Can you please point me to what it is that Phil Gramm is responsible for? Seems like a mixed bag from what I can tell, where some of the deregulation he enabled (he was by far not the only one doing that- Bill Clinton admits that he favored the overhaul of Glass Steagall, he wasn't pressured by Gramm and other Republicans- and a lot of people are refuting the idea that those changes caused more harm than good.)

I keep hearing Gramm's name being thrown around as the embodiment of deregulation, and I think that's a gross exaggeration and possibly a complete distortion of what he really did.

And although I take your point that the policies are reflective of our entire system rather than policies of one party or another- the problem I see is that people in general don't see it that way and instead view it completely through partisan lenses. I don't think there's any hope of fixing that until we correct the public perceptions.

These policies are reflective of our entire economic system on a basic level and is not specific to a party nor even politics in general.

The best analogy though is that liquidity is a river and regulations are levees. The more liquidity there is the better the regulations have to be to keep it from overflowing and both the Republicans and Democrats (and business and economists) encouraged a raging torrent of liquidity that even perfect regulations couldn't contain fully…but then in the last 10 years they knocked down most of the very important regulations — and Phil Gramm was instrumental in a lot of that — and so now we're all flooded.

The only policy that they know how to do is add more liquidity, and it's not helping because that was the problem in the first place. Hence our current crisis.

When you mention the moral hazard issue starting with Clinton- it seems to me that the point that was made, even by Clinton, was that the regulation needed to be close to the source of the problem (good independent oversight of the GSEs themselves) because otherwise it would spread systemically. Now, from what I can tell your argument seems to be that the problem was laxity in the overall system to regulate in the private sector lending agencies- but I think what was being said was that the primary cancer needed to be treated rather than trying to regulate against metastasis. Does that make sense?

What about mergers or acquisitions — did the CRA get in the way of that?

“Since 1988, there have been more than 13,500 applications for the formation, acquisition, or merger of bank holding companies or state-member banks reviewed by the Federal Reserve Board. Over this time, twenty-five applications have been denied, with eight of those failing to obtain Board approval involving unsatisfactory consumer protection or community reinvestment issues.”

Wow, just 8 out of 13,500. That's less than one tenth of 1%

You should read the links, since Barry points out the vast majority of originators didn't even have CRA apply to them.

Now don't get me wrong, I am all for conservative standards in home buying. I think that they should get rid of the mortgage tax deduction and the industry standard should be 20% downpayment and that the mortgage payment takes up a maximum of 28% of the monthly income. I don't think that home ownership should be a goal in and of itself. In fact I got into an argument with my dad because he said that he thinks we need to have policies that are inflationary to keep people in their houses and that lending to the poor was good policy, while I argued that it was just papering over systemic imbalances and it's better to have policy that lowers the cost of housing and helps address poverty, and then they could buy a house the old fashion way.

But part of the reason why Barry at the Big Picture is so angry (he normally has very temperate posts) is because he has been talking about these things for over 5 years and now literally the exact same people that told him he was crazy and helped perpetuate the problems are trying to get out of the blame.

What I object to in your understanding is the conflating of regulation with moral hazard. There is an objection to government ventures that they create moral hazard by mandating objectives and backing companies in a way that they'll do things they normally wouldn't (or by stepping in and bailing out companies “to big too fail”), but regulations provide rules to limit this risk.

Starting with Clinton in the late 90s, but especially in the early part of the decade and through Greenspan's malfeasance, the regulations were all but destroyed while the moral hazard remained. This leads to crony capitalism.

The GSEs obviously had some crony capitalism but the vast majority of it was not their regulations (which were basically untouched) but the lack of regulation on the rest of the industry. Now we are paying for it.

I guess it seems like perhaps my language is sloppy (or that which I'm getting from other sources ) in referring to subprime, and I know it's better to be accurate but if you use whatever term is right for 'bad, high risk loan' it still seems that the concept of CRA and the GSEs were a big driver (notwithstanding that I may find other information in the sources you provided that disproves that- but from what I see so far.)

