by President Clinton, encouraged more lending to those with patchy credit histories. Fannie Mae and Freddie Mac were able to use their government backing to borrow money cheaply, allowing them to absorb trillions of dollars in mortgages. And under the leadership of Chairman Alan Greenspan, the Federal Reserve Board pursued one of the most aggressive rate-cutting campaigns in history, which helped drive mortgage rates down to the lowest levels since the Eisenhower administration—yet the Fed resisted jacking up interest rates despite mounting evidence that housing prices were inflating to unsustainable levels.

While all of this is true, the causes of the current financial collapse, as with any economic calamity of this magnitude, are complex. The government may have helped create an environment that made us susceptible to a housing bubble, but at the end of the day private banks took advantage of that environment. They threw prudent risk management out the window, they pushed mortgages on un-creditworthy borrowers, they financed those mortgages with complicated financial instruments that few—if any—understood, and they escaped with millions as their companies begged for taxpayer dollars.

At a time when the nation is rushing toward socialism, there’s an obvious temptation among conservatives to rally around the market and lay all of the blame for the financial crisis on big government. But any full accounting of the current mess requires us to reconcile our belief in capitalism with the fact that this is a case in which actual capitalists behaved recklessly. Their behavior, and the public outrage that it generates, presents more of a threat to capitalism than an army of Paul Krugmans.

THE SEVERITY OF THE FINANCIAL CRISIS came as a surprise to many, but recent history provided plenty of warnings. When the housing boom started earlier in this decade, the stock market was still dealing with the fallout from the bursting of the Internet bubble in 2000. Separately, in 1998, the hedge fund Long-Term Capital Management, which made huge bets on small market fluctuations and had enjoyed several years of extraordinary growth, cratered from its exposure to the Russian financial crisis. “The fund had entered into thousands of derivative contracts, which had endlessly intertwined it with every bank on Wall Street,” Roger Lowenstein explained in When Genius Failed. “These contracts, essentially side bets on market prices, covered an astronomical sum—more than $1 trillion worth of exposure.” Fearing that the collapse of LTCM could bring down the major investment banks, the Fed pulled the banks together to orchestrate a bailout of the fund.

When the Internet bubble burst, it didn’t have the ramifications of the popping of the housing bubble, because investors weren’t able to build up enough leverage. When LTCM ran into trouble, it was bailed out for $3.65 billion—a number that is quaint by today’s standards. In this decade, investors returned to the “irrational exuberance” and created the housing bubble. But through the use of leverage, they were able to place bets on a much more massive scale, raising the consequences of the inevitable fall.

Responding to an easy lending environment ushered in by the Fed’s acceleration of interest rate cuts in the wake of the Sept. 11 attacks, mortgage lenders became increasingly aggressive in pushing loans toward homebuyers, regardless of their income or credit histories. They pumped up sales by designing a variety of loan types, from interest-only mortgages to adjustable-rate mortgages that came with low “teaser” rates that expired after a few years.

Countrywide Financial was one of the major beneficiaries of the boom. The Calabasas, California-based company saw its earnings explode from $374 million in its 2001 fiscal year to $2.67 billion in 2006—at its peak, the company was financing nearly $500 billion in mortgages annually. CEO Angelo Mozilo, who doled out lower rate “VIP loans” to the likes of Senate Banking Committee Chairman Sen. Chris Dodd (D-CT), unloaded $300 million in Countrywide stock between 2005 and October of 2007, according to the New York Times, as the company was plagued by rising delinquencies on risky loans that should have never been issued in the first place. The company was sold to Bank of America last year.

What enabled Countrywide and other mortgage lenders to finance all of their loans was the ability to bundle up thousands of loans into securities and then sell them off to Fannie, Freddie, as well as other banks and financial institutions. Ratings agencies such as Moody’s and Standard and Poor’s played a major role in the debacle by slapping high ratings on risky mortgage assets, because issuers convinced them that packaging geographically diverse home loans lowered the chances of default, even if the ultimate borrowers—regardless of their location—were financially strapped. (By definition, an AAA-rating is supposed to mean there is a one in 10,000 chance of default.)

Investment banks became increasingly eager to get a piece of the housing boom. Led by the likes of Richard Fuld of Lehman and Jimmy Cayne of Bear Stearns (who were both involved in the LTCM drama), Chuck Prince of Citigroup, and Stan O’Neal of Merrill Lynch, the banks and brokerages vacuumed up as many mortgage assets as they could. In Merrill’s case, they were operating with leverage ratios as high as 40-to-1, meaning for every dollar in equity it had $40 in debt. This was made possible, in part, by a 2004 decision by the Securities and Exchange Commission to exempt large firms from restrictions on the amount of debt they could hold.

Leverage allows investors to borrow money to purchase more than they can immediately afford, with the hopes that the return on their investments will exceed the costs of paying the interest on their debt. In a strong market, the more leverage firms can build up, the more money they’ll earn, but taking on excessive risk can have disastrous consequences when things go sour. While financial institutions should limit the amount of risk they take on, much like the spread of steroids in baseball, high leverage proliferated on Wall Street, because any bank that didn’t partake would be at a competitive disadvantage— at least in the short run.

Meanwhile, American International Group (AIG), which over the course of decades had grown into the world’s largest insurer by market value, expanded from the solid businesses that had fueled its growth in the first place, into the realm of credit default swaps, which are financial instruments that insure bondholders against the risk of default.

IT’S NOT AS IF PEOPLE WERE completely ignorant of the possible dangers stemming from derivatives. Warren Buffett had declared them “financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.” At the time, many books and articles were written pointing out that housing prices had inflated to unsustainable levels, and questions were raised about the risky nature of these subprime mortgages. It wouldn’t have taken a genius to understand that the day of reckoning would come at some point.

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About the Author

Philip Klein is The American Spectator’s Washington correspondent. You can follow him on Twitter at: http://twitter.com/Philipaklein

Letter to the Editor View all comments (111) | Leave a comment Leave a comment

Ben Rast | 4.9.09 @ 6:59AM

"how will I be able to defend capitalism from those who seek to destroy it when actual capitalists are behaving so indefensibly? "

That is precisely why we founded The Bastiat Society. It is an organization of principled capitalists who appreciate our motto: "Those who work in freedom should know how freedom works."

Deborah | 4.9.09 @ 7:30AM

A pox on all their houses! Thanks so much for this article, Mr. Klein. I like the simple solution of limiting the amount of leverage that can be taken on. It's the old computer programmer's acronym...KISS (Keep it simple, stupid). Logical, practical, transparent -- the more confusing a law or regulation, the easier it is to sneak around it.

Bob| 4.9.09 @ 7:37AM

Kudos, Philip!!! You have this EXACTLY right and in the proper proportions. This is what I've been saying since I've been posting here. I agree with EVERYTHING you have said in this post.

In addition to reserve requirements (limitations on leverage), we also need to have mortgage originators keep a portion of the risk. As to regulation, we need to get rid of the incentives like CRA, but we need more in terms of capital reserves, keeping risk with originators, limits on bonus structure to match risk (not how much, but when) and oversight. One of the big problems with oversight is that we need to pay SEC investigators more money so we can get some good ones who actually understand what's going on.

Philip, I can't believe they let you post here at AmSpec. Great piece....

Robert Rosencrans| 4.9.09 @ 7:59AM

Was it Capitalism that became like government, or was it Capitalism who took advantage of opportunities presented by big government, thereby becoming as corrupt as big government?

Many of the reasons for the collapse in some markets were based on financial scams, pure and simple. Isn't that more like criminal activity as opposed to the true pursuits of Capitalism?

In July of 2008 both Congressman Frank and Senator Dodd were quoted as defending Fannie Mae and Freddie Mac, exclaiming there was nothing wrong over at those institutions. In September of 2009, less then 90 days later, the government took over both institutions.

After the takeover the public has discovered that Senator Dodd got a sweetheart loan through Countrywide Mortgage, and also engaged in a questionable land deal in Ireland.

Is it possible that Capitalism can survive under an oligarchy of greedy corrupt politicians, who resemble the political mafia running Russian, Inc., in form if not in total function?

Elliott Spitzer, when he was the arrogant AG of New York, forced Hank Greenburg out at AIG, and soon thereafter the AIG group who handled derivatives saw a massive increase in their questionable business practices.

Then Elliott Spitzer, a former state Attorney General, who had risen to the elected office of Governor of New York was forced out after it was revealed he had violated the Mann Act.

Even before that incident, it was revealed that Spitzer had lied during an official state investigation about the funding for his campaign. But nothing was done.

Then there was the case of Senator Stevens, who had the entire weight of the Justice Department thrown against him, was convicted right before the election, and after losing the election, it was discovered that the Justice Department was staffed with corrupt prosecutors. Some corruption made have existed in the F.B.I. itself.

As you turn over each situation and look closely, there is a massive move toward corruption in government, where few are prosecuted, and in the business community where some are prosecuted.

It has been revealed that the S.E.C. had been receiving tips for years about Bernie Madoff and his financial house of cards. All one had to do, and with seemingly little effort, was to pull out the right card and the entire house would crumble. Yet, that never happened.

The citizens of the United States are not faced with a crisis in Capitalism, but a crisis of confidence in government.

Absolute power corrupts absolutely, and the average citizen must wonder what's going on inside the beltway. It's unmitigated greed compounded by unmitigated gall compounded by unmitigated duplicity.

Roy| 4.9.09 @ 8:16AM

I have never understood why anyone would think that businessmen operating under pure self interest would act any differently. Even Ayn Rand knew this, eg, Dagny Taggart's brother who lobbies for laws to protect him from competition. Of COURSE the executives of Lehman, etc, howled that they were "too big to fail" and deserved government bailouts. Self interest. The point of capitalism is not that you have faith in businessmen(calling them "capitalists" confuses things) but that you do not have such faith and you want to prevent them from using the government to socialize their losses. Sadly, the people failed this test. When the businesses howled doom we rolled over and bailed them out because "the financial system" was at risk.

Well maybe so but I have heard nothing that makes me buy that.

Any regulation that is created should in my opinion not consist of trying to dictate the business model of banks. Rather, it should be aimed at making sure that, if and when a bank does collapse, when they come screaming for a bailout the response is, in the immortal words of Charles Barkley:

"You can't have my shoes, you can't have my jersey, you can just get beat, and go home."

So whatever it is that makes the government think the bank deserves a bailout is what regulation should be aimed at preventing. After that we can sit back and let freedom work.

Bob| 4.9.09 @ 8:21AM

Rosencrans, it would be nice if something in your post was factual.

Securitization was started in the 80's as a business method of reducing corporate risk and placing it with investors. This allowed mortgage originators to loan more money and not take the risk of poorly originated loans. As long as housing prices continued to rise, it was like a Ponzi scheme since foreclosed homes could be sold for an amount close to the value of the loan. This had nothing to do with Fannie and Freddie. I was involved with securitization in the 80's and 90's and know this from the inside. While government accelerated this process, they did not enable it. You've got it exactly backwards as usual.

In terms of AIG, the Financial Products Group started their activities with swaps back in 2001. By the time Greenberg left in 2005, over half of the eventual swaps had already been completed. So your information is faulty on this as well.

Everyone was involved with greet, but as Philip said, it was primarily Wall Street that was the cause. Remember, it was under Republican leadership that the SEC failed due to a belief in deregulation to the extreme.

Big J| 4.9.09 @ 8:28AM

Mr. Klein,

Fantastic article. Conservatives are calling for less restriction on the free markets, and the liberals are calling for more. Both of these solutions carry blame for the current crisis. It is truly a "Chinese fingerlock".

I am a self-employed electrical contractor. Because my customers and I trade in tangible assets (I provide products and services, they provide money), it is very easy to track if corruption and greed seeps in. That is not the case when you are dealing in "mortgage backed securities" or "credit default swaps", whatever those things actually are.

My grandfather used to say, "The day we allowed money to make money was the day that the capitalist system began to fail." I don't necessarily subscribe to that belief. I think money is a commodity, and those that have extra to loan should make a profit from loaning it to those that do not. The situation is not that simple, however.

I think back to Barney Frank espousing "there is no potential crisis with Fannie and Freddie, they are perfectly sound organizations." Knowing that the Fed Chairman and Treasury Secretary not only knew, but allowed it to go on does not improve my faith in ANY elected official at the moment.

What is the solution? I think Mr. Klein and Bob have it right, although I don't profess to know such complicated things. If it doesn't get powered by 120-volts or more, I don't know much about it. I do believe this, however: You cannot continue printing money, attempting to spend your way out of the problem. Images of German's carrying wheel-barrow loads of money to the grocery store come to mind.

Capitalism has it's down sides, just like the up sides. No pleasure without pain, etc. As Mr. Klein put it however, it has created more prosperity and wealth than any other system on the planet.

Don't throw the baby out with the bathwater.

Dave| 4.9.09 @ 8:43AM

Shock, gasp and surprise, capitalists can be greedy and stupid and stretch to the limits dumb government rules and regulations for their own benefit. What we should be acknowledging is that the market did work and did its work well, never mind how absurdly stretched and distorted dumb government rules made it.

If the market is ultimately self-correcting the detritus will soon be gone and we can once again get on our merry way. In our own nation's history, when regulations were few, downturns were sharp and short. This downturn can be sharp and short if we let it. The sad truth is we are not letting it be that way. That is a failure of government.

Bob| 4.9.09 @ 8:46AM

Big J, while the system is complicated, the theory behind it is not. I think you have a handle on it.

What these financial instruments allowed people to do is sell the risk to someone else. When you sell the risk, you are no longer responsible for what you have done. In your case, it would like putting in an electrical service, and then not being responsible for any problems your customer encountered. Because of that, in the short term you might get a bit sloppy hoping to do more jobs in less time. If any problems occurred, you would no longer be responsible, so why not? Eventually, it would catch up to you, however, and you wouldn't get any more business. This is exactly what happened with the housing bubble. Selling off the risk was called securitization. Derivatives were just pieces of those securitizations put together in a way to make them more salable, i.e., repackaging. In your case, the product might have been new builds or service upgrades rather than all of the services you provide. Default swaps was really just insurance that financial institutions would buy because they knew their derivatives were risky if the market went down.

