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Special Report
Bloomberg Hides Government Causes of Financial Crisis
Media propagandists continue to advance the Democratic Party line.
(Page 3 of 3)
Lynch argues in his Bloomberg article, “The Community Reinvestment Act can’t explain why house prices in the U.K., Ireland, Spain and France doubled earlier this decade and almost doubled in Australia. All have suffered steep losses since then, with Ireland’s home prices dropping 38 percent by December 2010 from the 2006 peak.”
But this fails to recognize that the Fed managing the world’s reserve currency effectively exported its weak currency policy globally. Other countries loosen their monetary policies to avoid the negative short term trade implications of appreciating currencies relative to the dollar. Moreover, the dollar’s weakness masks the looseness of their monetary policies, misleading them into even looser policies. Their loose policies pumped up their own real estate bubbles.
Lynch argues further that federal housing policies can’t explain the bubble in commercial real estate, which also contributed to the housing crisis. But the Fed’s low interest rate, loose monetary policies would have the same effect in creating a bubble in commercial real estate that it had in housing.
Lynch adds that, “Losses on subprime mortgage-backed securities didn’t start shaking financial institutions until 2007, three decades after the CRA was introduced and 15 years after affordable housing goals were established for Fannie Mae and Freddie Mac.” But this fails to recognize that the CRA was not expanded into a real problem until the Clinton years, and even then it was only one factor in creating the crisis. The regulation carrying out Clinton’s undeniable federal policy of trashing traditional mortgage standards was much broader, greatly exacerbated by the Fed’s cheap dollar policies as well. This is why the problem extended well beyond CRA regulated institutions, which Lynch also fails to understand.
The crisis in American media now goes well beyond media bias. The real problem is now outright ideological partisanship and activism. Far too much of America’s self-professed media are not journalistic enterprises at all. They are political activist organizations posing as journalistic enterprises. In this crisis, Bloomberg News is just another part of the problem.
About the Author
Peter Ferrara is Director of Entitlement and Budget Policy at the Heartland Institute, General Counsel of the American Civil Rights Union, Senior Fellow at the National Center for Policy Analysis, and Senior Policy Advisor on Entitlements and Budget Policy at the National Tax Limitation Foundation. He served in the White House Office of Policy Development under President Reagan, and as Associate Deputy Attorney General of the United States under President George H.W. Bush.
Letter to the Editor View all comments (76) | Leave a comment
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Bill Hussein O'Stalin| 1.4.12 @ 6:24AM
In May of 2006 Citizens Against Government Waste went over a report from a federal agency which described decades of financial sloth at Fannie/Freddie. That agency was OFHEO, Office of Federal Housing Oversight.
The same agency went to Congress as early as 1998 describing a coming financial debacle led by Fannie/Freddie. They were ignored.
Read the article from 2006 which presages the coming debacle in 2008:
http://membership.cagw.org/sit.....le&id=9972
(Washington, D.C.) Tom Schatz, President of the Council for Citizens Against Government Waste (CCAGW), today released the following statement in response to today’s Office of Federal Housing Enterprise Oversight’s (OFHEO) Report of the Special Examination of Fannie Mae:
“Contrary to several advance media reports claiming that the OFHEO Report on Fannie Mae’s accounting debacle would contain ‘nothing new,’ the OFHEO report is not only much more aggressive in tone, it also dramatically expands our knowledge of what went on inside Fannie Mae. It is a much more detailed account of the extent to which Fannie Mae executives manipulated and distorted the company’s accounting practices in order to enrich themselves, publicly misrepresented and downplayed the risks they were taking in order to keep the gravy train running, played cat and mouse with its federal regulator, and made a mockery of congressional oversight.
In the 1980s and 1990s, Fannie Mae executives recognized that Congress would look the other way as the company ran rings around its federal regulator, kept its operations largely in the dark, and wrote its own rules. Congress’ lax attitude allowed the accounting scandal to fester undetected for years, all the time putting taxpayers at a growing risk for a GSE bailout. When OFHEO finally presented credible allegations of corporate wrongdoing and accounting transgressions at Fannie Mae, members of Congress pilloried the messengers, shielded Fannie Mae executives from scrutiny and accountability, and dragged their feet on taking any meaningful action. Many of those who buried their heads in the sand were among the most vocal critics of the executives at Enron and WorldCom when their accounting crimes were revealed.
One of the most critical points of the OFHEO report is that Fannie Mae’s ability to finance its massive ‘take no prisoners’ political and public relations operation grew simultaneously with its decision to grow its mortgage-backed security portfolio (MBS). The MBS portfolio did nothing to help low and middle-income families purchase homes, but it enabled the company to deflect scrutiny and keep its congressional allies in line. Therefore, the OFHEO Report recommends that Congress limit the size of the GSEs’ portfolios. The best legislative remedy is S. 190, which contains the strongest statutory language on portfolio limitations for both Fannie Mae and Freddie Mac.
Former Fannie Mae Chief Operating Officer Daniel Mudd observed that, ‘by virtue of its peculiarity,’ Fannie Mae ‘faced little organized political opposition.’ Company executives, flush with the proceeds of its MBS activities, were able to systematically hamper its regulator’s ability to engage in oversight by using the GSEs’ ambiguous provenance as a legal rationale. It worked then, and I would submit that it is still at work. To date, and in spite of a continual barrage of damaging revelations, Congress has failed to pass comprehensive legislation establishing some control over these housing giants.
