Nobel laureate Milton Friedman correctly observed, “There are severe limits to the good that the government can do for the economy, but there are almost no limits to the harm it can do.”
- Congress, throughout several administrations starting with Jimmy Carter’s Community Reinvestment Act in 1977, urged financial institutions to make home loans affordable to people with marginal credit ratings. Now they are defaulting on these loans and taxpayers are being asked to pick up the tab.
- Fannie Mae and Freddie Mac became an extension of the welfare state to promote Congress’s social engineering and vote buying. They became increasingly corrupt and donated large sums to members of Congress, especially as Congress started to investigate the corruption. Democrats Chris Dodd, Barack Obama, and John Kerry received the largest of these “donations.” To be fair, Republicans received money from Fannie and Freddie too, 43% to the Democrats 57%. Nevertheless it was Republicans that tried to reform Fannie and Freddie.
- The G. W. Bush administration tried to institute reforms, which were blocked by Congress. Could the donations have influenced the Democrats’ votes?
- There was no attempt by Bush to go to the people and demand action.
- “I join as a cosponsor of the Federal Housing Enterprise Regulatory Reform Act of 2005, S. 190, to underscore my support for quick passage of GSE regulatory reform legislation. If Congress does not act, American taxpayers will continue to be exposed to the enormous risk that Fannie Mae and Freddie Mac pose to the housing market, the overall financial system, and the economy as a whole.
I urge my colleagues to support swift action on this GSE reform legislation.” (John McCain 2005 on the Floor of the US Senate) Nobody listened.
- Banks sold their loans in packages to Fannie and Freddie who in turn sold them to investors. When defaults started en masse, the value of these packaged loans was called into question so their value plummeted beyond their real value. Banks are required by accounting rules (mark to market) to carry these loans at their market value which may be below their actual value. Confidence in banks began to slip.
- As confidence in the mortgage market declined, investors became aware of another huge liability that eclipses the housing market. Measured in trillions of dollars instead of billions, a structured financing product similar to insurance called credit default swaps are underwritten by large financial institutions to help large borrowers manage their credit risk. When debt issuers such as municipalities are in danger of default, the institutions (counterparties) are at risk of having to pay the underlying notes. No one knows for sure how large this risk is but uncertainty is what kills the financial markets. All of the large banks, even today’s apparent survivors, are at risk.
- Banks and our entire monetary system exist because people trust them. That trust has evaporated. The entire monetary system is at risk and will be reflected in international exchange rates.
- The general public understands little of the details or what to do about it. Fear is magnified by distrust in the people they voted for to watch out for their self-interest without really knowing what constitutes their real self-interest. They blame the Republicans, Democrats, greedy Wall Street, greedy homeowners, greedy banks, greedy rich executives, etc. for the discomfort of the change around them.
- Who is responsible for the financial crisis? 1. Voters for putting mediocre people in positions of power who promise the people a free lunch at every turn. 2. Mediocre politicians whose quest to stay in office at all cost leads to pandering and corruption.
If you rob Peter to pay Paul, you can always count on Paul’s vote.
It took over 25 years to create this mess. Whom do you think is best qualified to deal with this problem and work with a pathologically divided congress, the silver tongued Democrat candidate who votes “present” on difficult votes or the nominally Republican candidate who often votes against his own party on questions of conscience?