whose policies caused the crisis?

[Anonymous]

I've been trying to figure this out. Economics is not my thing. I read these convincing stories that blame the mortgage crisis on the democrats but I thought deregulation was a Republican thing... I'm trying to read more on the internet but all I get are blogs by people who clearly have a biased opinion. For those of you who understand this thing, what do you think? It would be good to hear from both sides... OR if there is a NONPARTISAN economist out there?????

[Anonymous]

Aaah- sorry! I meant to post this in the political forum. I don't know how I messed up... I blame sleep deprivation. Can it be moved?

[jsteele]

Both sides contributed. Republicans contributed more.

[Anonymous]

Everyone had a hand. Who is not to blame?

The Bush Administration had a goal of expanding their base by widening home ownership.

Bankers created financial products that were intricate and flawed.

The Fed under Greenspan believed that the markets were going to self-regulate as new financial instruments were created and did not regulate these new products.

The Republicans deregulated the banking industry.

The Democrats protected Fannie and Freddie from proposed regulation by the Republicans.

The mortgage companies also pressured Fannie and Freddie to back riskier mortgages.

Fannie and Freddie also wanted to gain market share and got involved in riskier lending to meet their growth objectives.

People bought houses they could not afford on the belief that they could always sell them at a profit.

Who did I forget?

[Anonymous]

Greenspan, the nut.

[Anonymous]

The reckless expansion of home ownership began in 1977 and was significantly expanded in the Clinton Administration. This, coupled with the Gramm deregulation was the catalyst, in my opinion.

[Anonymous]

Anonymous wrote:
Who did I forget?

You did a GREAT job!

I'd like to add that the increase in globalization has magnified the effects tremendously. Not sure who to blam for that. But -- the fact that everything is so closely connected and intertwined these adys means that the lack of access to credit is having enormous repercussions in, say, the shipping industry, which is affecting people areound the world.

[Anonymous]

Anonymous wrote:Everyone had a hand. Who is not to blame?

The Bush Administration had a goal of expanding their base by widening home ownership.

Bankers created financial products that were intricate and flawed.

The Fed under Greenspan believed that the markets were going to self-regulate as new financial instruments were created and did not regulate these new products.

The Republicans deregulated the banking industry.

The Democrats protected Fannie and Freddie from proposed regulation by the Republicans.

The mortgage companies also pressured Fannie and Freddie to back riskier mortgages.

Fannie and Freddie also wanted to gain market share and got involved in riskier lending to meet their growth objectives.

People bought houses they could not afford on the belief that they could always sell them at a profit.

Who did I forget?

================

La raza. Washington Post. Illegal immigration. Political correctness run rampant.....somehow we were supposed to blindly accept massive construction starts and massive numbers of new workers who displaced whole neighborhoods. at least that is what happened in fairfax and prince William counties.

[Anonymous]

Anonymous wrote:Everyone had a hand. Who is not to blame?

Who did I forget?

The mortgage brokers/companies and their "No document" loans. That means the borrowers did not have to prove their income or even employment for that matter. It's hard to believe there weren't laws to provide some level of guidelines. ANYBODY could become a mortgage broker.

Hedge funds: neither the people working in the financial industry nor people in government understood hedge funds enough to even regulate. Where there's smoke, there's fire. It's like the charlatans who sold magic snake oil in the 1800s. Nobody knew what was in it. Doesn't that signal something?

While everyone had a hand in this mess, ultimately, it is Uncle Sam to provide boundaries.

[Anonymous]

It's not the foreclosures that primarily caused the problem-- it's the hedged financial instruments that caused the problem.

Say there was $1 trillion in bad mortgages-- yes that's a lot and yes it would have caused some problems, but the problems would have been contained.

The real issue is that financial "geniuses" then sold off the rights to collect that $1 trillion in mortgage payments to hundreds of different banks-- by packaging it in "mortgage backed securities" (so that any one mortgage is in many MBS, and any one MBS has many mortgages).