Purp| 1.4.12 @ 6:56AM
"Virtually every Republican and conservative across America recognizes what is by now well established in the literature -- the government caused the financial crisis." - no need to read the rest of the article - it's filled with 1/2 truths, innuendo and the "we all know it to be true" misdirections. The "smart" (=Geckotypes)people on Wall Street figured out how to game the system when the regulatory control was relaxed in the '90s and GW Bush's Administration looked the other way and had sex with their charges in the SEC instead of maintaining compliance with what was left of regulations on the financial industry. The buying and selling of mortgages, slicing and dicing them into CDO's and other instruments, the poor oversight of the Rating Agencies - these were the seeds of the financial meltdown. The instruments were different and the methods different, but when banks and investment houses were allowed to overleverage, accompanied by 600 Trillion in CDS's from insurers like AIG and the bottom fell, they almost took us all with them. THAT is what caused the crisis. The housing crisis is a symptom, not the cause of the meltdown. Anyone that promotes anything else is a liar, stupid or evil.
Bill Hussein O'Stalin| 1.4.12 @ 7:02AM
That must include you then because the government made it all possible. Even the government admits that.
Purp| 1.4.12 @ 8:26AM
Possible yes, like I said, relaxed regulations and lax oversight - but the Wall Street crowd did it. They knew better and did it anyway. And, some of them completely went bankrupt because of their greed.
Yeah, the government is the bogieman, the government is bad, it takes all your money, it supports all the deadbeats, it's just awful, blah, blah, blah. Get over yourselves... YOU are the government. You might as well get on with your life, the government isn't going anywhere - and if Romney is elected, the RINO won't change a thing.
Bill Hussein O'Stalin| 1.4.12 @ 9:18AM
What has Obama changed? He's doubled the debt and his policies are directly tied to higher unemployment. Tell me how the banks played into that? It's an Obama created disaster but you apparently love it.
Purp| 1.4.12 @ 3:45PM
I never said Obama changed the banking system - he helped save it though - and that cost money. The crisis wasn't caused by Obama - my God, he wasn't even elected yet when the financial system collapsed - where were you in Sept/Oct of 2008? On the Moon?
Just as Bush signed TARP to save the banks, Obama continued saving the banks and the auto companies and helped millions with unemployment benefits and the Bush tax extension. It all cost money - what would you eliminate? What he did was put some brakes back into place on Wall Street - not enough mind you and passed near Univeral Healthcare to enable us to catch up to the rest of the industrialized world where we look like idiots. He killed Osama, which Bush could not for 8 years, he ended the Iraq war that Bush didn't know how to fight or win, and he's on track to end the Afghan War which with Osama Bin Laden dead, has little cause left. And, that's just a few things our next President, President Obama has done.
GMay| 1.4.12 @ 9:48AM
It's unfortunate that you are unable to rebut a legitimate argument with anything other than "blah blah blah" and a naive highschooler's attitude that "You can change the world!" nonsense. That bumpersticker style of argumentation goes over well on campus I hear.
Purp| 1.4.12 @ 3:49PM
First of all - can't you read? I rebutted the argument just fine in the beginning of my statement. Then I added my editorial comments.
The government is bad, the bogieman mantra is getting old, tired and lame. OMG they've been using that canard since Reagan's time. The man is dead, get some new material.
How about Herman Cain's 9-9-9 plan? Now there's a winner. Or Rick Perry's Part-time Congress - another winner. Oh, and don't forget Newt Gingrich lighting our highways with "Mirrors in Space" ... ! LMAO.
George S| 1.4.12 @ 12:35PM
What regulations what rescinded?
What regulation (Title and paragraph of the US Code, please) specifically outlawed "[the] buying and selling of mortgages, slicing and dicing them into CDO's and other instruments[,]" ?
What regulation (Title and paragraph of the US Code, once again please) specifically prevented banks and mortgage houses from over leveraging?
Purp| 1.4.12 @ 3:54PM
Glass-Steagall Act disallowed banks to engage in investment banking. It was a firewall put in place by FDR in the 1930's. Little by little since Reagans' time it has been dismantled. When that was finally repealed in toto in 1999, it took less than 10 years to blow it all up.
YOU'RE the lawyer - use Lexis-Nexis and look it up yourself. Do your own homework. I'm not your secretary. Now go ahead and parse words and pick out some picayune little word that isn't quite right - but if you can't counter the overall message/argument, don't bother with the nitpicking. It's very petty you know.
Tim the Enchanter| 1.4.12 @ 12:35PM
Purp- get stuffed. With a pineapple. Sideways. Please.
Purp| 1.4.12 @ 3:55PM
Ruh-roh, another one obsessed with my a*. You want it to, b* pirate?
VonMisesJr| 1.4.12 @ 1:03PM
I call you Perf since your arguments are full of holes. You should take a logic class, or perhaps you have and use it to confound and confuse.
You make more comments on this site than anybody, and virtually nobody agrees with you. Why not make a New Years resolution and make friends at MoveOn and the DailyKos? You apparently need friends and that and the soup kitchens seem the best bet.
VonMisesJr| 1.4.12 @ 1:46PM
The second worst POTUS of all time, Mr. Malaise, gave us the Community Reinvestment Act in 1977.
Bill (I never had sex with that woman and I never asked anyone to lie) gave us the repeal of Glass-Steagall and allowed investment banks and hedge funds to borrow at the Fed window and leverage dirivatives 30-1. Then he sent Reno to prosecute the banks for phony redlining charges.
Obama was the largest recipient of Wall Street donations in history and has bailed out everyone but working class Americans.