The parts that I've read elsewhere that you don't seem to address involved the mandates by CRA (which were basically like affirmative action, requirements to make loans to certain percentage of minorities even if they really couldn't afford the loans) and it seems that various new mortgage instruments were created in order to help meet those goals. But since it was done in this way, the new mortgage instruments also left the door open for other buyers and speculators to jump on the bandwagon and leverage real estate investments in a way that was fundamentally unsound and only worked for a while because of housing price inflation.

Where the CRA and ACORN type of involvement came in was in putting more and more pressure on the private lenders- not that the banks weren't willing participants in these schemes, they definitely were- but it was only the ones who really pushed these types of mortgage products (which perhaps had some of the beneficial effects that ACORN wanted, but as usual had the unintended negative consequences too.) There is a lot of talk here in Atlanta about thug tactics that ACORN used when they didn't think certain banks were doing their part- so that the banks that pushed the junk loans the most were the only ones that could expand or participate in mergers and such.

We'd have been far better off funding the housing programs directly in some way- maybe partnering with groups like Habitat for Humanity that allow unqualified buyers to get in by giving sweat equity- rather than creating this ponzi scheme. It seems like Bill Clinton foresaw some of these problems and he now has to admit that the Dems in Congress refused to address them from the outset.

And as far as the GSE role as I understand it, Fannie and Freddie also had perverse incentives both by their mandate and by the corporate bonus structure, so that they created the demand for the private institutions to peddle more and more of the bad loans (again, not that they didn't do so willingly in most cases.) The more I think about that, although I didn't realize that Fannie and Freddie didn't originate most of the bad loans and you're probably right about that, it doesn't really matter if their structure and mandate was such that they were creating a huge demand that incented all of the private lenders to do so, does it? Which brings to mind lenders like Countrywide, which seemed to be completely on board with this whole scheme and took full advantage of it, which had disastrous outcome.

Some links:
Here
here
here
and here

from the Big Picture. Those have all been recent.

Calculated Risk has been talking about it a long time and I don't want ot spend the time to look through their archives. One of the points there was that the Downpayment Assistance Programs run by the non-profits were awful because they made it so the owners had no skin in the game. But overall they too have echoed the Big Picture (CR is run by a couple of people that have been in the business their whole career and explain some of the intricacies of the process and pointed out problems a long time ago).

You have to be careful when talking about the difference between “risk” and “subprime” and GSE securitization and CDOs.

Near the end of the bubble (starting in 04 and 05) the GSEs started taking risky mortgages because they didn't do enough to verify that the data was good, and CR had a long thing about how the process was automated in a way where there are reports of mortgage originators fudging data until it worked. They also lowered their downpayment requirements and verification. But that's STILL not subprime, which means that the people had really bad credit or outrageous loan amounts..that is different.

Those were driven not because they were securitized in a way to sell to the GSE, but that they were sold to pension funds, governments, wealthy investors, etc. The root reason was the same (hey they're not on our books who cares) but that wasn't part of Fannie/Freddie. The vast majority of problems so far have been caused by subprime (below the standards of the GSEs) and jumbo loan (house worth more than they were allowed to buy) pools.

It's the next wave over the next two or three years where Fannie and Freddie are going to start being in trouble…..and that's partially because they did do some Alt-A (meaning they were good risks but there wasn't verification) partially because of fraud by the originators and/or buyers and more significantly a lot of the lower-middle class buyers that are the entire point of the GSEs are going to be underwater and many will lose their jobs. Just the expected default rate based on house valuation is going to be a huge problem regardless of whether the GSEs did anything “wrong.”

You can see this buy looking at foreclosures. I've been looking in Cleveland for a long time now and on the Fannie Mae/Freddie Mac site they have only had about 5 dozen foreclosures (I just looked and it's up to 150) while RealtyTrac which shows all foreclosures has thousands. So far at least, the GSEs are a small portion of what's gone bad.