Then, on top of that, other geniuses started collecting money to guarantee that the homeowners would actually pay their mortgages. Since it seemed like this was free money, and their was no regulation of these "credit default swaps", these banks guaranteed a lot more than they could ever cover-- say $50-60 trillion.

Now when people started defaulting on the $1 trillion, that meant that no one knew which mortgage backed securities were still valuable, and it also meant that the people who had been collecting fees for credit default swaps suddenly needed to pay up on the much larger amount of insurance they had promised to pay.

While everything was going swimmingly while people could make their mortgage payments, what really caused the severe problems for the banks aren't the foreclosures but the leveraged bets banks made that foreclosures would never happen.

Anyone who blames these problems on illegal immigrants is ignorant at best.

[Anonymous]

A friend of mine wrote this. I don't know if it's true, but I found his argument convincing:

As much as we would like to concentrate on things that we can control, it is an undeniable truth that what is playing out in the Financial Sector is clear cause for concern to all of us. As you will see later, the only ones who are probably not concerned are the speculators that are probably raking in immense profits. The past few weeks, we have seen gigantic financial companies crumble in a matter of days. The perfect financial storm took time to develop. Unfortunately, any warnings were lost in the wave of extreme speculation condoned by administrators more interested in their performance bonuses than the preservation of their company’s very existence.

What I would like to do now is describe how this storm developed. I am sure you have heard that the root of the problem was the Sub Prime Mortgages that were issued to home buyers who were not sufficiently credit worthy to qualify for Prime Mortgages. Additionally real estate prices were increasing in double digits year over year, and one could justify the mortgage’s value by the over valuation of the underlying properties. These mortgages where bundled into large pools and sold to investors in what are called: Collateralized Debt Obligations (CDO). Those CDOs yielded high interest rates because of the higher risk. When the banks sold them they replenished their cash positions to begin a new round of mortgages and the cycle repeats itself. So far so good, this is how the economy is supposed to work. Proof of this is that a very large majority (85%) of these mortgages are being paid on time.

In order to make it more palatable for investors to buy these mortgage packages, the banks sold “insurance” to guarantee the principal against default. They did this by selling Credit Default Swaps (CDS). The investors would pay the banks a quarterly premium and the bank would guarantee that if the mortgages went into foreclosure, the investors would get their money back. So far so good. CDSs are basically hedges by the investors against the possibility of foreclosure. Since they pay a quarterly premium they receive less interest from their investment and the banks can book the extra premium as income. This extra premium pads the banks income and executives get higher performance bonuses.

So where is the problem? The problem is this:

A. CDSs are not regulated. By calling them Swaps instead of insurance, the banks do not have to set aside reserves to guard against the exposure. Since they do not need to set aside reserves, the exposure does not make it to their books. This results in higher profits without revealing the liability and they can justify higher bonuses for the executives.
B. CDSs can be bought by anyone, even those who do not own the mortgages. Here is where the speculators came in. They pay another premium to the banks (more profits – higher bonuses). The banks have increased their income, but hidden behind off the books accounting, they have acquired more exposure to the eventual default of the mortgages.

Let’s look at the math:

A bundle of mortgages has face value of $10 million. Interest rate for the bundle is 8%. The bank sells a Swap to the buyer of the package and charge a 2% premium. The investors receive less income (8% - 2%) but the principal is now guaranteed. Bank receives $50,000 quarterly that it can report as regular income. It is assuming $10 million in risk, with houses as collateral. If the package goes into default and the bank can only recover $7 million in foreclosure, the bank will have to pay $3 million to the original investors. This is manageable.

However, since anyone can buy CDSs without owning the mortgages, the banks went on a selling spree and sold 49 more CDSs on the same pool mortgages. Now it can book quarterly profits of $2.5 million. More profits, more bonuses, no need for reserves, off the books liability. However, they now have $500MM of exposure against $10MM collateral. When the mortgages default the bank has to pay not the original $3 million but $150 million ($3MM time 50 Swaps). If they can only recover $5MM they have to pay $250MM. etc.