But you're right Perf, it all happened in 2007. Barney Frank's "rolling the dice" with affordable housing didn't really happen. It was conservatives on Wall Street, which is a oxymoron. The leading Wall Street executives shuffle back and forth in Democrat government jobs.
You are projecting again calling others liars, stupid or evil. But that's all you guys have left.
Purp| 1.4.12 @ 3:59PM
While I don't agree with your screed, what have YOU have left?
Mitt "Romneycare" Romney
Newt "Mirrors in Space" and "Put children to work and fire the adults" Gingrich
Rick "Bestiality" Santorum, yuck.
Ron "Legalize Marijuana" Paul
Michelle Bachman, Herman Cain, Tim Pawlenty, Rick Perry all losers.
And, you think Democratic Leaders have problems? Ha!
VonMisesJr| 1.4.12 @ 5:14PM
You are the loser. Your pathetic life is dedicated to annoying people and badgering them. You are the one that always has something nasty to say about everyone but the "One" whom you dream of licking his boots. You will be licking them, or trying to while they are on your neck.
Apparently you are so cowardly and greedy that you would sell your liberty for a EBT card.
c. j. acworth| 1.4.12 @ 7:30AM
The points made by Mr. Ferrara are well known to anyone who has been paying attention and not simultaneously living in deniel. Bottom line, whenever the Government tries to "fine tune" this or that aspect of the economy they usually end up screwing up. It's called the Law of Unintended Consequences, and it's a killer.
By the way, one thing I didn't see mentioned was the changes in tax policy during the last few decades. Has anyone tried to figure the added effect on home prices of making real estate so tax advantaged as it is? Just wondering.
Purp| 1.4.12 @ 8:28AM
When any person or group tries to do anything, there are unintended consequences ... that's just life. So throw out all the good because of some bad? That's silly or stupid.
GMay| 1.4.12 @ 9:45AM
When the consequences are plainly evident, yet forced upon them by the government, then it's readily apparent that this was a preventable catastrophe. There was no good to be saved from all this mess, so throwing it all out only makes sense.
If you find that to be "silly or stupid", that's your problem.
Purp| 1.4.12 @ 4:01PM
It's silly and stupid that you still believe the government "forced" anyone to give mortgages to anyone. Do you really think YOUR BOYS, the "R"'s wouldn't filibuster THAT? Seriously, you need to get the facts straight. Stop listening to the drugster, Rush Loudmouth. He'll say anything to keep the drugs flowing.
Louis Jenkins| 1.4.12 @ 9:51AM
Unintended or otherwise. The quote is from an article on the "Drudge Report."
"America has closed the books on 2011 with debt at an all time record $15,222,940,045,451.09. And, as was observed here first in all of the press, US debt to GDP is now officially over 100%, or 100.3% to be specific, a fact which the US government decided to delay exposing until the very end of the calendar year."
The government caused this. Plainly there is no excuse.
Purp| 1.4.12 @ 4:04PM
And roughly 1/3 to 1/2 of that debt is a direct result of the Bush tax cuts, the 2 unpaid Iraq and Afghan wars, and the unfunded drug benefit for Medicare. Another 1/3 came from Ronald Reagan (2.2 Trillion) and Papa Bush (2.8 Trillion). And your point is?
Debt to GDP was 122% in WWII and we're still here, so what's your point?
Mike 3/505| 1.4.12 @ 10:18PM
Purp,
Sorry...your math don't add up.
TrueBlue | 1.5.12 @ 1:03PM
Hate to break it to you, but the majority of the "cost" in the Iraq/Afghan wars was standard equipment maintenance, weapons purchases, and military paychecks.
The military continually purchases ammunition for training purposes, and they can only be held in storage for some long before they have to be used or disposed of, requiring new ammo be purchased. Those costs keep getting added in to the so-called cost of the wars, massively inflating the numbers. I won't argue that the cost in nation building was a waste since we don't practice Total War anymore, thus were trying to rebuild a nation that hadn't completely submitted to our "victory" but going to either country in the first place was not a waste at all.
Also, Reagan had a real enemy to deal with, the USSR (they weren't just boogeymen believe it or not), and had 8 years to build the debt to that level. He wasn't perfect, he fell for the same trick most Republicans do, the promise of cuts in the future if they'll just agree to this or that thing now.
Bush Sr. was a horrible horrible joke played on Americans.
Bush Jr. had 8 years, and yes he should have pulled the troops out a long time ago. He also made the mistake of not vetoing certain laws because he wanted people to like him, and he wanted to help people. Not a bad thing, but the purpose of government is not to help people, it is to protect the rights of the people to advance themselves and be responsible for their own lives, not to commit theft by taking money from those who either were successful or lucky (not necessarily mutually exclusive) and giving it to people who have no wish to get off their own rear to make their lives better.
Oh yea, Obama DID NOT END THE WAR IN IRAQ. The Iraqis did that by not wanting to negotiate a Status of Forces Agreement. As for bin Laden, since the only thing Obama did was give the go-ahead for the operation the only credit he really gets is having more balls than Clinton by actually signing off on it. Since the information used for that operation was attained using those oh-so-evil 'enhanced interrogation methods' that Bush gets creditted for The One gets no credit there.