Of course now they are being directed to buy up massive amounts of junk so I'm sure they'll get much worse.

Well, I don't mean to rain on your parade, but you didn't really do any moving. My position hasn't shifted; I've always held both parties culpable, one less, one more.

There's also a lot about CRA and how that led to more and more pressure on banks to fill quotas- stories about groups like ACORN protesting and suing banks which were trying to merge or expand so that they couldn't do so unless they had enough of the Alt-A loans, etc.

I'll try to gather a few links and to read more to see if I'm misunderstanding it, but your summary seems to either skip or contradict some of those factors which put Fannie and Freddie more at the center of the maelstrom, so I'm not sure what to make of it.

Freddie's accounting fiasco became public in 2003, while Fannie's accounting blew up in 2004. Mr. Raines was forced to resign, and a report by regulator James Lockhart discovered that Fannie had rigged its earnings in a way that allowed it to pay huge bonuses to Mr. Raines and other executives.

Such a debacle after so much denial would have sunk any normal financial company, but once again Fan and Fred could fall back on their political protection. In the wake of Freddie's implosion, Republican Rep. Cliff Stearns of Florida held one hearing on its accounting practices and scheduled more in early 2004.

He was soon told that not only could he hold no more hearings, but House Speaker Dennis Hastert was stripping his subcommittee of jurisdiction over Fan and Fred's accounting and giving it to Mike Oxley's Financial Services Committee. “It was because of all their lobbying work,” explains Mr. Stearns today, in epic understatement. Mr. Oxley proceeded to let Barney Frank (D., Mass.), then in the minority, roll all over him and protect the companies from stronger regulatory oversight. Mr. Oxley, who has since retired, was the featured guest at no fewer than 19 Fannie-sponsored fund-raisers.

Of course the WSJ is guilty of Liberal bias…

Anyway, now that I remember what you are referring to, I also recall that as I wrote that I was thinking you'd probably come back with the “Clinton did it too” thing but I included it in my comment mainly because I think it's so funny that we're recycling Clinton scandal names now. But yeah, I do think there was quite a bit in Bill and Hillary's history that indicates a far worse pattern than what we now know about Sarah Palin (I object to the use of your word “tendency”, for instance, to refer to one incident.) I'm not excusing her for it- I think it's good that the ethics panel did it's job and exposed this incident where she allowed her family affairs to get mixed up with her job. But as a pattern of behavior, I think put against the real reforms that she has tackled that's pretty weak tea. If it does become a pattern then get back to me on that in a couple of years and I'll agree to hold her accountable.

We have to decide who to vote for out of the candidates who are running. You seem more concerned with an old association of Obama's (and remember Ayers had been chosen “Citizen of the Year”), than a tendency by McCain's VP to use the perks of her office to solve personal problems. That action has been determined by the Alaska legislature to have violated the ethics of her office.

All I'm saying is that you are sounding much more judgmental about the Democratic ticket than the Republican one.

The argument for Fannie/Freddie is that the bulk of American's net worth is in housing, and that traditionally minorities and the poor have been shut out, and there is research that argues this is part of the cause of generational poverty.

The counter argument is that by providing a government subsidy to housing, it increases the cost of housing and thus makes it even more unaffordable and unsustainable.

Historically Democrats have been the prime supporter of GSEs because of their social aims (and they don't recognize the unintended consequences) while Republicans have tacitly supported it primarily because it causes rising asset values. Now as I'm sure you know, they used to be on the government books, but they were privatized in the 70s because we wanted them to be off the balance sheet. There are some convincing arguments that the structure of the entire system is inherently unstable and would collapse at some point.

OK so with that little background out of the way it's to the subprime crisis. The primary reason why housing started going up a lot was because Greenspan made money so cheap (cause he was scared of deflation) and everyone was looking for the next big thing and a bubble started. Once housing started going up a lot, then subprime became an issue because everyone wanted in, and to keep it going they had to go to non-traditional bases.

