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Yesterday I found myself in a political discussion that included my very lonely Republican friend. Eyes rolled when he claimed the Clinton administration was to blame for the mortgage fiasco. His argument is that during the Clinton era, lenders were pressured by the government, and by interest groups, to loosen loan standards in order to increase minority home ownership. This strategy reportedly worked splendidly while home prices were increasing. You know the rest of the story.

My Republican friend followed up with a link to an article that I have seen twice in the comments to this blog, so I hereby promote that link to my post:

http://www.nypost.com/seven/09242008/postopinion/opedcolumnists/house_of_cards_130479.htm?page=0


I'm not persuaded by the article, but neither do I discount it entirely. My problem, as always, is that I don't have enough knowledge to make a judgment about it. It sounds credible, but that doesn't mean much.

At best, the pressure to increase minority home ownership was only part of the problem. The executives in the mortgage industry must have known that the increased lending activity would make them even more stinkin' rich than usual, at least short term. In the long term, they would be living on their yachts. Without the greed angle, the executives might have better resisted what they knew was a risky path.

Second, as Warren Buffett said when he saw all the complicated financial derivatives based on mortgage activity, "My eyebrows are huge!" He didn't actually say that, but he did warn that trouble was brewing in the derivatives game long before it was obvious to people with normal sized eyebrows. So the exotic and complicated financial derivatives market made a bad situation worse, and that had nothing to do with the liberal agenda.

If there is any truth to the idea that the Clinton administration was a major cause of the mortgage crisis, you have to ask yourself why the media is mostly ignoring that angle. If it isn't true, does anyone have a link to a rebuttal?

 
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+2 Rank Up Rank Down
Sep 25, 2008
Surely you jest (and no jokes about Shirley) when you ask why no reporting on this. With this media?

No, you can't blame this on Clinton per se, but basically social engineering mostly of the Democratic persuasion throughout the years (everyone DESERVES a house).

There is HARD evidence of regulations forcing financial institutions to lend money to those that could not otherwise qualify. These regulations were put in place by democrats.

There is HARD evidence that Republican/Bush administration tried to put regulations in 2003 and 2005 required banks not base SO MUCH of their portfolio on such risky loans. Those proposal were quashed by democrats in house and senate.

The fact is that Obama and Chris Dodd both are number 1 and 2, respectively in campaign contributions from Freddie Mac and Fannie Mae. Chris Dodd (D) and Barney Frank (D) are on the committee that arguably have the most control of these government institutions masquerading as private !$%*!$%*!$%*!$%*!$ that if you dig AT ALL (as the media has not done), most every road leads back to the left side of the aisle. 'Nuff said.
 
 
+2 Rank Up Rank Down
Sep 25, 2008
I don't think it's reasonable to say "banks had to loan money or be labeled as racists" as the cause for this mess. If that was the case then the bank, knowing they were being "pressured" into making bad loans, wouldn't of used those loans to leverage up like they did - clearly the banks acted as if they thought those loans were golden.

Things got bad because BANKS assumed that home prices would always rise, and they used that "knowledge" to counteract normal lending logic. They were wrong. Then they went ballistic with leveraging their own assets, which amplified their wrongness. And it's not really right to blame the people who took out those loans either (despite my Libertarian desire to do so). Analogy -

Kid: "Mom, can I have ice cream for dinner"
Mom: "Sure"
- Mom then lets kid have ice cream every night for a year for dinner - ensuring the freezer is always stocked. After a year, the kid gets Type 2 Diabetes, gains 110 lbs., and is suffering from constant joint pain. Dad then comes home and yells at the kid for being fat.

In the loan process, it's the job of the banker to decide if the person can pay the loan back. That's why bankers make money, by being right more often than being wrong when it comes to who to give money to. This failure rest firmly on the folks who extended more credit than they should have. The problem is, is that banks make money by lending it, so saying "no" never makes the bank a dime (and saying yes apparently now just passes the downside onto someone else).


 
 
+2 Rank Up Rank Down
Sep 25, 2008
Well, Scott, since the media falls left of center you can understand why assigning blame to the Clinton administration is not a priority. But of course, you can't blame Bill and his cronies for the whole mess. Sure, they may have started the ball rolling, but the Bush administration could have made changes 5 or 6 years ago that would have minimized the damage. Where's a good economist when you need one?