Tax cuts do not cause debt (the idea they do is such a stupid fallacy). Government spending not being reduced to allow for those cuts cause debt. Regardless of the tax rate government revenue as a percentage of GDP stays within the same 5% margin of 15-20%. Logic and facts tell you with that being the case if GDP is increased then revenue is increased. Since more people take risks and invest when tax rates are lower (allowing them to keep more of their money if successful) this generally increases national GDP, thus increasing revenue. THE PROBLEM IS SPENDING. The government should NOT be allowed to spend more money than it took in in taxes the previous year. They have been using the Iraq/Afghan war as an excuse to expand spending on social programs, blaming all the debt on those two war fronts, but the actual amount spent on those actions is far less than the social program expansions.
markenoff| 1.5.12 @ 10:23PM
The overthrow of Saddam Hussein and the establishment of a semi-democratic government in Iraq cost less than the Dems $1,000,000,000,000 stimulus bill that paid for not so shovel ready projects.
markenoff| 1.5.12 @ 10:35PM
According to CBO numbers in its Budget and Economic Outlook published this month, the cost of Operation Iraqi Freedom was $709 billion for military and related activities, including training of Iraqi forces and diplomatic operations.
The projected cost of the stimulus, which passed in February 2009, and is expected to have a shelf life of two years, was $862 billion.
The U.S. deficit for fiscal year 2010 is expected to be $1.3 trillion, according to CBO. That compares to a 2007 deficit of $160.7 billion and a 2008 deficit of $458.6 billion, according to data provided by the U.S. Office of Management and Budget.
In 2007 and 2008, the deficit as a percentage of gross domestic product was 1.2 percent and 3.2 percent, respectively.
"Relative to the size of the economy, this year's deficit is expected to be the second largest shortfall in the past 65 years; 9.1 percent of gross domestic product (GDP), exceeded only by last year's deficit of 9.9 percent of GDP," CBO wrote.
The CBO figures show that the most expensive year of the Iraq war was in 2008, the year when the surge proposed by Gen. David Petraeus and approved by President Bush was in full swing and the turning point in the war. The total cost of Iraq operations in 2008 was $140 billion. In 2007, the cost of Iraq operations was $124 billion.
According to an analysis by the American Thinker's Randall Hoven, the cost of the Iraq war from 2003-2008 -- when Bush was in office -- was $20 billion less than the cost of education spending and less than a quarter of the cost of Medicare spending during that same period.
markenoff| 1.5.12 @ 11:31PM
Public debt has increased by 67 percent over the last three years.
And this is Ronald Reagan's fault because?
megapotamus| 1.4.12 @ 11:31AM
This is why we are supposed to have a federal government of quite limited, enumerated powers. Fiddling, if you must, should be done at the state level where a) they cannot print their own currency and b) those subject to the improving impulse have the option of escaping without leaving the nation behind.
Purp| 1.4.12 @ 4:06PM
Bush Tax Cuts, Iraq and Afghan War and Medicare drug benefit added almost 1/2 of the national debt - What could the states do about Wars, Medicare and Federal Income Tax Cutting?
Mike 3/505| 1.4.12 @ 10:18PM
No they didn't the numbers clearly say otherwise.
TrueBlue | 1.5.12 @ 1:04PM
Medicare Plan D is the only part of that program that actually works right...
markenoff| 1.5.12 @ 11:15PM
According to CBO numbers in its Budget and Economic Outlook published this month, the cost of Operation Iraqi Freedom was $709 billion for military and related activities, including training of Iraqi forces and diplomatic operations.
The projected cost of the stimulus, which passed in February 2009, and is expected to have a shelf life of two years, was $862 billion.
The U.S. deficit for fiscal year 2010 is expected to be $1.3 trillion, according to CBO. That compares to a 2007 deficit of $160.7 billion and a 2008 deficit of $458.6 billion, according to data provided by the U.S. Office of Management and Budget.
In 2007 and 2008, the deficit as a percentage of gross domestic product was 1.2 percent and 3.2 percent, respectively.
"Relative to the size of the economy, this year's deficit is expected to be the second largest shortfall in the past 65 years; 9.1 percent of gross domestic product (GDP), exceeded only by last year's deficit of 9.9 percent of GDP," CBO wrote.
The CBO figures show that the most expensive year of the Iraq war was in 2008, the year when the surge proposed by Gen. David Petraeus and approved by President Bush was in full swing and the turning point in the war. The total cost of Iraq operations in 2008 was $140 billion. In 2007, the cost of Iraq operations was $124 billion.
According to an analysis by the American Thinker's Randall Hoven, the cost of the Iraq war from 2003-2008 -- when Bush was in office -- was $20 billion less than the cost of education spending and less than a quarter of the cost of Medicare spending during that same period.
John| 1.4.12 @ 7:31AM
Discussions of the mortgage fiasco should include mention of the Bakersfield, non-English speaking strawberry picker making $14,000 a year who purchased a $720,000 home or Minta Garcia, a bus driver with a $800,000 mortgage. If banks discriminated on the basis of race, why did Orientals receive better treatment than Caucasians?
Purp| 1.4.12 @ 8:29AM
Why would any bank do that? Because they were going to sell the mortgage and couldn't care less what happened when they didn't own it - they collected their fees and moved on, leaving the mess for someone else - because regulations were removed to allow them to do it.
GMay| 1.4.12 @ 9:43AM
And why, pray tell, would the bank sell a risky mortgage that they were forced into in the first place?
(Hint: the answer is self evident)
George S| 1.4.12 @ 12:41PM
Not only that, but what would happen if a bank decided to "loan" themselves or family and friends their depositor's money and then claim the loans went bad?
I'm pretty sure there were government regulations in place to send those bankers to prison, no?
