FDR’s First Fireside Chat: The Banking Crisis

The start of our financial crisis was the meltdown of Fannie May and Freddie Mac. Why didn’t these institutions have the proper regulations to prevent them from failing?

Here is a report with quotes and video:

http://www.youtube.com/watch?v=VgctSIL8Lhs

No, jwest- the start of the problem was the easy credit that has been pervasive in our society for many years. The problem stems from a materialistic national shopping mania -- we have transitioned from a self-sufficient society to a society whose economy is based on consumerism.

Remember dear leader patting himself on the back about the percentage of home ownership, and urging everyone to go shopping in a time of crisis?

BTW- I thought you conservatives didn't believe in regulation? I don't think you can blame one financial institution when the entire banking/investment industry is going under. Are these the latest GOP talking points? Blame Fannie and Freddie then point out that Democrats took large campaign contributions from them?

Beyond desperate and lame, my friend.

Kim, no real conservative would ever oppose regulatory oversight of a government entity (not claiming that the current GOP wouldn't, but conservative principles would say that whenever there's a govt expenditure there should absolutely be regulation because you've removed that entity from the effects of the market.)

And yes, Fannie and Freddie were govt entities because the risk associated with them was being underwritten by the US govt.

I'm quite sure there were guilty individuals in the GOP for opposing changes to the oversight of Fannie and Freddie, but there's no disputing who was leading the opposition to that reform (Barnie Frank and Chris Dodd, who now pretend to be outraged over the meltdown.)

Kritt,

The “easy credit” you speak of was a result of democrats insisting that low income people were being discriminated against by the lending institutions.
“We want to see equal credit being offered by banks because it is the right thing to do, because the law requires it, because it is good business, because people accept it. “
(Janet Reno)
http://www.usdoj.gov/archive/ag/speeches/1998/0...

Banks and insurance companies were threatened with lawsuits and prosecution if they didn’t loosen up credit requirements and start making loans in low-income areas. Freddie and Fanny cooperated by buying the packaged loans that were written.

As the loans came into Freddie and Fanny, the growth permitted the executives of these institutions to reap large bonuses. They had no incentive to exercise good judgment on refusing some of these packages, as it would reduce their income.

Bush wanted increased regulation and oversight, so did McCain. Elrod’s relative, along with Dodd and Schumer blocked everything that was proposed – along with taking large contributions.

kritt11 said: "...the start of the problem was the easy credit that has been pervasive in our society for many years. The problem stems from a materialistic national shopping mania -- we have transitioned from a self-sufficient society to a society whose economy is based on consumerism."

I agree mostly with that assessment. I don't think consumerism is necessarily bad thing. But the easy easy credit IS a big reason. Why was I, at 18 years of age, sent numerous ads for credit cards. I feel for two of them and really messed my early credit up with one of them. Now I take full responsibility for being a blockhead during those times BUT being offered credit THAT easy fresh out of high school just seems very risky. And that's only on a Main Street level.

jwest said: "The “easy credit” you speak of was a result of democrats insisting that low income people were being discriminated against by the lending institutions."

Low income credit wasn't the primary problem. It was the "stated income" loans with no verification offered to those $100k - $250k a year folks buying $2+ million homes. There are swaths of those high-priced foreclosures in Las Vegas, suburban Detroit, Miami Beach, and other hardly low-income areas. Yes credit was extended to low income earners but it was alot of upper middle class to high class nonsense contributing as well.

Here’s a NY Times article that explains it better:

http://query.nytimes.com/gst/fullpage.html?res=...

Of course Freddie and Fannie are federal organizations, just like Amtrak. Nominally private, but you know where the money comes from to back them up when needed.

[sigh]

At least nobody -- yet -- has commented here that Obama is also the next FDR.

But I'm sure that Shaun will somehow claim McCain is Hoover (and Nixon).