By the way, I agree with your grandfather that it is important that we rebuild a manufacturing base here.

Pingback| 4.9.09 @ 8:48AM

Topics about Economy » Archive » The American Spectator : Wrestling With Capitalist P links to this page. Here’s an excerpt:

Archive » The American Spectator : Wrestling With Capitalist Pigs Topics about Economy The American Spectator : Wrestling With Capitalist Pigs Posted in Economy Topics on April 9th, 2009 Philip Klein created an interesting post today on The American Spectator : Wrestling With Capitalist Pigs Here’s a short outline While all of this is true, the causes of the current financial collapse, as…

P. Aaron| 4.9.09 @ 9:17AM

Washington sure enjoyed the tax revenue generated from all those profits either real or imagined. They are addicted to tax revenue at least as much as some on Wall Street and elsewhere are addicted to profit...at any cost.

The question is who's addiction really needs treatment here? Washington's, Wall Street's, or both?

Anthony| 4.9.09 @ 9:38AM

Mr. Klein's last paragraph sums things up rather well. When you get excesses in the private sector, a la Fuld, Mozilo and Prince, you ultimately get a correction and these folks end up in prison.
When you get similar excesses from the political ruling class in Washington, not only do they not end up in prison, but as Mr. Klein opines, we end up with Stalins, Lenins and Maos. Therein lies America's current dilemma, self correction from the markets is impossible in today's enviornment, especially with the current Democrat politburo and Obama as the anti-capitalist-In-Chief in charge.

Pete| 4.9.09 @ 9:40AM

Washington owns the dope plantation. They don't think they need treatment as long as they can harvest what they please when they please.

Bob| 4.9.09 @ 9:48AM

Actually, Anthony, the "ruling class" during the housing bubble were Republicans, not Democrats. Obama has only been in office for a couple of months now. The politburo was conservative, not liberal. That's why I believe our party must change before we can effectively combat fiscal excess. The party, thus far, has not changed. We are still reactionary with no cohesive plan except to say "no".

Bill Hussein O'Stalin| 4.9.09 @ 10:00AM

Bob: Are you a pathological liar, or do you just appear to be one? It's a real conundrum. You use other aliases to post here and I'm sure everyone has you figure out for the nut cake you are. Yet you come, indicating your government dispensed medications are not working or are in short supply. What type do you take? Are you on Thorazine? We all want to know.

Robert Rosencrans| 4.9.09 @ 10:04AM

Here's an article from Forbes which shows that the poster Bob is either a misinformed idiot or a liar. Most likely both.
http://www.forbes.com/2009/03/03/aig-greenberg-derivatives-markets-equity_suit_34.html
That's only part of his stake; Greenberg is the largest shareholder in AIG, if you don't count the U.S. government's pending 79.9% stake, with about 10.0%, or more than 200.0 million shares.

Greenberg is arguing that the inflated financials were related to derivatives contracts, an area of the company that expanded after he left in 2005. It follows his theme that the company was driven into the ground by his successors. Ironically, Greenberg was ousted after allegations of accounting improprieties, though these were never firmly established.

The suit asks that Greenberg be paid the difference between what the shares were worth what when he bought them and what they would be worth had the company not allegedly deceived him about their value as an adjustment to the $70.0 million in tax he paid in connection with exercising his options. It's hard to calculate what he might obtain if he were to prevail but with AIG closing Tuesday at all of 43 cents a share, the value of his stake has fallen to $1.6 million from $201.2 million.

"This is actually a pretty standard securities-fraud complaint," said Peter Henning, a professor at the Wayne State University Law School, "but unlike the usual class action, he's one very deep-pocketed plaintive who can pursue this."

One interesting issue will be if Greenberg qualifies as a purchaser. He received the shares via Star International, a company that was set up by AIG to reward senior management. "If the company awarded him the shares directly, he could qualify purchaser," Henning said, "but it's unclear if it goes through a third party."

Bob| 4.9.09 @ 10:07AM

Actually, Bill, you are clearly the uneducated nutcake here. I use no other aliases to post. AmSpec can certainly prove this by looking at my IP address. Are you also into conspiracy theories? Are you paranoid? Take some Lithium, please.

Furthermore, you can show absolutely no lies from my posts. But then again, you seem so deranged I doubt whether you can tell fact from fiction.

Bob| 4.9.09 @ 10:18AM

Rosencrans, I retired from AIG and know the company well. Again, over half of the default swaps were in place before Greenberg was ousted. Nothing you have posted refutes that. In Hank's testimony before Congress he blames the downgrading of the company's debt for the problems. When the debt was downgraded it triggered that reserves be increased for the swaps. When that happened, AIG didn't have enough for the reserves. The fact is that Greenberg did not foresee the possibility of debt downgrades.

Face it, Rosencrans, you don't know what you're talking about.

By the way, there were two groups where executive kept their bonuses: CVStarr and SICO. Starr was for the very senior execs and SICO was basically for the corporate VP's.

By the way, Greenberg was the only person that could run the AIG insurance business. It was a decentralized operation with over 600 divisions. However, he was not as good with the banking and investment businesses -- and that was his weakness. His solution for these problems was to hire people, primarily from the political world, to help. In my entire career, I've never met a person as competent as Greenberg at managing a particular line of business. His great strength was his ties to foreign leaders and politicians as the insurance business is highly regulated in all countries and these types of connections are essential for success.

If you don't understand this Rosencrans, you could always ask.

Robert Rosencrans| 4.9.09 @ 10:29AM

Bob, you are a pathological liar. You need help bud.

Truth to Power| 4.9.09 @ 11:06AM

Robert Rosencrans,
Why do you think Bob is pathological? I agree with you about the liar part. If I thought he was pathological I would feel pity instead of contempt.

Bob| 4.9.09 @ 11:36AM

Rosencrans, when you call somebody a "liar", you'd better have some proof. How would I know so much about the inner workings of AIG if I didn't work there? If you have no proof, then you are something worse than a liar -- you are a cheat and an idiot. Again, everything I've said is true and can be proved. If you really have doubts, contact AmSpec. They know who I am and can verify my facts. I just don't want my identity published because fools like you will spam me to death.

Rosencrans, please get an education so you can argue on the merits.

Note to more rational beings that Rosencrans and Truth to Power: I continue to throw bombs here, purposely, since I believe the only chance Republicans have of becoming fiscal conservatives again is to become better educated and deal with facts and data rather than ideologies. Ideologues like Rosencrans and Truth are ruining the party and hurting this country's chances of becoming truly conservative from a fiscal perspective. And yes, I do believe most social conservatives add to this problem because they rely on belief to the exclusion of reason.

Robert Rosencrans| 4.9.09 @ 11:47AM

Oh, I'm sure AIG, a corrupt company, would vouch for a corrupt poster. Bob: You don't throw any bombs here, because it's obvious you are a liar. You claim to have worked everywhere and done everything, what ever is convenient. Continue to throw your firecrackers and enjoy yourself. I suppose it's what the idle poor do for laughs.

Crackerjack Joe| 4.9.09 @ 11:48AM

I suggest a new name for this thread. Wrestling with a lying pig.

Bob| 4.9.09 @ 12:13PM

AIG is not a corrupt company. Their insurance businesses are sound. The FPG was, indeed, a corrupt division and completely separated from the main operation.

And since you can't read, I said exactly the opposite -- that I continually throw bombs here.

So what kind of proof do you want that I worked at AIG? Do you want to know where Hank's office was and what pictures he had on the wall in the waiting room next to it? Do you want to know what seat he occupied on the company plane? Do you want to know what piece of exercise equipment he took with him on trips? Do you want to know how he treated his son in meetings? Rosencrans, you are just showing your lack of intelligence when you have absolutely no proof that I've lied in any way. You are clearly a loser.

Anthony| 4.9.09 @ 12:27PM

Bob, you're engaging in a bit of revisionist history here. While it is true that Republicans held control in Congress for years during the housing bubble, nonetheless, Bush, his regulators and even McCain attempted to correct the problem before it crashed. I'll concede that while Bush was strong and steadfast in defense of America from foreign elements, he and the R party folded like a cheap card table in standing up to Democrats. Hence, when Chris Dodd, Barney Frank and the D establishment cried "racism" when attempts to reign in Fannie & Freddie were tried, Bush & Co. backed away, and now the bill has come due, as will Social Security, Medicare and Medicade. I agree with you that Rs are somewhat reactionary, I believe they would love to do more than say no, but this inability is due more to the liberals control of the media and other vital institutions, rather than faulty principles. If Bush had the media behind him, many things would have gone differently. Don't confuse timidity with reckless policies.

Bob| 4.9.09 @ 12:41PM

Anthony, what I'm saying is that Fannie and Freddie were NOT the major problem and even if we regulated them better, we still would have had the problem. 70% of these subprime derivatives were purchased outside of Fannie and Freddie. And, according to Congressional hearings, Fannie and Freddie got the best of them because their standards were higher. The default rate of non-Fannie and Freddie derivatives were far higher. The numbers just don't back up your position on this.

Regarding Social Security, Medicare, and Medicaid, I couldn't agree with you more and have said so numerous times. These are the really big issues and we need to address them with reform and tackling the cost of health care in this country.

Regarding the liberal control of media, I just don't think that applies much anymore because of the growth of the internet and outlets like Limbaugh and Fox News. Right wing controls radio and Fox News has more viewers than CNN and MSNBC. This whole deal about "liberal media" is really overstated if you actually think about it. But then again, most ideologues don't think -- they believe.

fundamentalist| 4.9.09 @ 1:17PM

"The crisis could not have happened without certain government policies, but it could have been prevented if Wall Street had shown more wisdom, humility, long-term thinking, discipline, and, ultimately, some common sense. "

Not necessarily. Why does the Fed lower interest rates? Obviously, to encourage people to borrow money, spend it and revive a sagging economy. So what would happen if the Feds lowered interest rates and no one borrowed? The Feds would reduce interest rates again, and again, and again, making their interest rate zero, as they have done recently. No matter how wise or moral businessmen act, eventually someone will cave in to the temptation offered them by the Fed of obsenely low interest rates and they will earn huge profits from it. Those huge profits will lower the resistance of others who will eventually join in the feeding frenzy. All along, Ivy League economists are telling the reluctant that they're stupid for refusing the money from the Fed and extolling the wisdom of the Fed for offering the financial equivalent of guiltless sex.

The root of the problem is mainstream economic theory. The Fed is enslaved to it and business people have no defense against it. As long as the Fed acts like a financial prostitute, and mainstream economists and the media pimp for it, we'll have a nation of hapless johns.

Truth to Power| 4.9.09 @ 1:22PM

Bomb throwing Bob is the great hope of the GOP?
Only in his own little mind. I think that it is obvious that he is a libtroll. Study his word usage and "reasoning" and there is no other explanation. This makes him a liar but again I am not seeing pathological. He is just a doofus with too much free time.

Bob| 4.9.09 @ 1:39PM

Hey, Truth (that is a misnomer), the more you eschew moderates and independents, the greater chance Republicans will lose. The Republican party is the smallest it has been in modern history. Backwards, anti-intellectual, garbling, data hating, non-thinking ideologues like you are the problem. The Republicans will always have your vote in Presidential elections, but mine is the swing vote. Get used to it.

Lawrence Kennon| 4.9.09 @ 2:31PM

You wrote:

"...how will I be able to defend capitalism from those who seek to destroy it when actual capitalists are behaving so indefensibly?"

The first thing to fully understand is that the current system - the system under which these abuses occurred - is not Capitalism. It is a mixed system with some aspects of Capitalism combined with some very significant amounts of government regulation and government interference. People who work in this system adapt to the system as it is, not some ideal of Capitalism which doesn't exist at this time.

In a relatively free system with minimal government interference people who operate in the market must operate mostly on objective principles of investment. In such a market you don't normally loan a lot of money to people to buy houses without some assurance that the borrowers have a reasonably good chance of making their payments.

Enter the CRA which mandates that investment firms not do this rational due diligence and the market changes. Enter the government creating a Fannie Mae and Fannie Mac with the ability to further distort the market and the market changes even more so.

The market you have now does not really resemble a free market system. It does not attract the rational entrepreneurs we might see depicted in an Ayn Rand novel. It attracts people who see how they can use the existing system to make money. Some of these people are not always far sighted, and most often they don't care about the long term consequences as long as they can make lots of money today.

The ultimate fault and root cause is always a government which distorts the market such that these kind of people can thrive. It is not a failure of free markets or Capitalism. It is a failure of human nature taking advantage of "easy pickings" created by the unintended consequences of irrational government actions.

That I think is the message that has to be articulated. Bad government policy creates the environment that let's these sort of people thrive. The cure is to return to a true free market, and to rap people like Barney Frank sharply on their piggish snouts.

Bob| 4.9.09 @ 3:09PM

Actually, Lawrence you are only partially correct. The capitalism we have is not true free market capitalism -- it never can be because we do have socialist institutions like the military, Social Security, and Medicare which comprise almost 3/4ths of our budget. But you are wrong about the CRA as it only played a minor role. The majority of failing mortgages right now are not CRA induced and more than half of the current mortgages are due to speculation on the housing market. The CRA did no cause this. What caused this was the abandonment of another free market principle -- the the people who make the deal take the risk. Once you separate origination from risk, there is no reason the originator won't cheat if there are people out there who will buy the risk. Please get off of this Barney Frank thing. Yes, he like many others, contributed to the problem, but he was far from the major cause. Furthermore, Republicans were in control of the Congress and the White House when this happened. Frank did not assume control of the committee until 2007. When you make false claims like this it only makes your position weak.