Purp| 1.4.12 @ 4:08PM
I assume so, but they have to be enforced by George Bush's administration - are you kidding me? He wouldn't enforce clean water laws, and you think he enforced this?
Purp| 1.4.12 @ 4:06PM
there was no force, never was, never will be. Prove it.
megapotamus| 1.4.12 @ 11:35AM
The regulations were not REMOVED to allow them to do it, they were CONSTRUED to COMPEL them to do it! You are certainly correct that the automatic ability of the bank to lay off these lunatic risks without scrutiny on Fannie was dispositive but who signed on for that? Any QUANGO like Fannie/Freddie will always be inflated and then looted. It's where the money is.
Purp| 1.4.12 @ 4:11PM
Nope. Got that wrong Chuckles. Intense lobbying and billions of dollars spent on lobbying efforts preceded the repeal of Glass-Steagall - that is on the record. The financial industry was concerned about competing with larger International Banks like Deutsche Bank and sold the politicians on the benefits of repeal - just like they did on NAFTA. Neither one has worked out for our country's benefit, has it? And, no one was forced to do anything. That's a canard to give cover to the real crooks - Wall Street run amok and banksters playing casino with our money.
TrueBlue | 1.5.12 @ 1:06PM
Most lobbying precedes the passing or repealing of laws, that's why there were people lobbying for it. Responsibility goes to the guys who actually passed the change, sorry.
Won't argue with the Wall Street run amok bit though, but which party do they primarily support again? Oh yea, the Democrats.
wood pellet mill | 3.12.12 @ 6:18AM
The points made by Mr. Ferrara are well known to anyone who has been paying attention and not simultaneously living in deniel. Bottom line, whenever the Government tries to "fine tune" this or that aspect of the economy they usually end up screwing up. It's called the Law of Unintended Consequences, and it's a killer.
By the way, one thing I didn't see mentioned was the changes in tax policy during the last few decades. Has anyone tried to figure the added effect on home prices of making real estate so tax advantaged as it is? Just wondering.
martin j smith| 1.4.12 @ 7:54AM
BLOOMBER IS BS ( FULL OF IT ) . HE IS A SOCIALIST IN HIDING.
Trebuchet| 1.4.12 @ 8:09AM
1991 Penny Pritzker, a Lib Dem, of Superior Bank comes up with the Mortgage Backed Security to sell portfolio's of Sub Prime loans from her Bank.
1995 JP Morgan comes up with the Credit Default Swap as a Hedge against any loss they may incur from the purchase of the Sub Prime tier of CDO's.
2000, ACORN goes after Ameriquest and Ameriquest makes a big Donation and teams with ACORN to sell their 100% no Down no Doc loans. Paul Sarbanes tells the then CEO of Ameriquest Kirk Lang in front of the Senate Banking Committee "you guys do it right".
2003, Roland Arnall of Ameriquest, after years as a liberal Democrat, changes parties and backs Arnold S. for Gov. over Gray Dufuss and becomes a support of President Bush. Arnall becomes a Neo-Con and finances a private intelligence gathering community headed up by Michael Ledeen. The Left headed by George Soro’s unsheathes the long knives.
2005, Eliot Spitzer a Democratic Presidential hopeful goes after Ameriquest.
2005, John Paulson the head of Paulson & Co. Hedge Fund has a lunch meeting with Soros and they begin buying CDS's against Ameriquest CDO's and shorting the ABX. George Soros nephew is the largest investor in Paulson’s fund. Paulson and Goldman Sachs set up the Abacus Fund loaded with companies that are buyers of Ameriquest CDO’s. As an aside, Soros warns his close associates Herb and Marion Sandler, the owners of World Savings the originators of the Adjustable Rate Mortgage, to sell out which they did just before the crash making a cool 21 Billion dollars.
As more CDS's are bought, automatic triggers for drops in ratings from Moody’s, Fitch, MBIC etc are triggered.
2006, Ameriquest can't sell CDO's because the ratings are dropping. The Hedge Fund Sharks smell blood and circle, buying every CDS they can get and begin buying them against the other Sub Prime CDO's from other Investment Banks and Lenders and anyone who bought Sub Prime CDO's.
2007 New Century and Ameriquest are bled to death (Citigroup led by a Lib Dem, Robert Rubin, picked up the pieces of both) and fold. Paulson makes 14 Billion, Soros makes 13 Billion. The Hedge Fund Managers go into full feeding frenzy and buy CDS against anything that lends money and then begin using Naked Shorts to make sure the ratings drop on the Investment Banks making their CDS explode in value. Also, the companies issuing the Mortgage Bonds can’t find enough crappy loans to issue bonds on to create the other side of the CDS trade so the start writing phony Bonds backed by nothing.
2008 Bear Stearns is nearly driven into the dirt by the Hedge Funds and the game is exposed.
2008 The FED steps in and backs Wall Street making CDS held by Hedge Funds worth pennies on the dollar and the redemptions begin as wealthy Sovereign Funds and Pension Funds put sell orders in to get their money before the Hedge Funds go belly up. Hedge Funds sell everything in sight to cover the redemptions, almost crashing the stock market and commodities. Almost 50% of Hedge Funds are gone now.
Soros has purposefully crashed the Mortgage Market, the Housing Market and the US Economy with two outcomes in mind. 1) Cut off funding for the Conservatives (Real Estate, Home Builders and Mortgage Industries are big contributors to Republicans) and 2) Crash the Economy and insure his candidate Barrack Obama is elected President.