However it should be noted that Fannie/Freddie never did subprime loans as they were always prohibited by regulations. The accounting scandal arose in part because they were private companies and they were missing out on this huge boom that they weren't allowed to participate in. So to counter that, they started reducing the amount of downpayment that they would require, and let non-profit groups start paying the down payments for people (when the boom started all these social groups said that the poor should be able to get in on it so a lot was set up to help them get ownership even if they hadn't saved much).

Most people don't distinguish between “sub prime” which means that you were a bad risk (and the GSEs never did), Alt-A which meant on paper you were good but you didn't necessarily want to have a large downpayment or show proof of being good and Prime, which is most traditional but too saw a decrease to about 10% down (there is also a difference between “conforming” which means the GSEs could buy it, some of these were Alt-A and “non conforming” which means the loans were too big or two risky to be bought).

To be brief, what ended up happening was that a lot of the unsustainable part of the bubble was built on subprime and jumbo loans that the GSEs weren't allowed to buy, but they didn't want to lose market share so they expanded their lending far past what they should have…..everyone assumed that housing values would rise forever. Also somewhere along the line they bought securitized mortgages that were Alt-A…I'm not sure why they were allowed to do this.

So in my understanding the fairest assessment is that they are not really responsible for the housing bubble excess, but that working within the existing rules they took on too much on stupid assumptions……and the Democrats blocked attempts to slow this down. But on the other hand it was the Republicans that were primarily the ones that created the environment that led to the bubble in the first place.

One last point is that I truly am not committed to this POV because of dedication to fairness of spreading the blame- it's because I honestly think that we as voters won't be able to exert any positive effect to fix the mess unless we understand how we got here.

In fact, after getting past the early history in the 108th Congress, she then goes on to praise the overwhelming passage of HR 1461 in the (still GOP led) House of the 109th Congress….but she tempers her enthusiasm by complaining ( a legit complaint, mind you) that the Senate didn't act on it (she adds that this may have been due to filibuster attempts by the Dems in the Senate, but she doesn't know…gee, so maybe we should find out?)

In short, she writes an article saying the GOP talked of the problem but did nothing, yet her facts support a number of actions that were taken (even though ultimately they were unsuccessful, and even though at least PART of that failure was due to Dem opposition in a Congress that had a thin GOP majority.) She also displays a lack of understanding by including Dem sponsored bills which sought to increase housing opportunities, not to address the oversight problem- as though these were indicative of a Democrat desire to address the looming financial meltdown.

I haven't gotten through all of the Pelosi bill yet- it's quite confusing because it contains so many other elements besides the GSE oversight issue. I'm not necessarily criticizing the final outcome there, but it's quite disingenuous to pretend that the Democrats were only late to the game because they lacked the votes in the earlier Congress when really the record shows that they were actively opposing the regulatory overhaul when the problems first came to light.

I'll also note that Baker once again was the member who introduced HR 1461 in '05 (the one that passed the House but died in Senate committee.) I'm beginning to consider writing in Baker for president- and at least I hope he returns to govt service in some capacity. I have no idea why conservative leaning pundits aren't knocking his doors down to get him on the public airwaves right now- he's the real unsung hero in this whole mess who tried repeatedly to sound the alarm before it was too late.

June 7, 2003: OFHEO director Falcon begins a special investigation into accounting irregularities at Freddie Mac.
“On June 7, 2003, Armando Falcon, the Director of the Office of Federal Housing Enterprise Oversight (OFHEO), ordered a special examination to be conducted into the events leading to the public announcement on June 9, 2003, of the termination, resignation, and retirement of three principal executive officers of Freddie Mac. On that date, the Enterprise announced the retirement of former Board Chairman and Chief Executive Officer Leland Brendsel, the termination of former President and Chief Operating Officer David Glenn, and the resignation of former Executive Vice President—Chief Financial Officer Vaughn Clarke. The special examination was ordered to expand and supplement an ongoing OFHEO examination of the financial condition of the Enterprise and the decision of Freddie Mac to restate its financial reports for 2000, 2001, and 2002.”