- in case anyone cares...| 4.9.09 @ 3:50PM

Dagney's brother's quotes from page 851 of my edition: Why shouldn’t I be given the fulfillment of my desires… Why should you be happy while I suffer? Oh, yes, the world if yours, you’re the one who has the brains to run it. Then why do you permit suffering in your world? You proclaim the pursuit of happiness, but you doom me to frustration. Don’t I have the right to demand any form of happiness I choose? Isn’t that what you owe me…? It’s your sin if I suffer! It’s your moral failure… therefore I’m your responsibility, but you’ve failed to supply my wants, therefore you’re guilty! All of mankind’s moral leaders have said so… who are you to say otherwise… you can’t be good, so long as I’m wretched. My misery is the measure of your sin. My contentment is the measure of your virtue.
I want this kind of world, today’s world, it gives me my share of authority, it allows me to feel important – make it work for me… You have the privilege of strength, but I – I have the right of weakness! That’s a moral absolute!”

Robert Rosencrans| 4.9.09 @ 6:10PM

Here are some facts you can delve into in reference to the scatological history at Fannie/Freddie. Second link was written in the year 2000 about the CRA and predicted exactly what happened.
http://www.realdemocracy.com/blamewho.htm
The Federal Housing Administration (FHA) was created as part of the National Housing Act of 1934. The goals of the organization are: to improve housing standards and conditions; to provide an adequate home financing system through insurance of mortgage loans; and to stabilize the mortgage market. In 1965, the FHA became part of the Department of Housing and Urban Development (HUD). FHA insurance premiums are paid by homeowners, which are included in monthly payments, and it the only government agency that is completely self-funded and comes at no cost to taxpayers.

The total number of FHA loans fell from 19 percent in 1996 to 6 percent in 2005, with almost all of the decline occurring since 2001.

If government had done nothing further, and not created the housing/mortgage monsters that followed the creation of the FHA, this mortgage/financial meltdown would not have happened. Government-driven mortgage financing, turned creative financing and the easy-money mortgage madness for unqualified homebuyers simply created mortgage and finance monsters, which threaten the entire economy.

The Federal National Mortgage Association (Fannie Mae) was created in 1938 as a government agency by FDR' New Deal to provide liquidity to the mortgage market. For the next thirty years, Fannie Mae held a virtual monopoly on the secondary mortgage market.

In 1968, LBJ removed Fannie Mae from the annual balance sheet of the federal budget and converted it into a private corporation. The guarantor of government-issued mortgages was transferred to the new Government National Mortgage Association (Ginnie Mae)

The Emergency Home Finance Act of 1970 created Freddie Mac. The goal was to create a seconday market for conventional mortgages, as indicated in the Fannie Mae charter.

In 1977, Former President Jimmy Carter created the Community Reinvestment Act (CRA) which was passed by the 95th Congress to increase affordable housing, despite opposition from the banking community.

In 1992, the regulator of Fannie Mae was critically weakened by the actions of Congressional Representative Barney Frank. The agency was required to get its budget approved by Congress, while agencies that regulated banks set their own budgets. That gave congressional allies an easy way to exert pressure. In the late 1990's, under the direction of the Clinton Administration's relaxing of lending standard, the then Fannie Mae CEO Franklin Raines relaxed lending standards to allow subprime borrowers to obtain loans.

In 1995, President Clinton's administration revised Community Reinvestment Act (CRA) regulations that allowed mortgage lenders like Countrywide, that do not mitigate loan risk with savings deposits as do traditional banks using the new subprime authorization, which is known the secondary mortgage market. The revisions allowed securitization of CRA loans containing subprime mortgages, which were first started by Bear Sterns in 1997. The number of CRA mortgage loans increased 39 percent between 1993 and 1998, while other loans increased only 17 percent. Other rule changes gave Fannie Mae and Freddie Mac extraordinary leverage, allowing them to hold just 2.5% of capital to back their investments, as opposed to 10% for banks. By 2007, Fannie Maw and Freddie Mac owned or guaranteed nearly half of the $12 trillion U.S. mortgage market.

In 2003, the Bush administration proposed changes to move governmental supervision of Fannie Mae and Freddie Mac under a new agency created within the Department of the Treasury. Spearheaded by Representative Barney Frank, the proposal was defeated. Frank said, "Theses two entities -- Fannie Mae and Freddie Max -- are not facing any kind of financial crisis, the more people exaggerate these problems, the more pressure there is on these companies, the less we see in terms of affordable housing."

The CRA, the Clinton Administration and Representative Barney Frank encouraged risky lending, and put pressure on banks and mortgage lenders such as Countrywide, which caused the subprime mortgage crisis.

As Chairman of the House Financial Services Committee, Barney Frank sits at the center of power. Frank knew that his defense of the failed mortgage system was catching up with him, so he steered a major housing relief bill of 2008, which aimed to protect thousands of homeowners from foreclosure by falling back on FHA to substantially increase its insurance of home loans, including 2,3 and 4 unit dwellings. The increase in insured loans allows homeowners to re-finance bad loans or to purchase new homes if they had lost their homes to foreclosure. And Frank was at the forefront of House approval of the $700 billion taxpayer bailout of the financial train wreck that he substantially engineered.

Here's an article that was written in 2000 that predicted the entire debacle.

http://www.city-journal.org/html/10_1_the_trillion_dollar.html

Looking into the future gives further cause for concern: "The bulk of these loans," notes a Federal Reserve economist, "have been made during a period in which we have not experienced an economic downturn." The Neighborhood Assistance Corporation of America's own success stories make you wonder how much CRA-related carnage will result when the economy cools. The group likes to promote, for instance, the story of Renea Swain-Price, grateful for NACA's negotiating on her behalf with Fleet Bank to prevent foreclosure when she fell behind on a $1,400 monthly mortgage payment on her three-family house in Dorchester. Yet NACA had no qualms about arranging the $137,500 mortgage in the first place, notwithstanding the fact that Swain-Price's husband was in prison, that she'd had previous credit problems, and that the monthly mortgage payment constituted more than half her monthly salary. The fact that NACA has arranged an agreement to forestall foreclosure does not inspire confidence that she will have the resources required to maintain her aging frame house: her new monthly payment, in recognition of previously missed payments, is $1,879.

Even if all the CRA-related loans marketed by nonprofits were to turn out fine, the CRA system is still troubling. Like affirmative action, it robs the creditworthy of the certain knowledge that they have qualified by dint of their own effort for a first home mortgage, a milestone in any family's life. At the same time, it sends the message that this most important milestone has been provided through the beneficence of government, devaluing individual accomplishment. Perhaps the Clinton White House sees this as a costless way to use the banking system to create a new crop of passionate Democratic loyalists, convinced that CRA has delivered them from an uncaring Mammon—when, in all likelihood, banks would have been eager to have most of them as customers, regulation or no.

CRA also serves to enforce misguided views about how cities should develop, or redevelop. Consider the "investment" criterion—the loans to commercial borrowers rather than individual home buyers—that constitutes 25 percent of the record on which banks are judged in their compliance review. The Comptroller of the Currency's office makes clear that it is not interested in just any sort of investment in so-called underserved neighborhoods. Investment in a new apartment building or shopping center might not count, if it would help change a poor neighborhood into a more prosperous one, or if it is not directly aimed at serving those of low income. Regulators want banks to invest in housing developments built through nonprofit community development corporations. Banks not only receive CRA credit for such "investment"—which they can make anywhere in the country, not just in their backyard—but they also receive corporate tax credits for it, through the Low Income Housing Tax Credit. Banks have little incentive to make sure such projects are well managed, since they get their tax credits and CRA credits up front.

This investment policy misunderstands what is good for cities and for the poor. Cities that are alive are cities in flux, with neighborhoods rising and falling, as tastes and economies change. This ceaseless flux is a process, as Jane Jacobs brilliantly described it in The Economy of Cities, that fuels investment, creates jobs, and sparks innovative adaptation of older buildings to new purposes. Those of modest means benefit both from the new jobs and from being able to rent or purchase homes in once-expensive neighborhoods that take on new roles. The idea that it is necessary to flash-freeze certain neighborhoods and set them aside for the poor threatens to disrupt urban vitality and the renewal that comes from the individual plans and efforts of a city's people.

But keeping these neighborhoods forever poor is the CRA vision. CRA will help virtually any lower-income family that can come close to affording a mortgage payment to purchase a home, often in a non-poor neighborhood. Thanks to CRA-driven bank investment, poor neighborhoods would then fill up with subsidized rental complexes, presumably for those poor families who can't earn enough even to get a subsidized, easy credit mortgage. The effects of all this could be to undermine lower-middle-class neighborhoods by introducing families not prepared for home ownership into them and to leave behind poor neighborhoods in which low-income apartments, filled with the worst-off and least competent, stand alone—hardly a recipe for renewal.

It will take a Republican president to change or abolish CRA, so firmly wedded to it is the Clinton administration and so powerfully does it serve Democratic Party interests. When Senator Gramm attacked the CRA for its role in funding advocacy groups and for the burden it imposes on banks, the Clinton administration fought back furiously, willing to let the crucial Financial Services Modernization Act, to which Gramm had attached his CRA changes, die, unless Gramm dropped demands that, for instance, CRA reviews become less frequent. In the end, Gramm, despite his key position as the chairman of the Senate Committee on Banking, Housing and Urban Affairs (even the committee's name reflects a CRA consciousness) and his willingness to hold repeal of the Glass-Steagal Act hostage to CRA reform, could only manage to require community groups to make public their agreements with banks, disclosing the size of their loan commitments and fees.

A new president should push for outright abolition of the CRA. Failing that, he could simply instruct the Treasury to roll back the compliance criteria to their more relaxed, pre-Clintonian level. But to make the case for repeal—and ensure that some future Democratic president couldn't simply reimpose Clinton's rules—he might test the basic premise of the Community Reinvestment Act: that the banking industry serves the rich, not the poor. He could carry out a controlled experiment requiring no CRA lending in six Federal Reserve districts, while CRA remains in force in six others. A comparison of lending records would show whether there is any real case for CRA. In addition, CRA regulators should require nonprofit groups with large CRA-related loan commitments to track and report foreclosure and delinquency rates. For it is these that will reflect the true threat that CRA poses, a threat to the health of cities.

The Community Reinvestment Act funnels billions to left-wing activists, while threatening to destabilize lower-middle-class neighborhoods.
City Journal Winter 2000.
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Truth to Power| 4.9.09 @ 6:26PM

Bomb throwing Bob stumbles around like a drunk knocking over strawmen and thinks that he is a great reasoner. I like polite moderates and independents. Some of my best friends are such. Sometimes they make convincing arguments. Bob is neither polite nor a moderate and the only people that seem to like his arguments have been his fellow libtrolls. He is a rude undercover libtroll. This makes him a liar and frankly so transparrent that he can't be very intelligent.

Interested Conservative| 4.9.09 @ 7:07PM

Bob - A question about this line of yours: "The Republican party is the smallest it has been in modern history."

How old are you? By my reckoning, the lowest point for the GOP since 1980, is somewhere around 5-10 points higher than many, many points of its standing for the 50 years preceding 1980.

Sure, it has problems, and so do the democrats - that's why we have a two-party system. Will the dems coalition thrive beyond next month, next year, 2012? Doubtful.

The GOP already has regained most, if not all of its most recent swoon in the polls, in just a few months since the 08 elections.

Could it foul up some more? Absolutely, but without effect since it presently has no power.

Almost everything the dems do for the next year and a half will have certain and visible effects.

I'm waiting for them to start targeting GOP governors - see if they go after Arnold, or Crist - that will show some desperation. Also on immigration (though I agree with some of what they want on the issue) simply trying to create new voters is not particularly a sign of strength.

Finally, they'll reach the horns of the dilemma in choosing between benefiting the few (labor, teachers unions) and the many (free trade, "change" for schools) which will disaffect some large bloc.

After 2012 they won't hold both the WH and Congress, and perhaps neither.

Interested Conservative| 4.9.09 @ 7:16PM

Bob - I'm also intrigued by your comment on the roles of Fannie and Freddie. I suspect they are the major role in this, even if only in the 30% range of defaulting derivatives.

That's huge and concentrated - a lethal combination. It begs the question of why they should exist in the first place and how they got to be to big to fail. They certainly don't have the same defense as the purely commercial enterprises - i.e. decades of growth and success.

Look at the very hearings you cite, and the famous videos of Reps. Frank and Waters essentially dismissing any underwriting standards.

Barney bears plenty of responsibility, and deflecting and disclaiming it entirely is what makes him look arrogant, but that's a fairly common and non-partisan trait.

Aussie Example| 4.9.09 @ 7:42PM

In Australia, when a borrower takes on a mortgage from a bank or other lender, he or she is wholly responsible for paying back the amount borrowed. I believe in the US a defaulter simply has to hand back the keys to the bank and the debt is forgiven. Here in Australia (and the UK I believe) if your property sinks to below the value of the mortgage, then the borrower still has to find that money to make up the difference! This results in people with negative equity, and still owing a debt to banks after foreclosure. This process tends to instill a measure of personal responsibility in the case of the borrower, in place of the reckless of the US approach, where people can simply shrug, hand back their keys (and unpaid debt) with no further responsibility.