And it really irks me that the investment bankers display a "but they said we could!" attitude. It's almost like some bankers were not sanguine with the ever relaxing standards but instead of calling it a duck, they found ways to slice and dice it to make it more palatable. Using insurance and derivatives they assured themselves that these investments were not overly risky. And besides, they were making a ton of money! This is a lesson we've all learned by middle school. Don't make loans that probably won't be paid back.

 
 
Sep 25, 2008
There are plenty of people to blame:
1) Alan Greenspan brought borrowing costs below the rate of inflation - you were paid to borrow money! That fueled a huge boom in lending. He also refused to investigate shady lending practices.
2) People in the mortgage industry who created no-doc loans - they got their commission and pretended that real estate only goes up or decided it was somebody else's problem.
3) The rating agencies decided that repackaging dangerous mortgages somehow made them better and branded them as perfectly safe.
4) The SEC who decided that the major investment banks could take on a lot more risk starting in 2004 - and of course the banks who took them up on their offer.
5) The Clinton moves are pretty far in the past - sure they can have some of the blame, but you can also blame the guys invested the idea that banks can lend out more than they own..
 
 
Sep 25, 2008
Forgot the link to the article by the Nobel prize winning economist, http://online.wsj.com/article/SB119794091743935595.html
 
 
+1 Rank Up Rank Down
Sep 25, 2008
The push to extend home ownership to individuals of modest means predates the Clinton presidency. It in fact goes back to the seventies. Over the past thirty years many groups advocated for less restrictive lending criteria over the years. The government reacted and through the semi-governmental organizations of Freddi-mac and Ginnie-may supported the expansion of home ownership to people of modest means. There is plenty of blame to go around however. Real Estate agents sold people homes they could not realistically afford. Mortgage brokers qualified people for adjustable rate mortgages that where guaranteed to become unaffordable when the rates went up. Both did this because of greed - higher commissions. Meanwhile, the companies that were standing behind these shaky loans needed to placate the Wall Street analysts, so they developed the creative financing and accounting products that hid the problem for, actually, quite awhile. Let us not forget the individuals that bought the homes. They too bear some of the responsibility. They could have said,"No. I don't want to over extend myself financially." Do government agencies bear some of the blame. Yes. Mortgage companies? Yes. But so do all of those well meaning do gooders that lobbied for expanded home ownership in the first place. As do the people that took on financial burdens they could not afford. Now it is time for the rest of us to clean up the situation as best we can to prevent the country from falling into another great depression. Lets just not do it again. OK?
 
 
Sep 25, 2008
I'd just like to point out that most of the blame falls at Alan Greenspan's feet.
After we had the slight economic downturn around 2002 he lowered the fed's interest rate down to 1%. The idiotic part was that he left the fed's interest rate at 1% long after the economy pulled out of the downturn.

note: When the fed's interest rates are low, it encourages banks to lend money more aggressively. This is a good thing in a recession because we need to stimulate the economy but under normal !$%*!$%*!$%*! it causes banks to lend more than they should. Can anyone say sub-prime mortgages?

The aggressive lending policies of banks caused the housing bubble and then the bubble crash was triggered by Greenspan raising rates right before he left the Federal Reserve. (Raising rates caused mortgage payments to go up for many families and lead to the rash of foreclosures that popped the bubble.) The reason that this bubble pop is worse than the tech bubble in the late 90's is because the way that we normally stimulate the economy in a downturn is to lower rates and encourage banks to loan out more money, however, since banks are getting hurt badly by this bubble burst they have no available funds to loan out. That is why we are seeing the Fed step in so aggressively and congress trying to bailout all the banks. When the tech bubble burst, stockholders were the one's primarily hurt allowing the fed to fix the problem normally since the banks were still operating normally.
 
 
Sep 25, 2008
Interestingly enough, Nobel prize winning economist Vernon L. Smith predicted this situation last December, and has a very convincing argument attributing the whole thing to Clinton. By the way, there's an assumption of yours from a previous post that I would like to question. You seem to think that it is inherently obvious that we should tax the rich more than we already are. However, this is not entirely true. Most of the market is held up by the super-rich, and taxing them more means that they will have less money to invest in the market, thus hurting the economy as a whole and actually decreasing the amount of money the government gets in taxes. Think about it-the average person makes very little more than they spend, and if they get more money they will simply spend it rather than investing it, especially if Obama increases the capital gains tax. Taxing the rich may seem like a very good idea, but it has the potential to make the market even worse than it already is. Anyways, just thought I'd throw that out there...
 