Judy Kay| 1.4.12 @ 10:55PM
Wow! Who are you? Thanks for your enlightening post.
TrueBlue | 1.5.12 @ 1:32PM
Forgot to mention that Citigroup also gained the contract for Government Travel and Purchase Cards after they got their bailout early 2009. Then received another huge chunk of change when they got a tax break amounting to $10+bil after the government sold off the 34% of Citi's stocks that they held (killing the $14bil profit the government should have earned), pushing the company over the 50% of company stocks traded in a single year that was supposed to invalidate that tax break. They got $50bil with their original bailout btw.
aware| 1.4.12 @ 8:16AM
Excellent article, Peter! I would only point out that "government" is still beating the hell out of the dead horse of monetary and credit expansion. The half life of their "policies" is getting shorter and shorter as the end predicted by Mises gets closer.
Purp| 1.4.12 @ 8:31AM
Back to the "bogieman" government ... that is getting so tired and lame, YOU are the government, or did you miss that in Social Studies.
GMay| 1.4.12 @ 9:41AM
Since your understanding of government and the people's influence on it are roughly that of a social studies student of the ninth grade variety, I'd humbly suggest moving forward with your education.
Purp| 1.4.12 @ 4:13PM
Why, didn't you know that elections have "consequences" ? Your vote is powerful when combined with millions of others. I couldn't care less about your suggestion, since it is irrelevant to the discussion and useless in solving any real problems.
aware| 1.4.12 @ 11:18AM
First the rulers said they were gods, then they said they were appointed by God. But they really struck gold with "you are the rulers".
megapotamus| 1.4.12 @ 11:38AM
By "you" you mean the electorate at large. Does that mean that YOU have endorsed and bear responsibility for, say, the wars? Yes, collectively America is responsible but they are feeling the impact of their fantasy and neglect only now. "You" is getting a hard lesson in mathematics and it will continue at least as long as the expansionist policies continue, which looks like indefinitely. The final action of government is always to loot the Treasury. G Washington.
VonMisesJr| 1.4.12 @ 9:34AM
Excellent article Peter. The problem is that the crises has not been dealt with and is being exacerbated by current policy.
Banks are still receiving virtually interest free money from the Fed and buying Treasuries paying 2-3% (all you can eat). Obama and the Congress refuse to let the market clear offering redundant homeowner bailouts. The Fed still holds interest rates at near zero, and Dodd Frank regulated everything but Fannie and Freddie.
We all know the history of the subprime meltdown and who is responsible. I would suggest that you discuss in future articles what is being done to intentionally prolong the crises. And it is clear that this was done for central government increase in power. It has been the largest redistribution of wealth in history. People should have this clear in their minds when they vote in November. If your home value is greatly depressed and perhaps underwater, and your retirement fund suffered huge losses, and your job is on the line; it must be abundantly clear who not only did this, but that they continue to redistribute middle class wealth.
Purp| 1.4.12 @ 4:15PM
And, who, pray tell pulls the puppets strings? You are blaming the wrong people. Follow the money and you will be enlightened.
TrueBlue | 1.5.12 @ 1:35PM
Soros, Buffett, Bill Gates Sr. and Jr... all Democrats. Majority of Wall Street contributions to political campaigns going to Democrats... you're right, let's follow the money.
GMay| 1.4.12 @ 9:39AM
Bloomberg has written itself into irrelevance with one word over and over again - "unexpected".
Unemployment goes up? Unexpected!
Unemployment remains the same? Unexpected!
Unemployment goes down? We knew it!
Markets drop? Unexpected!
GDP estimates for growth revised downward? Unexpected!
Whitey O'Carr| 1.4.12 @ 10:02AM
There is one thing that no one has brought to the attention of the discussion. During this recession/depression the VALUE of real estate has gone down but not the property milleages. Why is that? That is because local gov't uses property taxes to fund their operations.
Now back in the distant past throughout the nation housing was commensurate with the rate of inflation. Beginning in the late sixties local government began to inflate the REAL VALUE of property to increase the amount of tax revenue coming into it's coffers. If you do not believe me, then take a look at all of the distressed properties and underwater mortgages that are still paying the pre 2008 property milleages. The real underlying cause of this economic disaster is the inflation of property values by government. When property is allowed to settle back to a market determined rate, then the economy will begin to grow again.
George S| 1.4.12 @ 12:19PM
Not really. Property values skyrocketed when speculation started after CRA lottery winners entered the market, increasing the demand. Once the values rose to the point where people could no longer afford the prices, those who HAD to sell (move, retire, change jobs, etc.) were forced to lower their asking price. Once the speculators spotted the incipient trend, the dump selling began.
The initial cause was the simple supply-demand law rationed by price. The government made it possible to eliminate price rationing, thus more people had the entrance fee to the housing market.
cvrgrl| 1.4.12 @ 10:29AM
"The big problem wasn't caused just by loans to low income borrowers. Once lending standards were trashed for these borrowers, they couldn't be maintained for more creditworthy borrowers. This let more well-heeled speculators in on the scam, now able to qualify for highly speculative mortgages they could not have qualified for previously. That vastly expanded the resulting credit risk vulnerabilities for the financial system.