Falcon46| 4.9.09 @ 8:48PM

I think Mr. Klein’s article misses the point on the underlying issues we are facing in this economic crisis. Reader’s here could do worse than read books like Warburton’s “Debt and Delusion”, McChesney’s “Money for Nothing: Politicians, Rent Extraction, and Political Extortion” and DeLorenzo’s “How Capitalism Saved America.” Unless we have an informed public that participates at the primary election level we are doomed to ever more intrusive Big Government Statism (BGS) from both major parties.
Free market Capitalism (FMC) was being undone from the start by Alexander Hamilton and his ilk, then the TRoosevelt-to-Wilson era savaged capitalism in major ways and then FDR got his way with BGS in his second term by reenacting (more discretely) much of what had been declared unconstitutional in his first term. What we are left with today is just a hollow shell of what FMC should be.
To those who say the CRA and Freddie Mac/Fannie Mae GSE’s were major factors; well they played their small part. But they were just the visible part of the political extortion and mayhem that McChesney addresses in “Money for Nothing.” In the background, the Federal Reserve was intimidating the banking industry in the same way on a much larger scale than the CRA and its lawyers. See the Boston Fed’s 1992 publication “Closing the Gap: A Guide To Equal Opportunity Lending.” And in parallel the FED was inflating the money supply, creating easy credit and lowering interest rates that lead to the NASDAQ and housing market bubbles. One has to ask why companies would any longer seek to raise capital from the stock market when they can get it much cheaper from the FED/banking system printing presses. From this follows the conclusion that the common man in the United States is today supposed to be just a consumer, who is not allowed to participate in wealth creation.
The truth is the FED is not independent and doesn’t fight inflation. It uses its unchecked and unconstitutional power to make money for the people who own it, offers cover for the political elites that are in power, creates inflation, is destroying capital in this country in a way that means we produce less and less of anything the rest of the world wants, and acts as a total monopolistic power over our money and financial system from which there is currently no escape.
Until we say “no more,” until we fight to properly educate our young, until we substitute an economics text into our universities like Reisman’s “Capitalism” for the Keynesian trash in economic textbooks like Samuelson-Nordhaus or McConnell’s “Economics”, until we force a truly honest civics course back into our government school classrooms that includes the works of Hayek, Sowell, DeLorenzo, Woods, Skousen, Powell, etc., until we get rid of the FED and back to constitutional control of our money, until we reassert our moral sovereignty over our government, we are doomed to suffer the tyranny of big government statism inflicted by a political and monetarist elite enabled by a willfully ignorant public majority. The questions that Klein raises in this article are just so much media noise that miss the real issues.

Elrond Hubbard| 4.10.09 @ 3:22AM

This magazine, along with other conservative outlets, has rightly documented how a raft of government policies, some dating back decades, (To Reagan)... etc etc

Everything else in his essay is masturbation and nonsense. But the Reagan part is true.

NoSurprises| 4.10.09 @ 3:25AM

Lern 2 math.

EMB| 4.10.09 @ 4:58AM

Amazing dyslexia: "whereas when government control over the economy is taken to the extreme, we end up with Lenin, Stalin, and Mao". History (and logic) turned exactly on its head....

Rocket Mann| 4.10.09 @ 4:59AM

You were a naive child, and still are. Dont beat yourself up, but you dont get a thing. *pats your head*

Picnic at Hanging Rock| 4.10.09 @ 5:11AM

Aussie Example

Yorue bicurious too, arent you...

The last orange roughy| 4.10.09 @ 6:02AM

Judging from this thread, a large number of Americans are completely insane and are going to destroy the planet with their grotesque, monstrous and childish egotism, selfishness, arrogance and lack of empathy and solidarity, backed up by vast armies and the power to inflict your so-called freedom on everyone and everything else on this doomed planet. Cheers.

Robert Rosencrans| 4.10.09 @ 8:26AM

Someone noted that I had the wrong year in the article above. The quote by Senator Dodd was from July 2009, stating nothing was wrong at Fannie/Freddie, etc. In September 2009, less then 90 days later, the government took over both institutions. The point is that government corruption lessens the opportunities for capitalism, only promoting opportunities for mafia like activities. Here's a little more on the subject.
http://www.liveleak.com/view?i=22a_1232744022&c=1

Nothing could more painfully demonstrate what is wrong with Congress than the current financial crisis.

Among the Congressional “leaders” invited to the White House to devise a bailout “solution” are the very people who have for years created the risks that have now come home to roost More...

Five years ago, Barney Frank vouched for the “soundness” of Fannie Mae and Freddie Mac, and said “I do not see” any “possibility of serious financial losses to the treasury.”

Moreover, he said that the federal government has “probably done too little rather than too much to push them to meet the goals of affordable housing.”

Earlier this year, Senator Christopher Dodd praised Fannie Mae and Freddie Mac for “riding to the rescue” when other financial institutions were cutting back on mortgage loans. He too said that they “need to do more” to help subprime borrowers get better loans.

In other words, Congressman Frank and Senator Dodd wanted the government to push financial institutions to lend to people they would not lend to otherwise, because of the risk of default.

The idea that politicians can assess risks better than people who have spent their whole careers assessing risks should have been so obviously absurd that no one would take it seriously.

But the magic words “affordable housing” and the ugly word “redlining” led to politicians directing where loans and investments should go, with such things as the Community Reinvestment Act and various other coercions and threats.

The roots of this problem go back many years, but since the crisis to which all this led happened on George W. Bush’s watch, that is enough for those who think in terms of talking points, without wanting to be confused by the facts.

In reality, President Bush tried unsuccessfully, years ago, to get Congress to create some regulatory agency to oversee Fannie Mae and Freddie Mac.

N. Gregory Mankiw, his Chairman of the Council of Economic Advisers, warned in February 2004 that expecting a government bailout if things go wrong “creates an incentive for a company to take on risk and enjoy the associated increase in return.”

Since risky investments usually pay more than safer investments, the incentive is for a government-supported enterprise to take bigger risks, since they get more profit if the risks pay off and the taxpayers get stuck with the losses if not.

The government does not guarantee Fannie Mae or Freddie Mac, but the widespread assumption has been that the government would step in with a bailout to prevent chaos in financial markets.

Alan Greenspan, then head of the Federal Reserve System, made the same point in testifying before Congress in February 2004. He said: “The Federal Reserve is concerned” that Fannie Mae and Freddie Mac were using this implicit reliance on a government bailout in a crisis to take more risks, in order to “multiply the profitability of subsidized debt.”

Chairman Greenspan added his voice to those urging Congress to create a “regulator with authority on a par with that of banking regulators” to reduce the riskiness of Fannie Mae and Freddie Mac, a riskiness ultimately borne by the taxpayers.

Fannie Mae and Freddie Mac do not deserve to be bailed out, but neither do workers, families and businesses deserve to be put through the economic wringer by a collapse of credit markets, such as occurred during the Great Depression of the 1930s.

Neither do the voters deserve to be deceived on the eve of an election by the notion that this is a failure of free markets that should be replaced by political micro-managing.

If Fannie Mae and Freddie Mac were free market institutions they could not have gotten away with their risky financial practices because no one would have bought their securities without the implicit assumption that the politicians would bail them out.

It would be better if no such government-supported enterprises had been created in the first place and mortgages were in fact left to the free market. This bailout creates the expectation of future bailouts.

Phasing out Fannie Mae and Freddie Mac would make much more sense than letting politicians play politics with them again, with the risk and expense being again loaded onto the taxpayers.

Bob| 4.10.09 @ 11:18AM

IC -- regarding the size of the Republican Party, it is the smallest in MODERN history, i.e., since Reagan. You are certainly correct that it was smaller during the 50 year preceding Reagan. However, this last election was devastating for the size of the party for several reasons. First, the size dropped from 36% of voters to 29% while Democrats increased from 36% to 39%. Self identified social conservatives represent 18% or so of voters. There is a schism between social conservatives and regular Republicans which accounts for the lowest percentage of minorities in the party as well as the average age of Republicans increasing. Therefore, demographics is working against the future of the party. Younger voters, by a very high margin, are pro-choice and don't have a problem with gay marriage. In fact, in the younger demographic, 78% of that group think that gay marriage is fine. These types of opinions historically do not change over time. From a statistical perspective, we are well into a generational change. That is why no logical/rational poll would take the point of view that the party should accept the values of the increasingly irrelevant social conservative base. The smart conservatives like Frum, Brooks, etc., can't overlook the data.

Furthermore, I don't see your data in Republican Party approval ratings. While Obama is at about 66%, the Republican Party is at 31%, the lowest in 25 years. You might hear from Rush/Hannity/Beck that the party is doing well, but I haven't seen that confirmed in the majority of polling.

Regarding Fannie and Freddie, you are mixing up two values. They had 30% of the subprime mortgages, but these were of far better quality than subprime mortgages in general because of their standards. They do not have 30% of the derivatives, as these contain both prime and sub-prime mortgages. Fannie and Freddie doesn't own derivatives, they own mortgages. Furthermore, these are not highly leveraged. Their default rate has caused the problem, however, when you don't have 30:1 leverage, it's not anywhere near as bad. To give a perspective, a $1 loss for Fannie/Freddie is equal to a $15 loss for Bear/Sterns which is equal to a $50 loss for AIG. The effect of leverage is great when your underlying security is up, but when it goes down, you lose by the same percentage. AIG's swaps basically put a bottom collar around the leveraged investment.

With regard to Barney Frank, etc., remember that Republicans had control of Congress and the White House at the relevant timeframes. If it was the right thing to do, all it took was a majority vote by Republicans. Was Frank wrong? Absolutely, and he deserves corporal punishment for that. However, he was not in charge until 2007 -- long after any changes would have done any good. I just don't see how you can rationally come to the conclusion that he had so much power over all of those Republicans and the White House to fully control government.

I happen to agree with Rosencrans on this one that Fannie and Freddie should be totally private enterprises with no government backing. Getting government out of the mortgage industry (i.e., limited government) is always the right thing to do. However, he also continues to blame this on the CRA, Frank and Dodd, and does not blame the people who were actually in power and refused to do anything about it. EVERYONE was wrong, but Republicans were in complete power. This problem was set in stone by 2006. What any of these guys did after that had no effect on the current crisis -- it was a done deal. In fact, AIG stopped making swaps in 2006. That is the difference between using facts and data versus blowing off steam.

Crackerjack Joe| 4.10.09 @ 11:26AM

Facts are not blame, facts are facts. Sorry, those are the facts, Jack.

Bill Hussein O'Stalin| 4.10.09 @ 11:31AM

Here's something interesting. Apparently 5.5 million illegal aliens also got some of those CRA loans. When you consider that called for a commitment of over 4.2 trillion dollars, that could explain an economic smack down.
http://www.vdare.com/sailer/090215_cra.htm

When measured in terabucks, the Community Reinvestment Act was negligible until the 1990s. And it was still small potatoes until the Clinton “reforms” of 1995 and the rise of well-organized pressure groups of the kind affiliated with the NCRC.

But the biggest flood of CRA assurances came during the presidency of George W. Bush, who repeatedly called in 2002-2004 for 5.5 million more minority homeowners by 2010. Cumulative bank pledges (typically doled out over ten years) grew from $1.85 trillion in 2002 to $4.20 trillion in 2004.

Indeed, total CRA commitments increased by $1.63 trillion in 2004 alone, the first year of the Housing Bubble.

For the benefit of overseas readers for whom the words “billion” and “trillion” mean different things than they do for American readers, let me spell that last bit out as if I was writing it on a check. In 2004 alone, banks publicly promised to lend over the next decade to CRA-qualified minority and lower income neighborhoods the sum of $1,630,000,000,000.00.

That’s a big number.

And those kind of numbers put a lot of upward pressure on home prices as they got incorporated into expectations. Not surprisingly, the subsequent mortgage defaults that plunged the world into economic crisis are disproportionately concentrated in CRA-covered minority and lower income communities.

Using the NCRC’s data, I created this more readable graph to show CRA agreements by year from 1977-2004:

The CRA gives community organizers leverage over banks primarily when they request federal regulatory approval to merge. As the NCRC explains:

1998 was a year of mega-mergers that included the Bank of America and Nations Bank merger as well as Citigroup’s acquisition of Travelers; CRA pledges totaled $812 billion dollars as a result. … CRA pledges shot up again in 2003 and particularly in 2004. The year 2004 experienced watershed mega-mergers as Bank of America acquired Fleet, JP Morgan Chase acquired Bank One, and Citizens gobbled up Charter One.

Landmark CRA commitments during these years included:

The $430 billion pledged in 1997 by Travelers (now part of zombie bank Citigroup—indeed, total pledges by various fragments of Citigroup add up to just under one trillion dollars).
*

The $375 billion anted up when buying Dime Bank in 2001 by Washington Mutual (which, after a bank run last fall, was bought up cheap by the now ailing JPMorgan Chase);
*

And the $800 billion promised by JPMorgan Chase upon its acquisition of Bank One in 2004.

Some of the $4.2 trillion in the NCRC’s tabulation is no doubt double-counted. For example, WaMu shows up three times in the list of CRA commitments:

* In 1997, when it outbid Home Savings in a CRA pledgeathon to acquire Great Western by offering $75 billion in inner city lending over ten years (versus Home Savings cheapskate $70 billion CRA offer).

* In 1998 when it pledged $120 billion when buying Home.

* And in 2001 when it proclaimed $375 billion when buying Dime.

So WaMu accounts for $570 billion in the NCRC’s list of pledges, but if you prorate the various amounts, it’s really more as if WaMu promised, say, $418.5 billion over 14 years.

Nevertheless, despite the NCRC’s double-counting, much is left out of its $4.2 trillion figure too. For example, CRA commitments have continued since NCRC’s 2005 report. In 2008, Bank of America, another walking undead Red Ink Giant, pledged $1.5 trillion in CRA lending to get federal approval for its purchase of Countrywide Financial.

Nor is Countrywide’s 2003 pledge of $600 billion counted by NCRC.

In case you are wondering, the $4.2 trillion number does not include the trillions targeted by Fannie Mae and Freddie Mac to buy up minority and lower income mortgages on the secondary market.

Please keep in mind, as I explained two weeks ago in VDARE.com, that the CRA didn’t hold a gun to the head of Kerry Killinger of WaMu or Ken Lewis of Bank of America and force them to lend hundreds of billions to likely deadbeats.

No, the CRA has contributed to the mortgage disaster through a more subtle “selection effect”.

Assume there are two distinct kinds of bankers:

* Optimists who think lending more money to CRA-approved folks will turn out to be profitable.

* Pessimists who don’t.

Of course, there are always a lot of people in the middle without strong opinions who will go with the flow toward whichever camp seems to be gaining in money, power, and popularity.

If you were a Pessimist who didn’t believe that the government’s favored borrowers were likely to pay their mortgages, the CRA couldn’t make you lend to them. But if you didn’t play ball with the CRA, you couldn’t buy other banks, which is the easiest way for a bank to get big.

And the CEOs of big banks get paid more:

" ’There continues to be a high correlation between CEO compensation and bank asset size, and no correlation with three-year [earnings-per-share] growth and shareholder returns,’ Citigroup banking analyst Ruchi Madan wrote in a May 6, 2005 report on bank executive pay.”[Are reforms working? Experts say link between pay, performance is lacking, By Len Boselovic, Pittsburgh Post-Gazette, May 15, 2005]

See how it works?