 
+3 Rank Up Rank Down
Sep 25, 2008
My understanding is that this is bad argument for several reasons.
<p>
1. Republicans had control of congress and the executive branch for most if not all of the run-up in housing prices. The party of accountability never seems to be accountable for anything.
<p>
2. As the quotes below show, GWB supported or at least took credit for some of the expansion of the mortgages to minority borrowers. These quotes were made in October 2002 at a minority homeowner conference.
<p>
"I set an ambitious goal. It's one that I believe we can achieve. It's a clear goal, that by the end of this decade we'll increase the number of minority homeowners by at least 5.5 million families."
<p>
"Homeownership is also an important part of our economic vitality. If -- when we meet this project, this goal, according to our Secretary of Housing and Urban Development, we will have added an additional $256 billion to the economy by encouraging 5.5 million new home owners in America; the activity -- the economic activity stimulated with the additional purchasers, the additional buyers, the additional demand will be upwards of $256 billion. And that's important because it will help people find work."
<p>
3. The actual amount of subprime loans is only $250 billion. It's the derivatives based on these loans that are the problem. Deregulation is not the problem from my understanding since these derivatives were never regulated in the first place, which is one of the reasons they were created.
<p>
I've been trying to understand this also and so far this is the short version of what I've come up with.
<p>
For various reasons mortgage standards were relaxed. This relaxing of standards along with people's belief that home prices would always go up resulted in about 250 billion in subprime mortgages.
<p>
The problem was not so much the mortgages but the derivative instruments created based on those
mortgages such as the credit-swaps. Many financial institutions bought these instruments without
understanding them. Freddie and Fannie are sometimes blamed for this since they helped to create
a market for these instruments by buying them. Financial institutes liked these derivatives because
they could avoid regulations that were placed on the actual mortgages.
<p>
When home prices started to decline, and subprime mortgages started to default, the market for these
instruments started to dry up because they turned out to be far riskier than the financial institutes
realized and no one could really understand how to value them. In financial parlance, they became illiquid.
<p>
The fact that these derivative instruments no longer traded is a problem because under accounting rules passed a few years ago, banks have to mark their assets to market. In other words, they have to value these instruments by the price at which they trade, but with no market, they weren't trading.
<p>
Therefore the the actual asset base of the banks became unknown. This is important because the amount of money banks can lend is based on their amount of capital. With the amount of capital being unkown, the solvency of individual banks was also unknown so everyone became very hesitant to lend to everyone else. Hence the drying up of credit which some compare to an engine running without oil.
<p>
Paulson, instead of shoring up the underlying 250 billion in subprime loans, which would relatively inexpensive,
wants to buy the derivatives. The problem is Paulson comes from the same class of people who foolishly bought these things without understanding them in the first place. He also wants to buy them for the value that banks now claim they are worth which almost everyone agrees would be far more than they're worth. I personally think he will be knowingly or unknowingly be ripped-off by the financial institutions.
<p>
Warren Buffet has suggested selling a little bit of each banks derivatives on the open market, and then buying the remainder of the derivatives at the market price. The Treasury would probably make money on this approach but of course this won't happen because the banks lose out.
<p>
The whole executive compensation thing is a smokescreen. Executive pay is peanuts compared to the overpayment of the derivatives. The banks are going to make out like bandits and down the road these executives will be paid handsomely for their ability to get the taxpayer to pay for their mistakes. Banks that were not foolish enough to buy these derivatives will be punished by having to compete with banks that were recapitalized at taxpayer's expense.
<p>
Markets hate uncertainty and this is basically a story of uncertainty brought on by the creation of complex financial derivatives. The end of this story is special interests using fearmongering to obtain taxpayer money to enrich themselves even though far less costly solutions were available.
 
 
+1 Rank Up Rank Down
Sep 25, 2008
US Housing market survey shows that in all of 1990's some 44 million houses were sold and out of this 19% or 8 million units were sold to minorities.

