The Economy

This is a long one and dry, very dry but it underlines in the best terms I can put-up with, what we're going through financial right now. I'm startled that no one in our main stream media is giving you this story, so I'll try...

Most Americans can barely make sense of the latest economic mess we're in. All most of us know is that, until this afternoon, it looked like the jerks in Washington were going to bail out the jerks in New York and they were going to use our money to do it. Turns out there's a lot more to it than that, and the longer this mess is drawn out, the more we learn about and the more it stinks.

In order to understand the problem we first need to identify the cause. For all the talk we've heard from politicans and pundits about how we need a deal and what that deal needs to entail and how we need to work quickly to acheive a deal, few are taking the time to explain what exactly went wrong.

There is no argument among economic experts that the current financial crisis took shape due to the market's realization that banks were issuing billions of dollars in conventionally bad loans but why would the banks make the bad loans in the first place? Well for that we need to go back to the Allan Greenspan era - the Federal Reserve cut the interest rates that governed the issuance of credit to banks and the banks used those lower rates to bring in customers who were willing to take on a higher level of risk than traditionally had been the case. Customers were willing to take the increased risk in part due to the fact that many Americans were making a lot of money in real estate investment - buying low and selling high, treating property as one might treat a stock. In the background, the market continued to work against itself. The reason that prices in real estate continued to rise exponentially was due to the increase in available credit, so the very thing that was allowing those to get into the market on the ground floor, buying starter homes, etc., was helping others to move up. For the nation, it seemed like a great thing - more homeownership bread personal responsibility causing an indirect decrease in property crime, increased credit availability made for increased investment, etc.

The old adage seemed true - a rising tide floats all boats. It looked like this was the reverse of trickle-down economics, a flood of capial at the bottom was resulting in a bullish market at the top. But there were cracks in the foundation. In an effort to get this credit into the hands of consumers, banks had been making bad loans to unqualified investors. These loans weren't an issue so long as the real estate markets kept increasing in value as they had been for some time, investors would be able to restructure their mortgages at a better price for a better rate down the road. But that brings us back to why they made the investments in the first place - why would banks make loans that they didn't think they could make money on - this is where the Republicans and Democrats diverge in opinion.

The Dems blame it on pure greed. They say the bad loans were made with the assumption that even if the loans failed - who cares? The banks could still sell the homes at the higher rate so long as the market stayed good but that logic just doesn't hold. It would denote a complete divergence from the rules that have governed financial markets for centuries. One or two banks making bad loans and going under, that's just bad judement... but all of them?

The Republicans have been saying, quietly, since 2003, that these bad loans were being made because of failed or failing Democrat policies. In 1977, Jimmy Carter signed into law the Community Reinvestment Act (CRA). The Act dictated that banks must make loans to low-income borrowers, even if that meant ignoring many of the criteria they would use to make conventional loans, namely credit history. The CRA allowed the government to examine banking organizations to determine whether or not they were "meeting the needs of their communities."

George H.W. Bush tried to blunt the effects of the bad act by enacting sweeping oversight as part of the Financial Institutions Reform and Recovery Act of 1989 which was created in response to the Savings and Loan crisis of the 1980s. This oversight included a rating system, accesible to the public, that would measure a bank's compliance with the CRA regulations.

But any modest gains made by Bush administration were erased by Bill Clinton in 1993. In a sweeping economic dictate from the Executive Office, Clinton established a series of quotas to hamstring H.W.'s CRA rating system. Banks were forced to make a number of these risky investments in order to obtain a favorable CRA rating. The direct result was that banks went out of their way to make these risky loans to obtain favorable CRA ratings - they also hired community groups to "consult" on the issue. In 2000, the Senate Banking Committee estimated that, as a result of Clinton's "reforms" in 1993, these community groups had received in excess of $9.5 billion in government salaries and services. Among them, receiving $760 million, was ACORN a group with strong ties to the group Barack Obama worked for during his days as a community organizer.

In 2002, the Bush administration oversaw an interagency review of Clinton's early '90s reforms. In response to the striking findings the administration tried to enact reforms and regulations that were opposed vehemently by the Democrats but passed in the Republican-controlled Senate. But the reforms didn't go far enough and in 2003, billion dollar accounting errors reported by Freddie Mac and Fannie Mae did little to slow the bad behavior promoted by the CRA.

What do Freddie & Fannie have to do with anything? Simple - Freddie Mac and Fannie Mae are entities created by the government but run as publicly traded businesses. Their express purpose is to buy-up mortgages from banks and lending institutions, repackage them into mortgage-backed securities then resell them to investors. For a better explanation of what went wrong, read this. This crisis - billions in bad assets uncovered, poorly kept books, a staggering amount of potentially unstable credit loosed on the market - should have produced the appropriate response. In the coming months and years Republicans would call for increased regulation of the markets while they were blocked by Democrats, charging racism and threatening to use their opposition as a potentially damning campaign issue. Let's face it - the Republicans have never had a good response for the charge that they don't care about poor people, especially poor minorities, despite the fact that poor minorities have been voting Democrat for fifty years and the vast majority of them are still poor. A damning video of this reverse-racism in practice can be found here.

So nothing gets done and here we are - saddled with the sins of 30 years of bad financial practices. And somehow, the guys among those who caused this crisis have the nerve to blame it on the other guys? The ones who, for at least six years have been calling for stricter regulation? Grated, the Republicans are, as usual, doing a terrible job on the PR end of this one, but you'd think the media would at least attempt to follow-up on this one - instead they cling to the line that eight years of Bush economic policy caused this problem... ridiculous line made moreso by the fact that in their TWO YEARS of control of the House & Senate they have yet to pass a single line addressing this financial issue. And yet, it's all the Republican's fault...