Saturday, August 21, 2010


There are several reasons how we got where we are.

   The biggie is the housing bust.Starting in mid 1998 housing prices started to climb at very fast rates , peaking at the beginning of 2006 then crashing.During the run up in prices the common mentality became driven by greed. How could we go wrong? Well a lot of people got caught with the hot potato.Demand dried up ,home values dropped and many found themselves with a mortgage value higher than the property value.Also many got caught with home equity loans and hit hard with those adjustable rate mortgage adjustments.Additionally abandoned and foreclosed houses on the market further drove values down.This is what started the recession.People felt poor,and stuck and the building industry with its suppliers had to cut back dramatically.

  So everyone wants to blame someone but who is responsible? At the risk of upsetting those on the far left I blame Bill clinton, George Bush senators and congressmen on both sides ,greedy bankers,underwriters,realtors, appraisers and undereducated consumers.
  It was in late 1999 that Clinton pushed for repeal of the Glass-Steagale bill and loosened standards of The Community Reinvestment Act  [CRA].The graph below clearly shows the growth of the housing bubble,the pop and fall thereafter.So are we to conclude it is all Clinton,s fault? Not so fast.The passage of the bill happened while the republicans controlled congress and had very strong support from both sides with only 9 senators being opposed.So then we can conclude that it was one of the few occasions where both parties came together in a fine jester of doing good for the country.But as time proved their collective move started the beginning of the big financial meltdown which brought us to where we are today.Why were our partisan legislators in such great agreement on this? The banks made much higher profits on the loans under the CRA where money is lent to minority neighborhoods and businesses.Guess what,the banking industry lobbyists put on a full court press graciously making excessive contributions of hard and soft money and each party party was treated equally and the American public got the shaft and the bill.So again to those who think corporate america runs the show you are correct ,to a point,but government america  is selling itself out and we the people with it.This not a left vs right issue its more we the people,who pay the bills,vs they the government.


  It used to be that to qualify to buy a home you had to be able to put down 10 to 20 % in real money and the monthly payments of principle,intrest,insurance and taxes should not exceed about 30% of your monthly income which you had to prove was real.This worked very well for many years and housing prices stayed more or less stable appreciating at a rate close to inflation.  BUT the Clinton administration, in a noble effort, decided to deregulate the banking industry and encouraged them to make loans to consumers that had trouble making that downpayment and those monthly payments. Well banks are in the business to make money and they cant if they make high risk loans.So along comes American ingenuity in the name of mortgage back securities.Today we refer to them as toxic assets and this led to the failure of the big wall street banks and investment firms that created them.Basically  the banks ,encouraged buy the govenrment made loans to people who had no chance in the world of being able to pay them back. The banks couldnt sit on the loans because of the risk  so they got bundled and sold .when the buyers found out that they were not what they thought they had to write them down in an ever increasing downward spiral of home values. this led to the financial crisis and even the bankruptcy of iceland.

  So  Bill Clinton started it and George Bush was happy to see it continue as on the upswing it led to a robust economy and increased revenue to the government.Due to his inability to see the future and probably ineptness,he allowed congress ,both parties,go on an uncontrolled spending spree which along with two expensive wars led to dangerously increasing budget deficits.There was no control on spending  .
 Of course the chance to make a profit and pass off the risk attracted the attention of greedy bankers realators and even appraisers and underwriters. At the time these transactions in asset backed securities were not regulated simply because they were a new type of security.

 Finally uneducated and are greedy consumers were the ones who bought houses they had no chance of being able to support.I personally am aware of a Haitian immigrant who has no drivers license,is a dishwasher,travels on a bike and in foreclosure. He did not want to give up his nice $650000 home with a pool.I do not know for sure but suspect he put nothing down and probably received a check to move in.The poor guy was duped in a criminal way.There were also a lot of uneducated people who simply did not understand the concept of adjustable rate mortgages.

 So this is basically how we got into this mess.Relaxed lending,without risk to the lender,the trading of unregulated asset backed securities,a housing bubble blow up,followed by crashing home values,decreased consumer confidence,crashing demand for all goods and raising unemployment resulting in decreased tax revenues combined with increased government spending and the resulting increase in the federal debt.

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