Not surprisingly, over the years the CRA’s chokehold on mergers changed the culture of banking. The most powerful and highest paid executives publicly saluted the CRA, while the CEOs who thought it was politically correct nonsense were relegated to the sidelines in the great game of mergers and acquisitions.

The optimists who agreed with Presidents Clinton, Bush, and Obama that “underserved” minorities would somehow come up with the scratch to pay off their mortgages were allowed to build empires, while the pessimists were not. Those in the middle camp went with the flow and started believing the CRA propaganda.

Q. Whom do we want to win: the Optimists or the Pessimists?

A. Neither! We want a financial system in which the realists succeed and wind up in positions of power. Whether the realists will turn out to be this moment’s Optimists or the Pessimists is not something we should decide ahead of time.

But, that’s exactly what the Community Reinvestment Act does. It puts the government’s thumb heavily on the scale on the side of the Optimists, with, as we’ve seen, catastrophic results.

It’s time to repeal the CRA.

And it’s long past time to recognize the reality of human differences.

In 2006, commenting on Iraq, I wrote:

“Not for the first time, our public class’s refusal to think rationally about race and ethnic differences had resulted in bad—in this case, catastrophic—public policy.”

But even I didn’t realize our public class’s dogma was about to bring down the entire world economy.

The bottom line: in the words of science fiction writer Philip K. Dick:

"Reality is that which, when you stop believing in it, doesn't go away."

Bob| 4.10.09 @ 12:28PM

Hussein, that is a very objective article that you posted and I cannot disagree with the facts. It's important for people to understand that it was the Republicans and Bush that really made this take off. That said, the Dems were right with them. But they had different motivations. Republicans were enamoured with Wall Street, the theory of an "ownership" nation, and the rise in the economy. The Dems were taken by giving minorities loans.

What the article does not do is to take the next step and relate the CRA to the financial crisis. As long as foreclosures did not result in lower home values, the financial risk of a failed mortgage was very small as the foreclosed home could be sold for close to the value of the mortgage. Therefore, from a purely analytical basis, it was not much of a risk to give a loan to someone who could not afford it. This had the short term advantage of sales commissions on the homes sold as well as commissions to mortgage brokers. When these were bundled and securitized, Wall Street earned big bucks on the sales of derivatives and swaps. As commissions mushroomed, so did the taxes these people paid.

Of course, this was not only true of CRA loans, but all mortgage loans for without prime loans, you couldn't bundle a high rated derivative. As long as housing prices rose, everything was fine. However, this certainly was a type of Ponzi scheme for as soon as prices dropped, these leveraged instruments failed in huge amounts.

Therefore, the problem here was not the CRA, but the housing bubble and what Wall Street did to take advantage of it. What they did was legal -- and that was the main problem. If Wall Street's capital reserves were regulated, just like the banks, the CRA would have been anywhere near as "successful" as the demand for derivatives would have been lower and therefore there would not have been as much capital available for such loans.

That said, the much bigger portion of the problem was that loan originators -- most of them highly regulated -- were allowed to create loans and sell off the risk. As long as the risk could be securitized, they could lower the quality of the loans. None of this would have happened, CRA or not, if originators had been required to keep a significant portion of the risk. This would have forced originators to make a profit on the loan itself -- not just the sale of the loan.

That's why blaming the CRA doesn't make much sense when it comes to this financial crisis -- it was not the source of the problem. The fact that it was not used that much prior to the creation of derivatives proves that. That said, I would agree that the CRA hurt our society more than helped as it is never a good idea to give loans to people who cannot afford them. Regulation would have helped here as well.

James Wilson| 4.10.09 @ 4:37PM

Your point about bad capitalists giving capitalism a bad name is well taken; and no doubt many of the villains of the piece were Republicans and even conservatives. I still think that the underlying problem lies on the leftward side of the political spectrum.
My uncle is a hard-core libertarian and I once almost gave him a heart attack by asserting that I think Ayn Rand is a borderline socialist. Certainly libertarians in general would take umbrage with that characterization but I believe it to be true. People tend to look at socialism as an ecomonic system but it isn't; it's a religious system. Randism is similar in every way except how the market should be treated. 'Capitalism' is just plain old economics; the 'Capitalist system' should just be called the economic system. One of the underlying beliefs of Adam Smith and the whole Scottish Enlightenment was argued openly by Burke, and it is anathema to idealism whether socialist, marxist or libertarian: people cannot be perfected, and any system they create will be imperfect.
We've seen the utter failure of 'pure reason' over the last few centuries. Scientific socialism and racial socialism fared even worse. The problem with all of these systems, and Jeffersonian libertarianism too, is the common thread: romanticism. This is the problem too that contributed to the current mess; we romanticized the Wall Street 'masters of the universe,' we romanticized the entrepreneur, just as we've romanticized actors and singers to the point of blinding stupidity. Whether you over-glorify race, or class, or talent, or wealth, the problem is in the idealization of what is simply not ideal, and what's more, never will be.
Nobody who as actually read Adam Smith would believe he advocated 'anything goes' Capitalism, but his conclusions are too practical, not nearly romantic enough to suit most people. We have armies of people all over the world dedicated to the belief that they can fix anything with reason or science or proper racial balance or by stamping out other religions, or by putting the 'proles' in charge, and even by leaving everything to be decided by rugged individualists. They're all making the same mistake in imbuing whichever system they like with superhuman powers that can only be harmed by the perfidy of some unaccountably evil conspiracy.
Our system was designed to be economic, just as our government was designed to be federalist. In both cases that means diffusion of authority. The trend in America has been in both cases centralization of authority for generations. All that does is makes little issues much bigger. A tiny stone thrown into a big pond makes ripples, but if the stone grows faster than the pond you can empty the thing. Economics as well as a federal republic are all about diffusion and balance. Good luck with the political slogan "Restore the Balance!" though.

Black Saint| 4.10.09 @ 4:58PM

Excellent article!

SocialEngineer| 4.10.09 @ 8:22PM

Fraud and a twisted incentive system are at the root of most aforementioned problems, but receive the least attention. Incentives are what made bankers, insurers, credit rating agencies, and politicians act the way they did. Recklessly looting private and public value is fraud. Companies and persons who defrauded investors and the public should definitely be held accountable. While the politics and laws created an environment ripe for plunder, it is the plunderers who acted solely in their best interest, at the expense of everyone else.

Where's the tea party?| 4.10.09 @ 9:56PM

I just found out about a hidden tax increase. I can no longer deduct my student loan interest. Apparently an income of greater than $115,000 is the new definition of rich - at least when it comes to student loans. I finally start to get ahead, and they start to take more and more!

Draconis| 4.11.09 @ 12:01AM

"The Community Reinvestment Act, which was originated during the Carter administration and updated by President Clinton, encouraged more lending to those with patchy credit histories. "

Well, yes. Sort of.

The central document ot the Mortgage Follies is the summarizing 1998 Boston FRB paper "Closing the Gap: A Guide to Equal Opportunity Lending", adopted as policy by the United States government and including in the Appendix the several pertinent laws, including CRA 1977.

"Closing the Gap" reiterated the federal law that mandated mortgages for the unqualified, and gave detailed instructions on how to "qualify" unqualified mortgage borrowers. So, the bankers were required, under penalty of law, to make loans to unqualified borrowers and the government said that it was right and proper for these mortgages to be given.

You may think that the bankers were "greedy", but they were subject to financial penalties if they were not "greedy". The same argument can be applied to the rating agencies and the insurance CDSs. The same argument can be applied to Merrill Lynch and General Electric. They all jumped on the bandwagon because it was profitable and the government explicitly approved. The government had already declared that loans to the unqualified were right and proper, so who was AIG or Moody or Merrill Lynch or GE to deny government policy and law? Moody-rated and AIG-insured mortgages were highly sought after as investments precisely because the government had declared that they were right and proper, and besides, you could be fined if you refused to give mortgages to the unqualified.

The probable cost to correct the mortgage problem before the worldwide markets meltdown was probably $1 trillion. Compare that to the $2.5 trillion drop in the NASDAQ during the last year of the Clinton Administration and the $6.6 trillion dollar cost of LBJ's War on Poverty. We repeatedly go through Democratic Party-induced catastrophes, and repeatedly have to clean up the Democrats' messes.

Republicans view these catastrophes as problems to be solved; Democrats view these catastrophes as opportunities to be exploited. The suspicion is rising that Democrats create these catastrophes for political advantage. This is, in fact, a common tactic in Marxist revolution.

Sticking taxpayers with trillions of dollars of debt might seem cynical, but hey, it works.

Dracomis| 4.11.09 @ 12:35AM

Bill -

Good take. Two items:

"Not surprisingly, the subsequent mortgage defaults that plunged the world into economic crisis are disproportionately concentrated in CRA-covered minority and lower income communities. "

When we started giving mortgages to the unqualified poor, the relaxed lending standards were applied to everyone, i.e., lower down payments, lower income requirements. Some very high-priced real estate went to some relatively well-off buyers. When the values of such real estate went south, many buyers had almost no money invested and owning an underwater mortgage. This is the case in Florida, Nevada, and California, where there are many non-minority, non-lower income communities.

"No, the CRA has contributed to the mortgage disaster through a more subtle “selection effect”.

There is nothing subtle about ACORN holding in-your-face demonstrations in lending institutions and in the halls of congress demanding mortgages for the unqualified. How do you think the Community Organizer-in-Chief made his reputation?

Jeremy Janson | 4.11.09 @ 1:17AM

"Let he who is without sin cast the first stone."

Not usually used in this context, but a corollary would be: "and where is government coming from?"

Jason Keuter| 4.11.09 @ 3:07AM

Klein misses a basic point about capitalism and government: namely, that people will always act on whatever incentives exist. When the government creates incentives, you cannot berate people for responding to them. Thus, the capitalists do not share the blame in this case.

A more obvious point is that while the capitalists were playing games with other people's money, those other people gave the capitalists their money to play with. Very few people really know much of anything about their investments and the people they hire to manage them. The real lack of oversight wasn't the absence of government oversight, it was the absence of investor oversight. In fact, the very presence of government oversight encourages people NOT to pay attention to their investments. Take away that oversight and most investors would realize that they need to watch where their money is going. Further, barring governmental oversight and regulation, the most successful firms will be those that establish a long term record of integrity.

The common thread in both of these comments is that the presence of governmnet encourages irresponsibility. Ultimately, the proponents of laissez-faire and limited government are willing to live in a just world, one that holds people accountable for their own actions. The complaints about the irresponsibility of financial firms are all premised on the delusional belief that you can stow away money, ignore it and ignore the people who invest it for you, and expect nothing but modest to high gains on into eternity.

Bob| 4.11.09 @ 6:12AM

Do any of you deal with data and facts or do you just make this up? If you don't make this up, do you just accept what ideologues say? Here's the results of a study that tackles the CRA issue:

Study Blames Lenders, Not Borrowers for Mortgage Mess
Homeowners more likely to default with subprime loans

October 15, 2008

Risky mortgage products, not risky borrowers, are the root cause of the mortgage default crisis, according to findings from a new study of default rates among low-income and minority home buyers conducted by the University of North Carolina at Chapel Hill's Center for Community Capital.

The results of the study show that home loan borrowers with similar risk characteristics defaulted at much higher rates when they borrowed subprime mortgages than when they received loans made primarily for Community Reinvestment Act (CRA) purposes.

"The results are timely given the frantic rush to identify culprits in the financial crisis and to develop policies to rescue and rebuild the mortgage market," says center director Roberto Quercia.

"These results show clearly that mortgages made using traditional affordable housing guidelines are holding up much better than subprime mortgages. Homeownership can remain an important and primary path to financial security for Americans, even among those of modest means, as long as home buyers have access to safe-and-sound mortgage products," he said.

The study, "Risky Mortgages or Risky Borrowers: Disaggregating Effects Using Propensity Score Models," compared the default rates of home mortgage borrowers with similar credit characteristics who received different loan products.

One group received loans through an affordable home mortgage program, called the Community Advantage Program (CAP), designed to expand homeownership among lower-income and minority homebuyers. The other group received subprime mortgage loans.

Researchers compared the default rate (90-day delinquency) within two years of origination. Borrowers with comparable characteristics who had subprime loans were three to five times as likely to go into default as those with CAP loans, the study found.

"By isolating different features of the loan products, we identified major causes of higher default rates," said lead author Lei Ding, a senior research associate at the center. The features most strongly associated with higher subprime defaults were adjustable interest rate, prepayment penalty and broker origination.

"The more you layer these features, the higher the likelihood of default," says Ding. By contrast, he says, CAP loans typically are fixed-rate, 30-year-amortizing loans without prepayment penalties, and are originated by banks using significant underwriting regarding the borrower's ability to repay.

Policymakers and industry-watchers alike can learn a great deal from this study, Quercia said. "It is crucial to draw a distinction between affordable-housing loans and the subprime loans that later flooded the market," he says. "Though these affordable home loans may have acted as a substitute for non-prime loans on the front end, they have performed starkly better in terms of safety and soundness for borrowers and lenders alike."

No wonder out party is in trouble. If you don't understand the problem, you can't fix it.

Jason, you miss the point. The "capitalists" (and I was one of them) did not break any laws, but they were rewarded on "sales", not "results". The boards of directors are part of capitalism and they didn't do their jobs regarding either compensation or investment value.

Banks are very highly regulated and have strict capital requirements. Money thus flowed to unregulated entities like investment banks, hedge funds, and insurance holding companies. Banks have capital requirements for a reason -- to protect investors on the downside. Non-banks did not have those capital requirements and thus any downturn was a problem. This is the fault of improper regulation. Investors can't make those decisions without transparency. Those companies are not required to have any transparency.

You don't need a lot of regulation, and certainly over regulation is an issue any free market capitalist is against. However, capital requirements and transparency are basics that allow the free market to work properly.