June 15, 2003: Report of this date has opening statements by OFHEO director Falcon speaking in glowing terms of Fannie and Freddie- no mention of problems!

June 24, 2003: Rep Baker introduces legislation Result: committee hearings

Aug 31, 2003: Sens Hagel, Sununu and Dole introduce legislation

Sept. 10, 2003: Sen McCain signs onto Hagel/Sununu/Dole bill as cosponsor.

Sept 25, 2003: Sen Corzine introduces legislation related to s.01508. There were apparently no co-sponsors

July 21, 2003: Legislation introduced by Ed RoyceAgain, no cosponspors

What seems to emerge is a pattern of a select group of Republican congressmen and senators initiating legislation which then becomes stalled in committee.

I have no doubt that many GOP are to blame for that (and would bet that the names of the guilty parties who wouldn't get on board with these reforms can be detected by looking at the lobbyist donors to the members.)

But when you look at the CSpan videos of the hearings- it is UNIFORMLY Democrats who are actively attempting to block the regulatory reforms and UNIFORMLY Republicans who are promoting the reforms.

There was obviously tension between the HUD goals of increasing housing opportunities (rabidly supported by Waters, Frank, etc.) and the rational desire to carry out those goals in a fiscally sound way.

VIEW THIS IN IT'S ENTIRETY. This is not a partisan cherrypicking of fact- it's the entire hearing (OK, I fast forwarded through some of the dry parts- it's almost three hours long- but I stopped to catch the key parts of each speaker, to see who was advocating for and against reform. I'll note, for example, that Rep Kanjorsky (D) raised reasonable concerns, and I don't lump him with the rest of the Dems.

But again, there's this tension between providing affordable housing and doing it in a fiscally sound way- and the Dems constantly worked to promote the first at the expense of the second.

The bills that the author you linked to cited as Democratic bills to try to 'do something” represent more attempts to pour gasoline on the fire, not to fix the oversight of these GSEs.

I haven't had a chance to view the actions of current Congress that she linked to yet- I will do so, but so far her bias and lack of understanding is so obvious that I'm not optimistic that she's representing their actions correctly either.

First, the title of that article and the use of quotation marks around “a Freddie Mae accounting scandal in July” talking about July 2003, are indicative of the author's obvious bias. I still read on in case the substance of the article might actually override the bias, but then quickly noticed that she includes the bill introduced by Rep Baker in June 2003, after saying that none of the GOP introduced legislation prior to the “July scandal” and that the action that was taken as a result of that bill was that committee hearings were held (you know, those committee hearings which we saw on the C-Span youtube, where Frank said that there was no problem with Fannie, Rep Lacy said it was just a political 'lynching' of Franklin Raines, etc.

Then she includes two Democratic sponsored bills which were about INCREASING HOUSING OPPORTUNITIES, not about oversight of Fannie Mae. You (and she) really don't get that this was how the problem started in the first place- trying to legislate assistance in homeownership in ways that ignored fiscal soundness??

Those are just my off the cuff observations that jumped out right off the bat…I'm off to read more now.

I'll read your link but you don't need to convince me that there is fault to go around. What concerns me is that everyone from center to far left DOES attribute the economic problems to one party, and in one of the key parts of the whole crisis it was actually the party that they believe favors regulation which was blocking regulation.

The way I see it, Dems feel that private sector greed is the problem and convince their voters of that, GOP feel that that's not true, when actually all voters need to wake up and realize that most of the elected officials in both parties are profitting from schemes that involve private sector AND govt abuses. The malfeasance that has occurred is breathtaking, but still voters remain loyal to their party instead of looking for the specific members of each party that were responsible and the specific members who really did try to stop it.