The Heart Of The Financial Crisis

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I’ve been trying to explain it and clarify it for some Conservative friends of mine, but I’ve quite gotten to the nub concisely.

Matt Taibbi said it the way I wanted, and couldn’t quite spit out. Quote:

This whole notion that the financial crisis was caused by government attempts to create an “ownership society” and make mortgages more available to low-income (and particularly minority) borrowers has been pushed for some time by dingbats like Rush Limbaugh and Sean Hannity, who often point to laws like the 1977 Community Reinvestment Act as signature events in the crash drama.

But Rush Limbaugh and Sean Hannity are at least dumb enough that it is theoretically possible that they actually believe the crash was caused by the CRA, Barney Frank, and Fannie and Freddie.

On the other hand, nobody who actually understands anything about banking, or has spent more than ten minutes inside a Wall Street office, believes any of that crap. In the financial world, the fairy tales about the CRA causing the crash inspire a sort of chuckling bemusement, as though they were tribal bugaboos explaining bad rainfall or an outbreak of hoof-and-mouth, ghost stories and legends good for scaring the masses.

But nobody actually believes them. Did government efforts to ease lending standards put a lot of iffy borrowers into homes? Absolutely. Were there a lot of people who wouldn’t have gotten homes twenty or thirty years ago who are now in foreclosure thanks to government efforts to make mortgages more available? Sure – no question.

But did any of that have anything at all to do with the explosion of subprime home lending that caused the gigantic speculative bubble of the mid-2000s, or the crash that followed?

Not even slightly. The whole premise is preposterous. And Mike Bloomberg knows it.

In order for this vision of history to be true, one would have to imagine that all of these banks were dragged, kicking and screaming, to the altar of home lending, forced against their will to create huge volumes of home loans for unqualified borrowers.

In fact, just the opposite was true. This was an orgiastic stampede of lending, undertaken with something very like bloodlust. Far from being dragged into poor neighborhoods and forced to give out home loans to jobless black folk, companies like Countrywide and New Century charged into suburbs and exurbs from coast to coast with the enthusiasm of Rwandan machete mobs, looking to create as many loans as they could.

They lent to anyone with a pulse and they didn’t need Barney Frank to give them a push. This was not social policy. This was greed. They created those loans not because they had to, but because it was profitable. Enormously, gigantically profitable — profitable enough to create huge fortunes out of thin air, with a speed never seen before in Wall Street’s history.


The whole article is here.

2 Comments to “The Heart Of The Financial Crisis”

  1. By The Last Bass Player, November 6, 2011 @ 8:48 am

    Aah. So much I want to rant about on this, whilst pounding the table with a socialist fist. But I feel you and your friend have said it all.

    (Conservative friends? You have conservative friends? My heart goes out to you, my beleagured and tolerant friend.)

  2. By hunter, November 9, 2011 @ 7:16 pm

    And which party did most of Wall Street give to?
    Which party were Madoff and Stanford major supporters of?
    Which party does Soros support?
    From which administrations did Corzine come from, and which party was he leading as governor of NJ?
    From which party did Amy Gorelick come from and what did she do to FNMA?
    And here is what grown ups have to say:
    “In 1999, The New York Times reported that with the corporation’s move towards the subprime market “Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980s.”[17] Alex Berenson of The New York Times reported in 2003 that Fannie Mae’s risk is much larger than is commonly held.[18] Nassim Taleb wrote in The Black Swan: “The government-sponsored institution Fannie Mae, when I look at its risks, seems to be sitting on a barrel of dynamite, vulnerable to the slightest hiccup. But not to worry: their large staff of scientists deem these events ‘unlikely'”.[19] Mike Stathis also warned about the risks of Fannie Mae, triggering the financial crisis in America’s Financial Apocalypse. “With close to $2 trillion in debt between Freddie Mac and Fannie Mae alone, as well as several trillion held by commercial banks, failure of just one GSE or related entity could create a huge disaster that would easily eclipse the Savings & Loan Crisis of the late 1980s. This would certainly devastate the stock, bond and real estate markets. Most likely, there would also be an even bigger mess in the derivatives market, leading to a global sell-off in the capital markets. Not only would investors get crushed, but taxpayers would have to bail them out since the GSEs are backed by the government. Everyone would feel the effects. At its bottom, I would estimate a 30 to 35 percent correction for the average home. And in ‘hot spots’ such as Las Vegas, selected areas of Northern and Southern California and Florida, home prices could plummet by 55 to 60 percent from peak values.” [20][21][22]” wikipedia on FNMA
    You guys on the left know you did wrong and know you have to mislead people to keep up the charade.

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