Robert Rosencrans| 4.11.09 @ 9:06AM

Claiming that CRA had nothing to do with the banking crisis is CYA by socialists and their supporters. Here's a good read.

http://www.ibdeditorials.com/IBDArticles.aspx?id=313718923222067
CRA Defenses Sound More Like CYA

By INVESTOR'S BUSINESS DAILY | Posted Tuesday, December 09, 2008 4:20 PM PT

Mortgage Meltdown: Democrats first circled the wagons around the Community Reinvestment Act, aided by their friends in the media. Now regulators have joined them. It's called CYA.

Four federal agencies enforce the CRA, a banking regulation whose original purpose of encouraging homeownership among the poor was well-intended. Abused by the Clinton administration, however, the act triggered the subprime crisis by relaxing lending standards across both the primary and secondary mortgage markets.

These agencies, which over the years have become entrenched in pushing the act, include the FDIC, Office of Thrift Supervision, the Comptroller of the Currency and the Federal Reserve. Top agency officials each took a turn Monday defending the CRA during a C-SPAN-covered panel discussion on the housing crisis.

OTS director John Reich insisted it "had absolutely nothing to do with the mortgage crisis." FDIC chief Sheila Bair said it was a "myth," adding that "it's really unfortunate that this is out there." "It's simply not true," she asserted. Next up was Comptroller of the Currency John Dugan, who agreed the CRA "certainly was not the cause of the subprime crisis."

Though they offered little evidence to support their assertions, a Fed governor released findings of a study the Fed did with the Brookings Institution to quash the idea the CRA encouraged high-risk subprime lending to uncreditworthy borrowers.

In a speech to the "Confronting Concentrated Poverty Policy Forum," Randall Kroszner asserted that CRA-mandated loans are "nearly as profitable" as conventional loans. He cited a 2000 Fed study on CRA loan performance.

A careful reading of the 99-page report finds evidence that seems to undercut his conclusion that CRA loans are just as safe. For example, the study found that "nearly 90% of large banking institutions report higher 30-89 day delinquency rates for CRA-related home lending than for overall home lending."

That little gem was left out of Kroszner's argument, along with this one: "CRA-related home loans do not appear to perform as well as other home loans when the analysis is conducted on a per CRA-dollar basis."

What do current data show? "Unfortunately," Kroszner said, "the available data on loan performance do not let us distinguish which specific loans in lower-income areas were related to the CRA."

In other words, he doesn't really know, and therefore can't clear the CRA. Still, promoting the CRA is "important," he said, "because neighborhoods and communities affected by the economic downturn will require the active participation of financial institutions."

Kroszner, who is on the board of an affordable-housing advocacy group in Washington, also neglected to mention the role of government-sponsored enterprises in mitigating the risk of CRA lending.

In a more aggressive pursuit of "social justice," the Clinton administration revised the CRA in April 1995 to mandate that banks pass lending tests in "underserved" communities and suffer tough new sanctions for failing to make enough loans there.

According to the language of the new Clinton regs, banks that used "innovative or flexible lending practices" to address the credit needs of low-income borrowers passed the test. Banks with poor CRA ratings were hit with stiff fines and blocked from expanding their operations. Soon, "flexible" lending became the norm, and banks used subprime loans, which charge higher interest rates, to cover the added risk.

But it wasn't enough. So Clinton ordered HUD to pressure Fannie Mae and Freddie Mac to buy the higher-risk loans from private banks and lenders, while adopting the same "flexible" credit standards. By 2000, HUD had mandated that low-income mortgages — including CRA-related loans — make up half of their portfolios.

To further spread the risk, Clinton legalized the securitization of such mortgages. In 1997, Bear Sterns securitized the first CRA loans — $385 million worth, all guaranteed by Freddie Mac. Thus began the massive bundling of subprime mortgages that wound up poisoning the entire industry.

The cause and effect is clear. As ex-Fed chief Alan Greenspan recently testified: "It's instructive to go back to the early stages of the subprime market, which has essentially emerged out of the CRA."

It strains credulity for top regulators to now say the CRA had "absolutely nothing" to do with the subprime crisis. It smacks of political spin and bureaucratic CYA.

Mary| 4.11.09 @ 11:00AM

I think James Wilson and Jason Keuter have the best posts on this thread because they deal with foundational issues.

My 401K is just a place where I drop some money every week. Its collapse left me non-plussed, as did its inflation. What was of real value in that package? I couldn't tell you. And it would take quite a lot of study -beginning with acquiring the basics- for me to be able to converse in any meaninful sense to my broker, whom I like and I know is good guy. He couldn't have protected me from the confluence of collapsing industries. That confluence, though I don't understand it, is apparent. And in my imaginings, I can't see how the money supply -a dollar with a real value- isn't deeply implicated. Again, foundational.

I'm not going to call myself a conservative -or any other label for that matter- anymore. It's a meaningless and secondary term.

Talented, energetic people, like the Founding Fathers, laid foundations. Talented and energetic people expected no guarantees, but were confident in the liberty to rise or fall on one's own merit and hard work.

When this is embraced -Protestant Ethic- the advance(s) are great and diffused. Once an egalitarian ethos begins to run roughshod over this, a decline begins to occur. It takes a long time for the bottoming out because certain cultural practices provide a protection against a steep, immediate decline.

Robert Heinlein said that the classification of liberal, conservative, communist, socialist, etc was not primary. The primary differntiation was between those who wanted to control people, and those who didn't.

At 50 plus a couple, and looking possibly at being laid off in a couple of months, I'm not going to panick. Can I pay $200-3oo/mo for my own health care. I bet I can if I watch every penny. I know not everyone can do this, but that's not the point.

The point is that if I decide not to do that. To take a risk. If I come down with some dreaded disease, what gives me the right to demand a doctor treat me, and that someone else foot that bill?

In '87, I worked in shipping and receiving. Very low paying job. Just a few cents more than minimum wage. I carried my own Blue Cross/ Blue Shield policy. It had a $500/deductible and an 80/20 coverage after that. Stricly business in that I could go to any doctor in the US, if I needed to. It cost me $45/mo. It was pretty easy to come up with that money even at my low wage.

Culture and economics are not separable, and that's a problem for both conservatives and liberals. I have come to see that liberals who decry the bureaucrat in the bedroom think nothing of his presence in the examining room with your doctor. They accept it as some sort of necessary evil, based on what they consider to be right and wrong or good and bad.

Bob| 4.11.09 @ 11:16AM

What strains the credulity, Rosencrans, is why you don't understand what you have quoted. Let's take Greenspans quote:

"It's instructive to go back to the early stages of the subprime market, which has essentially emerged out of the CRA."

Just like the North Carolina study I referred to, he backs the proposition that the subprime market is different than the CRA. This distinction is important for it was those subprime loans, not the CRA, that was responsible for the crisis. Lenders eased the requirements for subprime loans, but could not for CRA loans because they are more highly regulated.

Now let's take another part of your statement:

"For example, the study found that "nearly 90% of large banking institutions report higher 30-89 day delinquency rates for CRA-related home lending than for overall home lending." "

Would it be any surprise that loans given to people who make less money would have higher delinquencies? But you don't answer the question of how much? Why don't you answer that question? Because there really isn't much of a difference.

For those directly involved, this was said:

"OTS director John Reich insisted it "had absolutely nothing to do with the mortgage crisis." FDIC chief Sheila Bair said it was a "myth," adding that "it's really unfortunate that this is out there." "It's simply not true," she asserted. Next up was Comptroller of the Currency John Dugan, who agreed the CRA "certainly was not the cause of the subprime crisis.""

Of all of the regulators, especially Sheila Bair is beyond reproach and esteemed by both Democrats and Republicans. Are you saying she is lying? She knows the numbers because she regulates the banks who gave most of the home loans.

And I repeat that quantitative studies like I mentioned back up the proposition that CRA loans were far better than the subprime loans which didn't even require proof of income. The CRA loans did require proof.

Furthermore, your article was an EDITORIAL, not a news story and not a study. Anyone can write an editorial. IBD wouldn't dare call something like this a news story -- it is opinion, not fact.

Now, for the statement that the CRA had "absolutely nothing" to do with the subprime crisis. I actually agree that it played a small part, but not anywhere near the major causes which included a housing bubble caused by primarily prime lending and speculation, not subprime/CRA, no restrictions on leverage by the companies that created derivatives and swaps, no requirement that lenders keep any of the risk, and a very poor rating system by Moody's, S&P, etc.

Before you post, you should understand what you are posting.

Robert Rosencrans| 4.11.09 @ 2:31PM

What strains credulity is when someone doesn't understand the facts, or claims they don't understand. However, their lies will never change the facts and are welcome. It indicates how desperate the left in this country to try to spin the truth. Well, the facts aren't something that can be spun, because the intelligent people will always find out the facts.

Robert Rosencrans| 4.11.09 @ 2:36PM

More facts for those who care.
http://www.heritage.org/Press/Commentary/ed101508b.cfm
s always, it's the cover-up that sinks people. Liberals are working overtime to cover up their role in the mortgage meltdown. Not only did they block attempts to reform Government Sponsored Enterprises (GSEs) such as Fannie Mae and Freddie Mac before they could drag down our economy, but liberals also abused the Community Reinvestment Act (CRA), turning it into a vehicle for directing loans to unqualified homebuyers. The left knows that whoever shapes public understanding of what caused today's economic crisis can shape America's politics -- and its future -- for a great many years to come. Thus, they're pushing the notion that too little government regulation was at fault.

If the country buys this idea, liberals can enact a carbon-copy of FDR's response to the Great Depression, building a larger, more activist and ever-more-controlling federal government. They can exploit the mess by establishing a conventional wisdom that more government is the solution, rather than understanding how big government is a root cause of the current financial meltdown. Claiming it all sprung from a lack of regulation is a half-truth, and a Yiddish proverb says a half truth is a whole lie. Over-regulation opened the money spigot by requiring lenders to make poorly underwritten loans. Under-regulation then allowed politicians to exploit that. Although greed and dishonesty among both borrowers and lenders had major roles, the CRA and the GSEs were at the heart of what happened, setting up the now-toppled dominoes of Bear Stearns, Lehman Brothers, and others. Over-regulation through CRA, aided by HUD, became a huge problem and, alas, wasn't even addressed in the multi-billion dollar bailout. The Clinton Treasury Department's tough new regulations in 1995 compelled the banks to engage in far-riskier lending practices or receive a failing CRA grade.

To avoid an "F" from the CRA, which could jeopardize their viability, the banks were pressured to direct hundreds of billions of dollars in high-risk mortgages to inner-city and low-income neighborhoods. Moreover, under CRA pressure, banks would "hire" radical, non-profit groups like ACORN to find them customers. Once trillions of dollars began to flow, politicians and lobbyists tapped into this stream, and so did left-wing activist groups. According to George Mason University's Russell Roberts, the CRA was buttressed by other new regulations during the Clinton Administration. As Roberts writes, "For 1996, the Department of Housing and Urban Development (HUD) gave Fannie and Freddie an explicit target -- 42 percent of their mortgage financing had to go to borrowers with income below the median in their area. The target increased to 50 percent in 2000 and 52 percent in 2005. For 1996, HUD required that 12 percent of all mortgage purchases by Fannie and Freddie be "special affordable" loans, typically to borrowers with income less than 60 percent of their area's median income. That number was increased to 20 percent in 2000 and 22 percent in 2005. The 2008 goal was to be 28 percent." The banks were kept from rebelling by using Fannie Mae and Freddie Mac's deep pockets to buy these poor-quality loans and take them off the banks' books. Under-regulation of the GSEs -- Fannie Mae and Freddie Mac -- allowed the money stream to widen and keep flowing. There has always been an implicit understanding that taxpayers would cover GSE losses and this enabled them to attract money and pour it into the CRA-induced sub-prime market.

The Bush Administration had warned about this for years. Fannie and Freddie, however, could skim enough to pay for political protection, plus pay sky-high executive salaries and bonuses to well-connected political figures. Over the past decade, Fannie and Freddie combined to spend a reported $200 million on lobbying and campaign contributions. Now bailing them out may cost taxpayers $200 billion directly, and far more indirectly. The circle of political back-scratching centered around the theme of affordable housing, which the GSEs marketed heavily. Politicians wanted housing for low-income and poor credit risks, so they used Fannie and Freddie to further that objective, and the GSEs responded with campaign help for those politicians. In return, politicians resisted reforms. This was demonstrated at a 2004 House hearing, where Rep. Maxine Waters (D.-Calif.) denounced attempts to stiffen oversight and regulation of this duo "so as not to impede their affordable housing mission, a mission that has seen innovation flourish, from desktop underwriting to 100 percent loans." "Desktop underwriting" meant undocumented loans. No proof of income or credit history required. And zero down payment. Members of both parties were involved in protecting the system. But liberal Democrats were the dominant force. Recently, House Financial Services Chairman Barney Frank (D-Mass.) told The Boston Globe, "[Republicans'] failure to regulate sensibly ... endangered the economy and ... burdened it with bad stuff.... Their own philosophy blew up in their face. They were so extreme in their insistence that there be no government intervention that they have wound up provoking far more government intervention than the Democrats ever would have." But Frank is covering up his own role because he sang a far different tune in 2003, when the Bush Administration and many Republicans (including Sen. John McCain) tried to require Fannie and Freddie to comply with Securities and Exchange Commission regulations and other additional oversight requirements. Treasury Secretary John Snow, in fact, had specifically warned Congress that Fannie and Freddie needed a new supervisory structure so that both institutions would "maintain capital and reserves sufficient to support the risks that arise or exist in its business." Rep. Frank was unconcerned. He told a hearing, "Fannie Mae and Freddie Mac are not in a crisis." Rather, he said, they were "fundamentally sound," and criticisms of them were unjustified exaggerations and "disaster scenarios." Then he confirmed why: "The more pressure there is [to regulate] then the less I think we see in terms of affordable housing" He wanted to continue both the giveaway train supplying mortgages to those who couldn't afford them and the gravy train for politicians. This appealed to liberals and in particular to the Congressional Black Caucus, which received six-figure support from both Fannie and Freddie in 2007. The GSEs' major campaign largesse went to well-placed friends in key positions. The top six from 1998 thru 2008, according to the Center for Responsive Politics: Sen. Chris Dodd (D.-Conn.) $165,400 Sen. Barack Obama (D.-Ill.) $126,349 Sen. John Kerry (D.-Mass.) $111,000 Sen. Robert Bennett (R.-Utah) $107,999 Rep. Spencer Bachus (R.-Ala.) $103,300 Rep. Roy Blunt (R.-Mo.) $ 96,950 And almost everyone in Congress got something.