The share of minority purchases in total "first time" houses sold, increased merely from 54% to 66% during the period.

http://www.huduser.org/periodicals/USHMC/fall2001/sum_tab_2.html

I don't believe that a 12% increase in buying could have triggerred something of the scale that we see today. Its part of the problem, but a very small part of the problem.

 
 
Sep 25, 2008
When people blame clinton for the mess they are generally refering to the changes he made tot eh Community Reinvestment Act that made it easier for banks/lenders to package up subprime loans and sell them as securities.

http://en.wikipedia.org/wiki/Community_Reinvestment_Act#Clinton_Administration.27s_Changes_of_1995

Prior to that banks would only do a certain amount of subprime loans because they did not want to have that much risk. Once they were able to sell that risk as a security the risk was minimized or at least more abstract.
 
 
+3 Rank Up Rank Down
Sep 25, 2008
Having worked with mortgage brokers and loan officers for several years, it's been my experience that the greed component in the industry is formidable. When you can swoop in, take advantage of someone who doesn't understand what you're saying, then take your commission and leave someone else to deal with the unhappy customer who only later realizes they've signed up for more loan than they can afford, your ethics tend to go out the window. The stereotype of lawyers is that they can obscure an issue with a lot of fancy language. Newsflash: their cousins work in the mortgage market and they're just as skilled.
 
 
+1 Rank Up Rank Down
Sep 25, 2008
I cannot point to any one administration (nor do I think anyone should). What we should be pointing at is the fat-cat greed of corporations and their C-level executives. Six figures is a good pay day for *anyone*. Ten figures is obscene.

Don't get me wrong! I am a staunch conservative that believes if you can earn it, you should get it (money that is) however, I think that lax oversight on the part of boards and trustees have put the US Economy in a dangerous position and placed all publicly traded companies under government scrutiny.

So while the conservatives on the right decry the growth of government because regulation is required, and the liberals on the left scream that they didn't get their fair share, the fault returns squarely back to the "bad boys and girls" whose behavior now requires "parental oversight."

Have we been fiscally responsible during the GWBush administration? No. Were we fiscally responsible during the Clinton administration? One might argue yes -- afterall we did actually have a budget surplus. But one might also argue that the surplus existed because the Republican controlled congress behaved... however this is beginning to deteriorate into a Rush Limbaugh-esque diatribe so I will go no further with this train of thought.

ANYWAY, it's the Gordon Gecko Syndrome that got us in this position... GG said "Greed is Good!" and Wall Street Believes it still.
 
 
Sep 25, 2008
I see your point, but I disagree with one of you arguments.

"Without the greed angle, the executives might have better resisted what they knew was a risky path."

If it was a government mandate that the lending institutions provide mortgages to high credit risk borrowers, the executives can't resist or they would be violating the law. Don't get me wrong, I believe that the executives were extremely greedy as is proved with all of the millions of dollars going out to all the CEOs. But to say that they would have resisted what they knew was a risky path without greed doesn't add up. This is what I imagine their thought process was:

Evil CEO: "Okay, let me get this straight. You want me to give this guy with poor credit a mortgage loan. Even though there is a high risk that he can't/won't pay it back?"

Stupid Government Official: "Yep. That's right. Here in America, everyone should own a home. It doesn't matter if they can afford it or not. We have to be fair. We don't want to hurt anyone's feelings telling them that they can't afford it."

E. CEO: "Okay. And I'm going to continue to make even more money than we originally forecast. This will most assuredly cause an economic crisis when people start defaulting on their loans. This doesn't make sense."

S.G.O.: "We'll let someone else deal with that. Right now, you have to give people money."

E. CEO: "Why do I feel like Dilbert and I have the same boss?"

You tell me that if someone came to you and said, "You have to run this company and the nations financial future into the ground. For doing so, we are going to pay you a ton. And by the way, if you don't do it, we will throw you in jail," you wouldn't do it.
 
 
+2 Rank Up Rank Down
Sep 25, 2008
I suggest that you watch Bill Clinton's recent interview on the Daily Show. (http://www.thedailyshow.com/full-episodes/index.jhtml?episodeId=185193) He doesn't exactly accept the blame for the mortgage crisis, but he does mention something along the lines of your Republican friend's argument.
 