HUD then broadened the developing disaster to the entire financial community, across the nation and even around the world, through mandatory regulatory quotas on Fannie Mae and Freddie Mac forcing them to drop their traditional lending standards as well for eligibility for securitization. That securitization pooled these vulnerable mortgages and sold shares in them, known as "mortgage backed securities" (MBSs), to other financial institutions. By the time the housing market collapsed, Fannie and Freddie faced three regulatory quota mandates. The first was to devote 56 percent of their mortgage funding to individuals with below-average income. The second required 27 percent of their mortgage funding to be granted to families with incomes at or below 60 percent of area median income. The third required 35 percent of their mortgage funding go to geographic areas deemed to be underserved.
The debasement of mortgage lending standards and massively increased mortgage funding through securitization of the new subprime and other non-prime loans greatly increased demand for housing, which spawned the rise of the housing bubble. Because the capital markets believed, rightly as it turned out, that the bonds issued by Fannie and Freddie to raise money for their mortgage financing were effectively government guaranteed, the two organizations were able to raise huge sums at low interest rates to pump into these mortgages and their securitization. That pumped housing prices beyond sustainability, and exploded the pollution of U.S. and world financial markets to toxic levels.
Going back to his ACORN days, and through his many years as an ultraleft politician, Obama was a supporter and cheerleader for these very Clinton housing policies. As President, he has been busily reinvigorating them, setting the stage for another housing crisis."
WELL DONE. NOW REPEAT THIS UNTIL THE IDIOT FOOLS THAT COMPRISE THE ELECTORATE MIDDLE UNDERSTAND!
Cynicon Implant| 1.4.12 @ 10:47AM
Excellent summary Peter!
And Purp, if government social engineering wasn't the hand that knocked over the first domino then please explain why banks changed their lending policies in the first place. Good luck with that.
Purp| 1.4.12 @ 4:19PM
I never said government didn't have a hand in all of this - of course they did. By their repeal of Glass-Steagall and lax oversight in the SEC and other agencies, of course they contributed. But the government did not FORCE anyone to offer mortgages to anyone, period. THAT is untrue, a lie that is repeated and repeated in right wing circles so much, y'all believe it now. Seems I've heard of that technique - connected with, now wait, I'll have it, wait, oh, yea, the NAZIS.
buckeyeman| 1.4.12 @ 10:51AM
"The Community Reinvestment Act can't explain why house prices in the U.K., Ireland, Spain and France doubled earlier this decade and almost doubled in Australia."
Many other countries had similar policies flowing from their own socialist/Marxist philosophies.
Purp| 1.4.12 @ 4:19PM
Very good point. Can anyone explain?
megapotamus| 1.4.12 @ 11:41AM
I strongly support the conclusions above but there is one caveat not addressed. We have clocked "trillions" in real estate value losses, yes, but how much of that was "bubble" or illegitimate inflation? It seems quite a bit of it and I speak as someone so underwater I am in danger of my nads getting sucked down the drain. These are unrealized losses overwhelmingly and an aversion to taking that haircut is holding back market recovery. When people have no option but to realize their losses THEN the prices will truly collapse, spark the bargain buying and bring us back to growth. Nothing else will do so.
axbucxdu| 1.4.12 @ 12:18PM
"...When people have no option but to realize their losses THEN the prices will truly collapse, spark the bargain buying and bring us back to growth. Nothing else will do so."
Thus the essence of Austrian economics: There is no such thing as a Free Lunch. But could you delay the collapse until MY house is sold?
markenoff| 1.5.12 @ 10:29PM
The essence of all rational schools of economics is that there is no free lunch. The essence of Austrian economics is the subjective theory of value. Your house isn't worth what you think it is if no one will pay your asking price for it. I am a Schumpeterian/Austrian in my outlook.
George S| 1.4.12 @ 12:26PM
... or we could wait for inflation to eat away the overinflated value. But the bottom line is that housing values are only determined by what someone is willing and able to pay. Right now, nobody is willing to pay the inflated value unless someone pays the overinflated value for their house. The result is the same: the buying power of each transaction is neutral, i.e., no capital gain, as one house is traded for another.
JimH| 1.4.12 @ 1:42PM
If government regulatory changes encouraging banks to lend to less qualified borrowers was the main problem, wouldn’t that show up as a disproportionally high number of foreclosures on the lower entry level of the housing market? Is this the case? Or did this new money drive up the price in all housing sectors? The real estate bubble by itself did not cause the financial meltdown. We’ve had these bubbles before and when they occur owners of over priced homes get hurt but the market works through and recovers. The crisis this time was because mortgages, good and bad were bundled together and collateralized. Rating agencies had no proper way to evaluate them, and apparently assumed that as long as the real estate market was rising there was little risk involved. As long as this was going on the mortgage issuers had little incentive to be careful. Fanny and Freddy bought tons of this paper, in part to encourage the market. I’m not clear on the details but it seems that the crisis was caused, not just by these CDOs but because further downstream they were being leveraged and purchased on margin. As a result when the bottom fell out the downside for these margin deals was far more than the money they had invested. You could say government was an enabler and created the necessary conditions for the meltdown but the private sector is not blameless.
Pat| 1.4.12 @ 2:29PM
A former Fed chairman, Alan Greenspan, also chimed in today with his unsolicited analysis of the ongoing comedy within the halls and restrooms of Congress. According to Greenspan, the ideological debate over spending on the welfare state is the problem we must deal with in 2012. With the exception of Obama supporters and Occupy protesters, intelligent Americans have to be asking: “What debate over welfare spending?”.
America continues to spend billions on every conceivable form of transfer payments (don’t you just chuckle at that euphemism) and just as we have done these past several decades. So, what debate, Greenspan? We don’t debate, we just continue to spend – everyone knows that so what’s your point?