The GSEs lobbied hard, too. Their combined lobbying budget averaged $17 million a year. As described by Rep. Chris Shays (R.-Conn.), "They hire every lobbyist they can possibly hire. They hire some people to lobby and they hire other people not to lobby so the opposition cannot hire them." But friends at the top were not enough. They needed them in every community, too. The Community Reinvestment Act guaranteed a steady stream of low-quality, but highly political, loans. Congress passed the CRA in 1977 to combat "redlining," a lending practice that prevented loans to minority communities. Clinton Administration regulations in the '90s added teeth to CRA, requiring banks to show compliance with meeting low-income loan targets or face civil actions that could assess a $500,000 penalty for each violation. Banks were "encouraged" to comply by hiring community groups (including ACORN) who contracted with financiers to steer low-income applicants to their institutions. As the Manhattan Institute's Howard Husock wrote in 2000: "The Senate Banking Committee has estimated that, as a result of CRA, $9.5 billion so far has gone to pay for services and salaries of the nonprofit groups involved." The left created the system that paid its community organizers very handsomely, thanks to the regulations on the financial community.

As The Heritage Foundation's J.D. Foster recently noted, "While a worthy cause, the net effect [of CRA] is often to encourage loans at lower credit standards and to encourage people to buy houses they really cannot afford." The net effect has also brought the economy to the brink of disaster. But unless the American public is told, re-told, and educated about how we got here, there won't be reform of the bailed-out-but-still-alive GSEs nor of the CRA. Then we would witness more big government, giving us far more help than we can afford.

Ernest Istook is recovering from serving 14 years in Congress and is now a distinguished fellow at The Heritage Foundation.

First appeared in WorldNetDaily

Bob| 4.11.09 @ 3:17PM

Rosencrans states:

"Well, the facts aren't something that can be spun, because the intelligent people will always find out the facts."

That's why I post with data and facts and you don't, Rosencrans. All you can post are reprints of "editorials" and "commentaries". They are biased by their very definitions. Charts with basic data are never biased. But then again, you must have the intelligence to be able to read them. Perhaps that's why you never present normalized charts to back up your inferences. Hmmmm.....

OK, let me show all of you how Rosencrans and others here bias the data. Or worse, they just pass on "commentaries" without actually looking at the data. Here's a list of ALL contributions made by the GSE's:

http://www.opensecrets.org/news/2008/09/update-fannie-mae-and-freddie.html

Notice that 5 of the top 10 people were Republicans. Kerry and Obama were presidential candidates and thus received a lot more than normal. McCain's campaign manager was the top lobbyist for Fannie -- Rick Davis.

Now you can all see what happens when people show you limited data and why I show you the full data set and let you make your own conclusions.

Again, this is another example of the lack of intelligence of the ultra right wing ideologues here. By the way, why was Eric Cantor higher on the list than Barney Frank? Hmmm.....

Robert Rosencrans| 4.11.09 @ 3:24PM

One things for sure, ad hominem attacks will never substitute for the truth.

Bob| 4.11.09 @ 4:06PM

Then prove your points with charts and full data not biasing the results through only putting selected data in your posts.

Regarding ad hominem attacks, you said:

"Well, the facts aren't something that can be spun, because the intelligent people will always find out the facts. "

When you say something like that in response to a post, it is, de facto, an ad hominem attack. And you are right, statements like that will never substitute for the truth. That's why I include references to the full set of data and charts. You know, the "trust but verify" think! If I'm going to say that some group is lacking intelligence, then I must present the data to prove it. Right?

It can't be an ad hominem attack if it is a conclusion based on fact. Please prove me wrong by addressing the full data set. Furthermore, you'd get a lot more mileage proving your case if you actually did some research on your posts. Critical thinking is an important discipline.

So if you want to make your case on the CRA, get some data, not some opinions from ideologues. If you can't do the analysis or look at the data yourself, then don't argue the case. The reason you and other ideologues don't talk about all of the Republicans getting contributions from the GSE's is obvious.

Now listen carefully to what I have said. I admit that the CRA played a role -- you can't deny that. But if you understand what happened, you cannot, by any stretch of the imagination, say that it played a major role. As many non-political analysts have said, there were a lot of entities involved in this problem. The rise in total consumer debt (and now country debt), plays a far more important role than the CRA. Leverage of non-regulated financial institutions plays a much larger role. The housing bubble played a huge role. Speculators played a huge role. Ratings agencies played a very large role. Did you know that when Bear Stearns settled every night there were $59 billion in settlement payment -- every night! A lot of this was paid by their in-house hedge funds -- clearly something that should have been illegal. AIG was never required to have reserves for their default swaps. This was far bigger than the CRA.

Anyone who believes the CRA was the major cause of this debacle doesn't understand what actually happened.

Robert Rosencrans| 4.11.09 @ 6:20PM

Updating college age minds. It's not an ad hominem attack unless it's directed against someone personally not generally.

Here it is briefly. There are internet posters who show their weaknesses by engaging in these type of attacks.
http://en.wikipedia.org/wiki/Ad_hominem

Ad hominem argument is most commonly used to refer specifically to the ad hominem abusive, or argumentum ad personam, which consists of criticizing or attacking the person who proposed the argument (personal attack) in an attempt to discredit the argument. It is also used when an opponent is unable to find fault with an argument, yet for various reasons, the opponent disagrees with it.

Other common subtypes of the ad hominem include the ad hominem circumstantial, or ad hominem circumstantiae, an attack which is directed at the circumstances or situation of the arguer; and the ad hominem tu quoque, which objects to an argument by characterizing the arguer as acting or arguing in accordance with the view that he is arguing against.

Bob| 4.11.09 @ 6:59PM

Thank you, Rosencrans, for explaining your actions more fully. Significantly, I've always posted fault with your arguments substantiated by data which means no ad hominem attack. Conversely, you've never substantiated your positions with objective data -- only opinion pieces from ideologues. This last post explaining ad hominem attacks contains NO verbiage related to the subject matter. At least you are consistent.

If you would post normalized data containing an analysis of the full range of data points that contradicted my arguments, I'd be happy to admit defeat on the issue. I do respond to a good, objective, non-ideological argument. Bring it on....

Robert Rosencrans| 4.11.09 @ 7:29PM

Repeat: An ad hominem attack is nothing more then an attack, not an explanation of facts. Which leads to a second thought:

Albert Einstein: If you do the same thing every day and expect different results, that's the definition of insanity.

Bob| 4.12.09 @ 10:24AM

Please, Rosencrans, show me that you understand some of the subject matter. Perhaps, though, with your last post, I understand your problem -- you don't know how to analyze data. If you re-read my posts, you'll see I've posted plenty of data oriented references and factual data regarding those elements causing this issue. The fact that you can't comment on securitization, leverage, account settlement, normalized data, etc., just proves to me that you cannot possibly understand this issue.

Robert Rosencrans| 4.12.09 @ 12:38PM

An ad hominem attack never fed a hungry child. You know, I've often found that people who ask you to explain things to them really don't want an answer, they simply use the next answer to elevate their attack, often bought on by various forms of mental illnesses, most likely megalomania.

Robert Rosencrans| 4.12.09 @ 12:51PM

In the Investors's Business Daily editorial above you find this fact:

If you go to Forbes you will find an article about the top 25 riskiest real estate markets in the country. All 25 markets have sub-prime loans in excess of 25%, all bought on by encouragement from Clinton in an effort to get housing for people who had little if any income. In the meantime the big security firms could cash in by selling the loans as differing forms of risk. A perfect storm for disaster, all bought on by socialistic forces.

http://www.forbes.com/2009/03/31/risky-cities-homeowners-lifestyle-real-estate-foreclosures.html

Bob| 4.12.09 @ 4:04PM

"I've often found that people who ask you to explain things to them really don't want an answer, they simply use the next answer to elevate their attack"

Rosencrans, you do that very well, indeed.

Now, let's get to substance. First, you are correct that Clinton pressured Fannie Mae and Freddie Mac. Did that contribute to the problem? Absolutely as I said before. However your "fact" that Clinton "legalized" the securitization of such mortgages is a misstatement. Securitizations of subprime loans was occurring back in the 1980's and remained rather small until 1999 when Gramm-Leach-Bliley was passed. The reason for this was that those institutions that accepted those CDO's had fairly stringent capital requirements. GLB changed all of that and opened these instruments up to relatively non-regulated institutions. Again, there wasn't a significant build up of these instruments until about 2002. Thus saying that Clinton legalized this, while technically correct in a minor sense, did not contribute greatly to the problem.

Regarding the Greenspan statement, all the CRA did was give the industry some experience in the foreclosure rates of loans to the lower socioeconomic strata. The CRA didn't directly lead to the subprime loans through governmental action, but through industry experience. This isn't a political matter, it is a financial matter. As I've said before, I was in this industry in the 90's as part of a subprime loan company who did not make CRA loans.

Therefore, your connection between the CRA and subprime loans is extremely weak and misplaced.

Instead of this back and forth, Rosencrans -- and I've given you a hard time about it -- let me state the real problem here. This whole economic meltdown has lots of causes. You cannot understand the industrial causes of this unless you truly understand securitizations, leverage, risk attenuation, and the actuarial effects of adverse risk selection.

The problem on a board like this is those, like you, are much more familiar with the political aspects than the technical financial aspects of this problem. It took me years and degrees to understand this stuff which is why I tend to use charts and data for support rather than political dialogue.

In the big scheme of things, the CRA was a VERY small factor. Any economic expert will tell you that. The overall rise in consumer debt has played a huge role here because defaults rise dramatically with increased consumer debt. I can't overstate the leverage aspects of this problem. When you have a 30-to-1 leverage rate, the downward pressure on housing price declines is huge -- and far more important than this CRA piece.

You have to go through the numbers to understand relationships on this issue. I know this is a political board and there is always the temptation to assign blame for the politics. But this episode has much more to do with bubbles and the economic cycle than it has to do with Washington. Even if we didn't have the CRA, this still would have occurred.

With regard to the riskiest real estate markets, this was do more about speculation and Fed easing of rates than any subprime problem. In these types of "growth" markets, you'll always have more subprime loans as the housing values rise faster than the rest of the U.S. and thus the risk seems less to the mortgage originator. This was not a disaster brought on by "socialistic" forces, but normal economic enterprise and a housing bubble.

Be careful of the Greenspan remarks. His Fed policy was part of the problem and he is trying to redefine his legacy. He was a very political animal.

Rosencrans, we come from different places. I'm more influenced by the economic and data aspects of this kind of problem and you are much more familiar with the political aspects. It is frustrating to see Republicans only comprehend the political side of an economic problem without understanding the underlying cyclical economic basis for this.

Philip Klein did a rather good piece on this and if you read it carefully, you'll see that I fundamentally agree with him.

Listen, I appreciate this last response because it addresses the issues and is cogent. Where we disagree is that because of my background in the business, I absolutely know that the major cause of this had to do with the economic cycle, the fundamental structure of investment houses/hedge funds, and the housing bubble -- none of which were created by government programs like the CRA. Without an industry background, it is quite difficult to understand all of this.

Politics tends to use trite examples and amplify them. You might blame the CRA and Barney Frank because you're a Republican while the left blames greed on Wall Street -- a class issue. Neither of these things were major causes, but were small contributing factors. Each side blows these things up all out of proportion.

Have a Happy Easter/Pesach/etc., what ever you are celebrating.

Robert Rosencrans| 4.12.09 @ 4:26PM

Ad hominem attacks are the work of the useless, the mindless, those who can't inspire by their ideas, simply attack others on a personal note. They do this because they can't defend the product of their own intellectualism.

http://mises.org/Community/blogs/radicalidealism/default.aspx

Economics is not a complicated science. This may not seem obvious to you if you've following the news from Washington, where a cabal of politicians, financiers and lobbyists have been spent the last several weeks desperately making a series of increasingly complicated, expensive, and ultimately unsuccessful plans to "save the economy." As the costs of their schemes have spiraled from billions and into the trillions of dollars, it has become increasingly urgent for you, the source of Congress' deep pockets, to examine the potential impact of their actions on your taxes, savings, and investments. Even if you have no intention whatsoever of voting this November (which, given the choices, is hardly unreasonable), it would behoove you to take the consequences of the pending federal bailout into consideration for your own benefit.

The key to understanding economic theory is to grasp that the same principles that apply to your personal finances, and perhaps to your interaction with your local grocer apply equally to the world at large, at all levels of economy activity. The key to understanding politics is to grasp that political success requires advocating policies which violate these basic economic principles - and then evading the consequences of their own policies - with the voters’ eager participation in the delusion.

A Potato Farmer Learns About Business Cycles

Suppose, for example, that you grow heirloom potatoes. Each season, you harvest most of the potatoes for consumption or sale, and save a fraction to plant the next season. The saved potatoes are your supply of loanable funds – the consumption you forgo now to invest in future production. The percentage of saved potatoes is your savings rate, and also your interest rate, since the consumption you forgo now is your investment in next season’s production capacity. Suppose that you have reached an equilibrium, so that each year’s saved potatoes are just enough to produce the same sized crop next year. Common sense indicates that you cannot increase your future consumption of potatoes without an increase in savings, and therefore a decrease in present consumption. This is a key point – increasing the rate of economic growth is only possible through increased investment. Increased investment is only possible through increased saving. An increase in saving requires a decrease in current consumption. The same principle applies when you decide to dine out less often this month to afford a new iPod next month.