 
0 Rank Up Rank Down
Sep 25, 2008
Hi Scott,

I remember those times, it was the bliss of the mid to late nineties. This was when I first entered the housing market. Some coworkers of mine were eligible for those new lending programs. I looked into them, they were not only for minorities just targeted at income level, I missed the cutoff point. What was initially offered was not all that great. There were still very stringent requirements compared to the standards that led to the really loose lending practices in the new millennium. Mostly the lenders were helping people get over the down payment issue. You actually needed one back then. Blended mortgages, not a new thing, were put into heavy use. You got a loan for the down payment and this was combined with the standard mortgage. I think this even eliminated having to pay PMI because it looked like you made a 20% down payment. The real problem is that this initial foray into relaxed lending standards worked and did not cause problems. People were not losing their homes a few years down the road. I think lenders saw this and then started creating exotic mortgages, 40 and 50 year interest only ARM loans. Just after this led to an economic boom, because of all the money being spent, the fed started to worry about inflation, for no good reason, and started raising interest rates. Bad combo, lots of bizarre ARM mortgages and raising rates, let the defaults begin.

The point being, the initial loosening of regulations was just a simple start that led to really bad lending practices then followed by stupid fed policy. The initial start was fine, what followed was stupid. If we had just put up with some inflation things would be fine. Inflation can be a good thing, but that is another post, a good debate for economists.

dsg
 
 
Sep 25, 2008
" You have to ask yourself why the media is mostly ignoring that angle."

Really Scott? You seriously have to ask that question?
It's difficult for me to fathom that there are still people out there who deny the extreme liberal bias of the mainstream media (yes, except for Fox News, which is just as conservatively biased).

That aside, you can't really blame the Clinton administration. You would have to blame congress at the time. Just like you can't blame the current administration for everything that gets through congress... oh wait, most people do. The truth is that the build-up to this whole debacle started back during the Carter administration.

However, whether or not the "Clinton administration" encouraged these ill-conceived lending practices, the lion's share of the blame still falls on the lenders who decided they should loan a bunch of money to people they knew couldn't pay it back.
 
 
Sep 25, 2008
What I have FINALLY started seeing (albeit rarely) in the last couple days in the media, is the statement that this is ALL our fault. Things are to the point where it doesn't make any sense trying to assign blame to either side; instead we should reflect on our national attitudes as a whole. The U.S. has been building a larger and larger economic bubble for the last couple decades, and that bubble, unfortunately, was inflated with a lot of hope and speculation rather than solid financial information and a real increase in resources.

Rampant consumerism and the almost-total American belief that we are entitled to all the same things as our neighbors (I'm not a religious person, but we are ALL coveters) is what created this mess. Too many people, Republican, Democrat, and nearly every other social group, are all interested in instant gratification and the accumulation of stuff and money, which inevitably will lead to problems. Certainly many people were doing things that were perfectly legal, but few stopped to reflect on whether they SHOULD be doing those things.

-People lied to themselves with the belief that they could/should have everything they want
-Lenders lied to people by telling them something that was too good to be true
-Business lied to people by making us think that we NEED all this crap
-The Media lied to us by spreading fear and fueling consumerism by always showing us the very best and the very worst of our fellow citizens
-The Government lied to us by....well, where am I supposed to start on that one??
 
 
Sep 25, 2008
My next door neighbor brought this up last week, and it was the first I had heard about it. I'm still not sure I buy it.

My rebuttal was that the current administration has been in power for eight years - six of those with control of all three branches of government - and if it was such a bad thing, why didn't they fix it? It's a little too late to be blaming this on the previous administration.
 
 
Sep 25, 2008
One just need look at who ran the Freddie and Fannie in the last 8 years, they all came from the Clinton Administration. One needs to review the banking committees in the House and Senate to see who blocked all attempts since '97 to oversee Fannie and Freddie, and then look at Fannie and Freddie campaign contributions donor list. One needs to look at who is running the current democratic campaign on housing and finance, see how much they made as they ran them in to the ground, and screwed us all, and wonder where this guy is going to take it, since he is their second biggest recipient in total dollars of campaign contributions.



In the meantime, Bush is not on the right track with this bail out. Pence and Gingrich have much better ideas, as does Ron Paul's advisor.

All moist robots should just make sure not to vote for the guy or gal with an I (for incumbant for some of yopu here) next to their name , and get a whole fresh bunc, and repate the process for the next 3 cycles tioll we clean both houses.
 
 
 
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