The Community Reinvestment Act (from the late 1970s) was wrong -- banks should not be required to function as social institutions or to function for other reason than to make money (same for all businesses -- "social responsibility" is pure garbage).

That being said, there were not problems with bad loans shortly after the Act was passed. What we saw instead were in two cases, institutions exploiting deregulation (S&Ls in 1980s, other institutions in 1990s and 2000s, particularly during the housing bubble of recent years, with easy credit). The housing bubble compounded this (inducing more bad borrowers to take loans they could not repay). Both financial disasters coalesced and became public disasters during Bush presidencies, incidentally.

What we see proposed now by the Democrats is the morally and financially wrong thing to do: effectively provide federal support to squatters, letting homeowners stay in homes when they face foreclosure, demands for mortgage interest freezes (this is Third World dictatorial as well as far-left crazy advocacy, and obliges the federal government to repay the difference plus penalties to compensate the lenders for the "taking" and for interfering with contracts), and similar nonsense.

If the federal government takes over actual properties, the homes should of course be foreclosed (occupants evicted) and the homes refurbished and improved before being sold later at a profit.

Obama is the next FDR....

Just had to break the "not mentioned yet" streak, DLS. :-)

My point of course was missed. Its simply just not fair to blame this entire mess on Fannie and Freddie and the relaxation of loan conditions for low-income home owners. Lehman brothers, Bear Stearns etc etc certainly should share the blame for risky investing as does the rest of Wall Street.

And my biggest problem is that requiring regulation only of entities that require backup from the govt seems inadequate---we see in this bailout that private entities will benefit from tax payer monies as well.

T Steel- I read a story once where a dog was sent a credit card (I'm assuming he didn't use it, LOL)

That is precisely my point- consumers have been encouraged to get over their heads in debt --- then derided for doing so. Bad judgment all around.

others have already beat him to the punch.

Of course, Ann Coulter agrees with me:

http://www.anncoulter.com/

Apparently, Bill Clinton agrees with me too:

http://newsbusters.org/blogs/noel-sheppard/2008...

jwest- I hardly call Ann Coulter a nonbiased source! And nowhere did Clinton say that the fault lay only with the Democrats--there's plenty for your side as well. After all, much of the easy credit was issued with a Republican conservative in the WH and a GOP led congress.

Kim, I don't disagree that other reforms are needed (in my view, for example, we need more restrictions on mergers- companies shouldn't be able to grow so large that they are virtually unmanageable, and certainly not so large that the govt is forced to bail them out in order to prevent a national economic crisis.)

But I think you continue to underestimate the degree to which the subprime mortgage problem was the catalyst for the meltdown. The toxic assets being held are right at the middle of all of this, and those assets are illiquid because there's no way to value something that no one wants to buy. The private companies affected by this are involved because of Fannie/Freddie subprime lending programs- the subprime mortgages were then bundled into bond like instruments which were traded by the other financial institutions that you mention.

Perhaps the point could be made that those instruments should never have been created, that this would have been a point at which regulation should have been applied- but no one from either party ever spoke out against them to my knowledge. And despite the public perception that Wall Street is tight with Republicans, the truth is that the Wall Street firms always back a winner and that means recently they've been major financial supporters of high ranking Democrats.

Another area that needs to be investigated is the rating agencies; there appears to have been some very shady bundling of the 'tranches' and the method of rating them, which obscured the actual risk. Again though, I don't recall anyone ever speaking of need for that specific reform.

In other words, your claim that the Dems favor regulation and GOP resists is a vast oversimplification and that partisan spin will prevent us from ever shining the light of day on who contributed to this mess.

BTW though, TSteel is right about the high rollers who bought houses with some of these loan instruments. From what I understand though, the minority lending concerns were the initial impetus for pushing for these subprime loans (and zero down, interest only, etc) and then that left a loophole for those who didn't fit into the minority or low income category to exploit. Again, the fact that it was being exploited was never a complaint until now, when all of the Monday morning quarterbacks are noting it and pointing fingers.