Imagine that you keep track of your remaining potato stock in a ledger. If your ledger is accurate, each hash mark in the ledger corresponds to a real potato – the potatoes are your “gold standard.” For a while, potatoes are plentiful and life is good. Then, one day, you see a commercial for the latest product from Apple - the iTater, a laptop made from potato starch. You must have it - but your ledger shows that the expense would cut into next year's seed stock. No problem - you just add another zero to the count of remaining stock and proceed to the nearest Apple store. You experience utopia with your iTater - welcome to the boom phase of the business cycle! Your constituents (the wife and kids) are happy, consumer spending is up, and interest rates are down (saving potatoes requires less of a sacrifice in current consumption - according to your ledger.) You have taken your ledger off the “potato standard” and created a fiat currency – but who cares, life is good, right?

What happens next season? Since the act of writing down numbers does not actually conjure up potatoes, you will be unpleasantly surprised when your stock of real investment capital suddenly runs out, and is not sufficient to meet planned expenses. You may be forced to liquidate your assets at a large loss (the iTater market is not so hot now that the iTater 2.0 is out), and without a true accounting of available investment capital (the seed stock in your cellar) long term planning becomes impossible. Welcome to the bust phase of the inflationary business cycle!
If you wise up to your economic fallacies, you will cut current consumption (no iTater Lite for the kids) to restore savings rates and pay debts. But suppose that you take a hint from Washington, and decide to implement a “bailout plan” by adding some more zeroes to your ledger, and resuming unsustainable consumption level by getting the tots the iTater Lites. You might even get a loan from your neighbor Mr. Wen.

What happens now? You've "rescued" your personal economy this season at the cost of further depleting your investment capital. You've won the "vote" of your kids this season, but you have even less capital for next season. Rather than allowing your personal economy to recover, you have further distorted your grasp of reality, and now have no idea how many spuds you have to consume, and how many you need to save. You can attempt borrow seed stock from your neighbor Mr. Wen, but unless you can drastically cut consumption to pay interest, he will eventually grow impatient and refuse to lend any more. The more you attempt to extend the illusion, the farther out of touch you become with reality, as the numbers on your ledger show exponential growth upwards while your actual consumption plummets toward zero. You've discovered hyperinflation, the ultimate destiny of all fiat currencies.

The Roots of the Housing Crisis

Let’s now apply the analogy of the potato farmer to the mortgage crisis our economy is now experiencing. The seeds of the crisis were laid during the New Deal, with the federal government’s creation of Fannie May and Freddie Mac for the purpose of allowing mortgages to be issued at below market rates. In other words, they are a form of price control (a price ceiling) on interest rates for home mortgages. As with all price ceilings, the consequence of making goods artificially cheap is a shortage. In this case, the physical supply of building materials, land, architects, and construction workers is not sufficient to meet demand. The existence of coercive government price controls is obscured by a number of elements intended to maintain the myth that every American family has a "right" to a home. The elements include the superficially “private” charters of Freddie and Fannie (and now, the other institutions being bailed out), the extra-legal guarantees provided to those entities (massive lobbying and high-level relationships with both political parties), and the indirect way the costs of shortages are paid (price inflation, rather than an increase in taxation).

Much of the blame for the mortgage lending meltdown has been placed on the "failure of the free market." But is there really any truth to this? The financial industry is the single most regulated industry in the economy. The failing institutions are precisely the ones that New Deal policies were meant to protect us from: the FDIC was supposed to prevent bank runs, the SEC was supposed to be stop shady investments, Fannie May and Freddie Mac were supposed to make sure that loans went to people who deserved them. Opportunistic politicians like John McCain are quick to blame the capture of regulatory institutions on lobbyists and "special interests." He promises to fix the problem by giving yet more money and power to corrupt government agencies, much like a mob boss who blames his enforcers for his protection schemes, and then promises his victims to lay off them if they just give him more guns and money. The only reason that special interests are so involved in government is that the government has ingrained itself so deeply in our lives. Giving more power to the state to regulate markets and redistribute wealth and privileges from one group to another only increases the incentive to strengthen one’s political connections.

There are two particular stimuli for the present housing “crisis.” First, is the expansion in the money supply by the Federal Reserve, motivated in part by the desire to pay for American overseas commitments without a proportionate increase in taxes, in part as a response to the destructive consequences of the anti-business sentiment that created regulations like Sarbanes-Oxley, and as a response to its own inflationary policy of the late 1990’s, which (much like the case of the unfortunate farmer) resulted in the boom and bust of the Dot Coms. Second, is the 1995 Community Reinvestment Act, which basically forced banks to make unprofitable subprime loans to poor neighborhoods and minorities. In 1999, the repeal of the Glass-Steagall act was tied to the CRA rating of banking institutions, again forcing them to make unprofitable mortgages. As the consequences of the loose money policies and the CRA began to come crashing down in 2008, the government responded with HOPE NOW and Project Lifeline, which use a combination of threats and taxpayer-sponsored bribes to prevent the markets from self-correcting. Unfortunately, as our farmer learned, attempting to fix over-consumption by increasing consumption only makes the situation worse.

The vicious pattern of inflationary business cycles is a downward spiral that is not a creation of the unrestrained greed of businessmen. Yes, businesses are complicit to the extent that they have taken part in the state’s redistribution of funds from taxpayers and dollar users. But this is only a minority of politically-connected enterprises. The Community Reinvestment Act is in fact an attempt to force financial institutions to become altruists – that is, act against their own self-interests. The mortgage crisis is primarily the inevitable result of a political-economic ideology that essentially attempts to turn wishes into reality through collective delusion. This ideology is in turn the product of a philosophy that rejects objective reality in favor of a reality created by the collective consensus, rather than the inescapable consequences of cause and effect.

The Philosophy of Make-Believe Economics

The German philosopher Emmanuel Kant famously argued that there are two realities: the noumenal, which is the way the world really is, and the phenomenal, which is the way conscious beings perceive it with their senses. Since the conceptual faculty is an object of distortion, the real world is forever beyond human understanding. Our perception of reality is therefore only an illusion, but it is a collective delusion, shared by all of society. American philosopher John Dewey took Kant’s premises to their natural conclusion: since "ultimate" reality is unknowable, social consensus is the sole determinant of truth and morality. Dewey rejected the notion of truth and of right and wrong as such, and held that pragmatic experimentation should be our sole guide to action, with democratic consensus as the ultimate manifestation of truth, morality, and political change.

Few people act like our potato farmer and deny the objects and events that happen before his very eyes. Yet in economic matters, most people, including most politicians, mainstream economists, and investors unconsciously follow Dewey's philosophical principles: reality is ultimately driven by social consensus, and the success or failure of markets depends only on the optimism or pessimism of consumers and investors. This is more than the belief that wishes and prayers affect reality - this is a belief that one's wishes arereality – if only enough people share the delusion.

The Federal Reserve and the Treasury Department are faithful followers of Dewey and Kant. By artificially lowering or raising interest rates, the government attempts to turn our perception of reality (the interest rate) into reality – our actual propensity to save. But pretending that there is a sufficient stockpile of spuds in the cellar is not the same thing as having a sufficient stockpile. The artificial manipulation of interest rates leaves investors flush with cash, but short on worthwhile investments (or vice versa) and thus diverts increasingly scarce resources into increasingly inefficient investments. Prudent investors (like the banks notin this week's news stories) stay away, while politically-connected spendthrifts splurge. Markets become increasingly unstable, and sooner or later, things come crashing down. The more you attempt to evade reality, the worse the disaster that you are asking for will become.

Angel| 4.12.09 @ 11:26PM

Excellent post, RR--but alas! I fear its brilliance falls on the deaf ears of the liberal moron troll, Blobbo. Thank you for your excellent information and your eloquence--I appreciated it!

Pingback| 4.14.09 @ 5:12AM

Misquoting an Ally links to this page. Here’s an excerpt:

… Before we make our choices, let us be wise enough to ask the proper questions. — Ira M. Kessel Rochester, New York IT’S NOT JUST THE BANKS Re: Philip Klein’s Wrestling With Capitalist Pigs: Philip Klein points out the misguided antics of the large banks that have earned capitalism a bad name recently. I wish to point out that the capitalist business society is not just made…

Pingback| 4.15.09 @ 10:13PM

Tea party - Page 2 - Tweak3D.Net links to this page. Here’s an excerpt:

…It's the same type of polemic fear-mongering name-calling that fooled main street moderate America into voting Republican while their collective pockets were being picked. http://spectator.org/archives/2009/0...apitalist-pigs Last edited by JZL; Today at 07:07 PM.. Today, 07:10 PM permanent link to #29 ( permalink) ninefivezero infinite resolution Join Date: Jan 2005…

Pingback| 4.28.09 @ 7:28AM

General Confusion links to this page. Here’s an excerpt:

…upon the General. He has, by all accounts, served our country with great honor and distinction. I salute him and his service. WHO WILL REGULATE THE REGULATERS? Re: Philip Klein’s Wrestling with Capitalist Pigs: It’s easy for conservatives and libertarians to agree that those who profit through fraud should be punished and that one of the few proper functions of government is to enforce the…

Gime| 4.24.10 @ 10:53AM

Moikka :) Mulla nämä on kohtuu lyhyet. Mulla on ollut rakennekynnet, tai oikeastaan omien kynsien päällä geelit (melkein sama, mutta ilman tippejä) jo 2007 syksystä, enkä kyllä enää osaisi elää ilman. En oikein keksi muuta huonoa sanottavaa kuin sen että kyllähän ne maksaa, mutta toisaalta se 50e kuussa on pieni hinta siitä kuinka hyvässä, siistissä ja kauniissa kunnossa kynnet pysyvät jopa 5 viikkoa putkeen :)

Pingback| 9.16.09 @ 6:55PM

Choosing Accounting Finance As a Career « Wicked Blogging links to this page. Here’s an excerpt:

…Blog » Bits Bucket For September 4, 2009 The Pool Room, Week Ending May 22nd 2009 | Steve Keen's Debtwatch Twitter Weekly Updates for 2009-08-16 | The League of Asset … The American Spectator : Wrestling With Capitalist Pigs Write a comment Click here to cancel reply. Name (required) Mail (will not be published) (required) Website Categories Advice Business Education Entertainment Family and Home…

Trackback| 9.25.09 @ 10:11AM

Homeowner Insurance, on Homeowner Insurance, links to this page. Here’s an excerpt:

Often the best homeowners insurance policies come from smaller and mid-range companies and not from the household name giants. In addition, the plans that are available online generally represent high quality and value these days.

hffg| 11.30.09 @ 4:12AM

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health habit | 12.4.09 @ 9:54AM

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poptropica | 4.9.10 @ 11:54PM

You can see how to do this in the videos, but basically you need to jump up when the Hydra is about to strike. He will rear one of his heads back to attack and his eyes will bulge out.
Poptropica
When this happens, jump up in the air and then try to land on top of his head. That head will get knocked out. When all five heads get knocked out, the Hydra will be asleep and you can click on him to get one of the scales. poptropica
I’ll have a full written walkthrough very soon, but in the meantime, here are some answers to some of the frequently asked questions about Mythology Island. Having trouble? Post a question in the comments and I’ll try to answer it!poptropica

Getting Hercules to Help You

Hercules won’t help you until you have all five items from Zeus’ quest. poptropica
Once you have the five items, bring them to Athena. Zeus will appear and steal them. The big jerk! Once this happens, talk to Athena and she will tell you that Hercules will help you.
Poptropica
. You’ll need to have the magic mirror from Aphrodite because Hercules doesn’t want to have to walk. He’s so lazy!
Getting the Hydra Scale

You can see how to do this in the videos, but basically you need to jump up when the Hydra is about to strike. He will rear one of his heads back to attack and his eyes will bulge out.Poptropica When this happens, jump up in the air and then try to land on top of his head. That head will get knocked out. When all five heads get knocked out, the Hydra will be asleep and you can click on him to get one of the scales. poptropica

blackberry | 5.9.10 @ 3:03AM

capitalist pigs is really funny..

guo | 7.1.10 @ 5:10AM

www.wmvconverterformac.com

guo | 7.1.10 @ 5:10AM

www.wmvconverterformac.com

elder scrolls skyrim | 3.23.11 @ 5:38AM

a bit depressing but interesting info.

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Felonious Attorney General?

Kaylin Bugos | 5.24.13

Did the Boy Scouts Cave to Pressure?

Claire Healey | 5.24.13

BBC World Survey Ranks Israel Near Bottom in Global Popularity

Aaron Goldstein | 5.24.13

Obamacare is a Big and Growing Problem for Democrats

Ross Kaminsky | 5.24.13

Stein on IRS Scandal

Patrick Ryan | 5.24.13

The Restricted Engine

Yogi Love | 5.24.13

Muslim, Er, Youth Riots in Sweden

Aaron Goldstein | 5.24.13

FLASHBACK TO: 1995

Pope Culture

By George Sim Johnston

A man of faith in a godless age is hitting Americans where it hurts.
Why the GOP Does Not, Like, Totally Suck

By P.J. O'Rourke

Mr. and Mrs. American Spectator Reader, let P.J. O’Rourke talk sense to your kids.
Dames at Sea

By John Corry
In the Absence of Guns

By Mark Steyn

In Britain, defending your property can get you life.
The Metaphysical Martini

By Werner J. Dannhauser
Counting the Costs of Clintonism

By Robert H. Bork

The debacle of this president’s administration is both a cause and a symptom of the decline of American values. Unless Congress impeaches him, that decline will go on unchecked. An eminent jurist surveys the damage and assesses the chances for the recovery of our culture.
Chuck McHagel

By George Neumayr

It won’t take long for conservatives to scratch this presidential wannabe off their 2008 scorecard.
The Legacy of Old John and Mother Fresh-Roasted

By Douglas Bartholomew
It’s the Best Time of the Year

By Mark Steyn

The American Christmas, like the songs that celebrate it, makes room for everybody under the rainbow. Is that why so many people seem to be hostile to it?
The Bush Crack-Up

By Brit Hume

Was the President done in by the economy, or by the politics of the economy?

Clip of the Day

H/T to National Review Online