That is the root of the problem. When the Sub Prime mortgages start to go into foreclosure, the banks are liable for many times the face value of the mortgages. This is how banks so huge were insolvent almost overnight.

It is estimated that the total value of CDSs is $50+ Trillion. That sum is many times larger than the underlying financial instruments they are supposed to guarantee. All this in an unregulated environment. Talk about a perfect storm!

[Anonymous]

Anonymous wrote:The reckless expansion of home ownership began in 1977 and was significantly expanded in the Clinton Administration. This, coupled with the Gramm deregulation was the catalyst, in my opinion.

I completely agree. Government telling financial sector what to do, beginning with carters community reinvestment act which laid the ground for gvmt and lobbyist forcing banks to issue mortgages that were against their standards. and it was clinton administration forcing freddie and fannie to increase the share of risky morgages in their portfolios.

seems more democratic to me, no?

of course greenspan and his monetary policies were a huge part of it too

[Anonymous]

Anonymous wrote:

Anonymous wrote:The reckless expansion of home ownership began in 1977 and was significantly expanded in the Clinton Administration. This, coupled with the Gramm deregulation was the catalyst, in my opinion.

I completely agree. Government telling financial sector what to do, beginning with carters community reinvestment act which laid the ground for gvmt and lobbyist forcing banks to issue mortgages that were against their standards. and it was clinton administration forcing freddie and fannie to increase the share of risky morgages in their portfolios.

seems more democratic to me, no?

of course greenspan and his monetary policies were a huge part of it too

If there had been some level of monitoring on the financial engineering, packaging MBS black hole securities, selling, repackaging, reselling, etc., then we would not have the SCALE of financial market mess that we have in the US and across financial markets around the world.

Republicans/conservatives seem so myopic and short-sighted on many topics. Really. If evolution had been a decision left to republicans/conservatives, Homo Sapiens would not be walking upright, but toggling along on our knuckles.

[Anonymous]

Anonymous wrote:

Anonymous wrote:Everyone had a hand. Who is not to blame?

The Bush Administration had a goal of expanding their base by widening home ownership.

Bankers created financial products that were intricate and flawed.

The Fed under Greenspan believed that the markets were going to self-regulate as new financial instruments were created and did not regulate these new products.

The Republicans deregulated the banking industry.

The Democrats protected Fannie and Freddie from proposed regulation by the Republicans.

The mortgage companies also pressured Fannie and Freddie to back riskier mortgages.

Fannie and Freddie also wanted to gain market share and got involved in riskier lending to meet their growth objectives.

People bought houses they could not afford on the belief that they could always sell them at a profit.

Who did I forget?

================

La raza. Washington Post. Illegal immigration. Political correctness run rampant.....somehow we were supposed to blindly accept massive construction starts and massive numbers of new workers who displaced whole neighborhoods. at least that is what happened in fairfax and prince William counties.

I'm not getting you at all. How did immigrants cause the problem?

Immigrants who build houses do so by working for the companies who are building them.
And immigrants who buy or rent actually help hold up home values by creating demand.

A lot of people, including conservatives, think that immigration is the best way to solve the problem. Right now we have too many homes, and we need to fill them. Greenspan, for example, a libertarian, pushed this idea.

[Anonymous]

[quote=Anonymous


I'm not getting you at all. How did immigrants cause the problem?

Immigrants who build houses do so by working for the companies who are building them.
And immigrants who buy or rent actually help hold up home values by creating demand.

A lot of people, including conservatives, think that immigration is the best way to solve the problem. Right now we have too many homes, and we need to fill them. Greenspan, for example, a libertarian, pushed this idea.

Some conservatives (like Ann Coulter) are saying that it's the fault of minorities who were given mortgages they didn't qualify for, and then defaulted. It's the liberal dems fault for the "Equal Opportunity" approach to mortgages, for forcing Fannie/Freddie for example to give mortgages to those who did not qualify.

I am not saying that. It's what I've read from conservatives.