Kritt,

“Bill Clinton on Thursday told ABC's Chris Cuomo that Democrats for years have been "resisting any efforts by Republicans in the Congress or by me when I was President to put some standards and tighten up a little on Fannie Mae and Freddie Mac" (video available here, relevant section at 2:45).”

"Of course, Ann Coulter agrees with me"

That's got to be the first time I've ever heard that here. But if Coulter and Clinton are on the same page on anything then perhaps the world is about to end.

CS- You have made some valid points. I happen to agree that many of the loans should not have been offered in the first place. Many as T STeel points out were not necessarily minority first time home buyers. I particularly have a problem with interest only mortgages-- where the buyer is only on the hook for the interest and has to put zero down. Then, if the home devaluates they owe more than its worth.

BUT why not help from the bottom up? Rework the loans and assist those in foreclosure to keep their houses? I'm not talking about cases where the owners have no chance of keeping their payments current-- just those who are on the brink-

Interesting though, that the phenomenon of despising the candidate from your own party might be the reason that Coulter and Bill Clinton are agreeing. It's freeing to be able to say what you really believe instead of the party line.

kim: I agree there might be a place for renegotiating some loans- the only problem I see is that this shouldn't happen with ALL of the defaults, plus it's a bit unfair to those who've already lost out. Choosing how to do this would be problematic, but I'd support it in principle.

Right now I think I'm most on board with Gingrich and Pence: handle the valuation process by changing the mark to market process (instead of as Treasury suggests is necessary, have the govt act as a buyer and setting up auctions to determine value.) The crisis of valuation is mainly on paper and the mark to market can be adjusted to solve that problem (I think Gingrich suggests a three year rolling average, which seems reasonable.) Along with that, they're suggesting a zero capital gains tax (Pence says temporarily) to get quick influx of private capital to buy the distressed properties once they're revalued. Then also put massive effort into energy plan to stop the hemmorhaging of capital that we're experiencing from oil purchases abroad.

That seems like the rational conservative fix for the problem- along with some of the regulation reforms I suggested above to stop future problems.

Just for good measure, here are the 17 times the Bush administration tried to get congress to tighten the regulations on Freddie and Fannie.

http://www.whitehouse.gov/news/releases/2008/09...

I really could care less about who did what and when at this point. Congress has basically "sucked" regarding all things finance for a lot longer than some may think. As for Bill Clinton, well... I wonder would he be so forthright if Hillary had the nomination. Methinks he would be tempered some.

I think we are have a serious, America-as-we-know-it decision here: Capitalists or Non-Capitalists. As much as it pains me to say (and experience) I would rather see a full collapse and rebuild rather than a patch-it-up-and-see-what-happens. An economic collapse in the USA would permanently alter (with MUCH incentive) how we "do business". Some will argue that we may not be able to get back if there is a full collapse. I say I DON'T WANT TO GO BACK. I want a new and improved capitalist structure. Make our governmental leaders earn that paycheck for once.

I have zero faith in this proposed bailout/whatever.

Mikkel has long, well-researched guest posts on all of this. Just scroll down. If one need to find a single source of the current crisis, it's simply that our debt levels were too high. Fannie and Freddy were the biggest players in this unsupportable debt, and so failure to regulate them is an important error, but clearly not the only ones. Deficits don't matter, I heard somewhere. Apparently, they do.

Also, why is this just coming out now? Where were Paulson and Bernanke for the last year? Apparently they assured members of Congress that the economy was sound. Even the GOP nominee believed that as of a couple of days ago! Pres. B was reluctant to sound the alarm or say the R word- even though most economists and the D's believed we were in trouble months ago.

"Of course, Ann Coulter agrees with me:"


You're tryin to be funny, I hope. AC has about as much financial savvy as a Barbie Doll, but with more botox and tighter skirts.