The GOP is being setup in the mainstream media as “fiscal tightwads” who wish to deprive the underprivileged – but that’s hardly new news. Congress, regardless of the election outcome, plans to continue earning their clandestine commissions on the vast river of money flowing into various government giveaway programs. The mathematical chance this phony “debate” would somehow curtail that multi-trillion dollar flow and those healthy commissions is the same as you being attacked by a lion and a grizzly bear on the same day while in the drive-thru lane at McDonalds. We have to pretend we are actually debating this issue in order to reinforce the illusion us voters have control over our government and our elected rulers. Sure we do and watch out for those grizzly bears and hungry lions as well.
Jabber3| 1.4.12 @ 4:10PM
Peter the federal government's housing policies as the real cause of the crisis needs to be continually communicated through articles like yours so that the blame cannot be placed elsewhere in order to use an angry electorate to continue to propagate these failed policies.
Purp| 1.4.12 @ 4:23PM
Except that it is untrue and a bald-faced lie. It's an effort to cover up the real crooks - but the game is up and prosecutions are starting.
cicero| 1.4.12 @ 4:59PM
Everyone keeps looking for answers in the mortgage market, when the real problem was in the banking industry. First the government repealed Glass/Steagal, allowing the banks to enter the gambling arena. Then the government saddled the industry with mark to market accounting. Finally, the bailed out the bankers when they crapped in their own baskets. While the first two were foolish, the last was (should have been recognized as ) criminal. Once it became abvious that the banks destroyed their own balance sheets by refusing to loan mooney to one another on the poker chips they has invented and agreed to use in the game, all of their assets had to be marked down to zero. If the government had done nothing, the whole thing would have righted itself in about 2 weeks. Granted, some of the bankers would have lost their jobs, and some of the banks would have had to take serious losses on their ledger sheets. Some of the bankers may even have been sued by their shareholders, and been made to give back thee last $100 million or so in bonuses. The statedd reason for the taxpayers rescue was so that the loan market would not dry up. What a joke! The only loans extended by the big banks was to the Federal Gov., in the purchase of T-bills.
The real shame of this whole fiasco is that the working class and the poor with be devastated economically when they inflate the currency to absorb the debt levels incurred. And nobody will go to jail. . .
But don't get me started.
Pat| 1.4.12 @ 6:59PM
Cicero, good analysis and recounting of events. But did you notice none of the major players in Washington or on Wall St. actually suffered from this little bedroom comedy? Sure, average Americans defaulted on mortgages, a small town in Norway even lost its city pension fund to Wall St., the little people, both here and abroad, certainly suffered but who can recall an agency head or elected official going to jail - or a Wall St. banker stepping out of his 40th story window in a fit of remorse?
The crisis got out of hand we were told due to the complexity of the financial system? Ok, we understand that, but who actually suffered among the Washington/Wall St. axis of evil crowd? Turns out that no one did.
Our political rulers have a tried and true formula for these situations. First, jiggle the regulatory rules so certain insiders can make fortunes requiring extra-large Swiss bank vaults. Next, spread the word, plus money or generous favors, among the Washington regulatory agencies – look the other way while we loot the store, we won’t tell if you don’t. After the crisis hits, muddy the waters and the public’s understanding with mind boggling complexity so no one actually comprehends the recent problem and then demand an immediate government infusion of taxpayer funds so the inside players don’t lose their windfall profits.
Alan Greenspan, the Feds’ chairman, later admitted he didn’t understand how credit default swaps worked but felt there was “something wrong” at the time. How amusing. Apparently, the Banking Commission, the SEC and the regional Federal Reserve governors also shared Greenspan’s total mystification with what was going on and, coincidentally, all at the same time.
Congress held hearings as they usually do, no one went to jail though, no head of a government agency even had to take the 5th. We never found out who in government got rich looking the other way or which bankers met with which Washington players over a drink to plan this fiasco.
In hindsight, there are those who blame the failure on this specific incident or that specific change in regulations. It helps them pass the time but Americans aren’t stupid, we know we were deliberately swindled by those we should be able to trust. Wouldn’t’ be the first time either. Our system is so easily manipulated by those who legislate the rules and those who have the money to pay for these legislative changes that we, the public, will remain perpetual dupes.
When suicidal bankers are raining down on Wall St. sidewalks and government agency heads are quickly packing a bag and heading toward countries with non-extradition treaties, we can assume those mythical “checks and balances” have actually started to function. Until then, however, the incredible sums of money we allow Washington to manage would corrupt even Mother Teresa – and our elected employees would never be mistaken for Mother Teresa.
Jon Bryden| 1.4.12 @ 5:19PM
Excellent article!! It really hits the nail on the head. I'm going to reprint this for my liberal friends to read.
cicero| 1.5.12 @ 1:38PM
Pat, my pointt exactly. Unfortunatley, our press has done a lousy job of reporting this story. They take what the malefactors give them, and print it as fact. What a waste of paper. I include the WSJ in this, as they are supposed to know better.
POST American| 1.5.12 @ 11:11PM
---------------------FINAL WORD-----------------------
"---the Government Causes' (?)
YES, yes indeed,
---the ECO--gnomic EUGENICS
of the 'Shadow Government'
---and their lurking places
within the deadly, deadly 'sin--is--stir'
TAX FREE, ultra-rich foundations
---------------REMAIN THE SOURCE.
The UNMENTIONED ----SOURCE.
----------HUAC/ Nuremberg 2012------2100--------