Who Caused The Financial Meltdown (Part 2)?

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Deregulation, yet another huge buzz word of the campaign. The Bush Administration allowed the nation to run wild, and the result is our current economic malaise. Deregulation was the beast that rose from the depths and shook the foundation of our economy.

This article is Part 2 of a 3-part series.  Part 1 is here.

Getting back to reality, deregulation has occurred of course, but not to any degree significant to this administration. Regulations change as a matter of course. Many of these changes in regulations had little to do with the Bush Administration, but with specific agencies responsible for their oversight. Alan Greenspan was a huge proponent of deregulation, for example, but was not under the control of Clinton or Bush.

It is difficult to pinpoint any specific recent event that resulted directly in the problem we face today. Certainly, financial instruments based on bad loans and sold on Wall Street magnified the problem and contributed substantially, but those financial instruments would never have been concocted if the bad loans did not exist in the first place.

It is easy to use the buzz-word “deregulation” and leave it at that, but research demonstrates the problem began decades ago with the weakening of mortgage requirements. Mortgage requirements that protected banks from taking on bad loans were severely impacted over a much longer period than the tenure of the Bush Administration.

So, how did the requirements for mortgages become so lax? Why were qualification requirements discarded that would have prevented the “sub prime” mortgage meltdown? Who supported it and backed it, and more specifically who blocked legislation to regulate it?

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The entire problem began in government, as so many of our national crises often do. The smoking gun that led to the entire problem points directly at two bills passed, not to help Wall Street, but to help Main Street!! Specifically, this was an effort to provide affordable housing to the poor.

During Jimmy Carter’s short term as President, these regulations began to take hold. Note we are not using President Carter as a scapegoat here, we are just using his term for historical reference. Affirmative action policies forced banks to offer loans to many that did not qualify. The result? The banks began taking on loans that otherwise would never have been considered. Failure to comply was criminal, subjecting the institutions to huge fines and class action lawsuits if they did not comply:

Failure to comply with the Equal Credit Opportunity Act or Regulation B can subject a financial institution to civil liability for actual and punitive damages in individual or class actions. Liability for punitive damages can be as much as $10,000 in individual actions and the lesser of $500,000 or 1 percent of the creditor’s net worth in class actions.

Regulation B Equal Credit Opportunity

In the late 1980s, banks were pressured heavily to become more lenient on loans to minorities and the poor. Federal guidelines actually started to guide banks away from using credit history as a determination of one’s qualifications for a loan. The Community Reinvestment Act was passed. Banks were not only encouraged to make bad loans to people that did not qualify, they were forced by law to do so. Other mortgage lenders followed suit. Unfortunately, this scheme of supplying risky mortgages to the unqualified only works as house prices rise. Once they stopped rising, it wasn’t long before the house of cards collapsed.

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The facts demonstrate it wasn’t the removal of government regulation that caused the problem. It was just the opposite. The cause was the enforcement of government regulations that forced banks to take on loans that would not have otherwise been approved. This continued for over a decade before the first signs of a crack in the levy began to form. How did the Federal Government respond?

Part 3 is here.

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3 Responses to "Who Caused The Financial Meltdown (Part 2)?"

  1. Churchlady   December 15, 2008 at 4:19 pm

    This is absolutely NOT true – the CRA forces compliance with tough qualifying standards, and the mortgage folks mostly were NOT banks and therefore not covered by CRA. This is the rant of the criminals who made this mess and who want NO penalties and NO regulation so, as after the Savings & Loan debacle, they can do it all over again! The banks and hedge funds and other upstream institutions that bought these loans (think of bundling the leftovers after a paper shredder) are total idiots, but they did NOT make the loans, simply scammed investors into believing they were profitable. Mortgage originators were New America (one of the first out of businss), Countrywide, and other mortgage brokers who dreamed up these subprime disasters, shoved them down the throats of homeowners who (up to 65 percent of them) actually qualified for conventional loans, and made out like bandits until the obvious occurred. It had nothing at ALL to do with the federal directives to help people buy homes. Quite the opposite.

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  2. Chip W   December 16, 2008 at 1:10 am

    I read something similar a few weeks ago, placing blame for the mess on the CRA, so I looked into it. I don’t remember details, but my residual impression doesn’t jive with your statements. Eg, that banks were forced by law to make bad loans to people that did not qualify. I doubt history supports this. CRA, I think, is being used as a scapegoat.

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  3. Grym   December 17, 2008 at 4:39 pm

    Apparently, according to this piece of historical revisionism, the past eight years never happened… All the financial sector de-regulation, the reductions in the federal interest rates, the change in federal usury laws, the decrease in lending standards, and the deceptive lending practices which targeted and often defrauded the uneducated underprivileged never happened. It was all Jimmy Carter and Barney Frank’s fault. Never mind the fact that OTC derivatives or Credit Default Swaps didn’t even exist under those administrations…

    This is honestly pathetic; a pathetic Republican delusion that feebly attempts to distort the harsh reality that their policies (only occasionally opposed by the weak, disorganized “opposition party,” the Democrats) have been the primary driving force behind the current economic disaster we now have. And to add insult into injury, now, the “fiscally conservative,” “Small government” Republican President Bush is pushing the largest Socialist act of this country has ever seen, including the nationalization of banks and hundreds of billions of dollars of debt. What we are witnessing is a spectacular failure, not of President Clinton or Barney Frank, but of Republican-brand economic policies.

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