4 Oct

Countering the DNC blame game on the bail out, and the financial crisis

                                       

Today, a gentleman named Larry Weisenthal posted a cogent comment on Mike A’s post, Democrats blocked financial reforms. Mr. Weisenthal presents the common DNC talking points about the events leading to today’s financial fiasco… and with it, the unprecedented giant step towards socializing the American financial system.

I started to reply, and thought I’d rather post this on it’s own. Do read Mr. Weisenthal’s comment in full, but I’m going to pull out the pertinent phrases that summarize his presentation.


McCain/Palin do not attack Obama on CRA as the cause
because it’s an “urban legend”

From Larry’s comment:

Why are these charges not being made by the likes of John McCain and Sarah Palin? Are the latter too polite to resort to negative campaigning? Why didn’t Bernanke or any other economist lay the blame at the door of the Fannie Mae? The whole reason Obama has jumped ahead so fast is because of the financial crisis. Why not turn it back on him and reverse the advantage? If the Democrats did, indeed, “block” sensible regulation in 2005, then why have no Republican Senators made that charge, when it’s looking for all the world that this election could turn into a disaster for Republicans, from the Presidential level on down? How is it that Democrats could really have “blocked” anything in 2005, absent a filibuster? With so many House Democrats having supported similar legislation, how likely is it that the Democrats could have put together nearly unanimous solidarity to sustain a filibuster? I’m just curious; this whole argument of Democrats “blocking” regulatory reform seems somewhat urban legend in character.

Larry then inserts the Bernanke explanation of how relaxed regulations of securitization, or the ability for banks to intersell their porfolios, as the cause. So let me argue this in two points.

First: Why aren’t McCain and Palin hammering Obama on this?

I think it’s been driving a lot of us crazy that the McCain/Palin team haven’t taken the blame game to the source. I think yesterday’s US News & World Report’s article nails down that reason perfectly. It’s balances dangerously on the appearance of minority bashing.

In James Pethokoukis’s article, he quotes a wistful Ace of Spades HQs blog post, wishing McCain would turn a lay out the truth for Obama in the next debate.

Nope, that is not going to happen Why not?

1) It is a complicated argument, and McCain is not good at making complicated arguments, not even about earmarks. (Note, additionally, his lack of defense of the war in Iraq during his debate with Obama. Amazing.)

2) There is a racial component to criticism of the Community Reinvestment Act that can make it sound like you are scapegoating minorities for Wall Street’s problems.

3) The campaign believes McCain’s time is better spent talking about taxes and energy and healthcare. Really.

I’d say #2 is more viable than #1. And #3? McCain’s always like to portray himself as taking the higher moral ground on negative campaigning.

But yup… take the CRA truth to the public, and the DNC will be happy to spin it as fat cat GOPers, “scape goating” minorities for Wall Streets problems. Truth today is more often buried by emotions.

~~~

Second: Why the relaxed regulations of “originate to distribute” intersale of assets isn’t the root cause.

Bernanke is, quite simply, giving the risky loan business a pass… Politically, he needed the DNC majority support for his and Paulson’s government expansion. To lay the problem on their shoulders would be counterproductive to getting this bill passed.

Let me say this about bundling of assets for sale interstate. The ability to bundle product between banks is *not* the problem. The problem is bundling and selling bad product that never should have been allowed … a product birthed by the CRA.

Look at it simply. Bundling is a theory that works well… assuming that you are bundling saleable, good product. If I had a product line of children’s toys, lead paint free, and was allowed to distribute these interstate… it’s capitalism is at it’s finest.

Now if I have a competitor who was using toxic materials in the toys, and he also is allowed to distribute interstate, he’s flooding the market with crap. And that chicken crap doesn’t come home to roost until the product is shown to be the crap it is. Now those that bought the cheaper, risky toys are left holding the toy bag. How did they know it was bad product?

Now… I ask you. Was the distributing the problem? Or was it the product being distributed? That is the base argument here for securitization and bundling. The DNC tosses the red herring of “those loans shouldn’t have been bundled”, instead of noting those loans should never have been created. But, if given their way, they will go back and play with the bundling rules… throwing the bagby out with the bath water.

… and more on that bundling vs CRA banks bit

Here’s another talking point in the same line of thought that Larry doesn’t bring up, but I will address anyway. There are those that argue the bulk of the risky loans were not made by CRA banks. This is true on the face.

But go here, and you ignore market supply and demand. If only CRA banks were allowed to make risky loans, and the demand for these loans far exceeds their ability to make these loans, buyers will go elsewhere. And the free market will give them a place to go. If it’s good for the CRA banks to do, why not for the competition? Afterall, lending is a fiercely competitive industry… and should be to keep costs low for the public.

Again, this is a red herring. Whether they had the ability to run every risky loan that the public demanded thru a CRA bank… or not… that product still would have ended up on Wall Street. Just, perhaps, benefiting fewer, select CRA banks, and not others. In other words, you would have been denying the same ability to offer risky loans, and clamped down on the competition. The few banks that could offer the loans would experience a boom. And they’d have to bundle to free up cash to continue making the risky loans.

End result, the same… just fewer players involved.

The ugly alliance between Wall Street and the DNC to accomplish the bail out

After the Bernanke pitch, quoted in Larry’s comment, blaming bundling instead of creating the risky loans to bundle… Here’s more of what appears to be a very “reasonable” talking point.

Why in the world would Merrill Lynch, Bear Stearns, Lehman Brothers, Washington Mutual, Wachovia, etc. snatch up all the the mortgages and mortgage-backed securities they could in the aftermarkets? Did they do this because of their desire to promote social engineering or because they thought they were good, profitable investments? Why was it that it was the lending institutions themselves which lobbied congress to to relax Fannie Mae restrictions and let the banks make whatever types of loans they wanted to make? Sure, there was a convergence of interest going on — banks wanted to make more loans to make more money; some Democrats wanted more loans made to expand housing opportunities — but the Democrats didn’t control anything during the period of time where the subprime market exploded, owing to aggressive profit-driven salesmanship of exotic (e.g. 2/28) lending instruments and exploding aftermarket investment.

In this section, Mr. Weisenthal is giving the DNC a pass because they “didn’t control anything during the period of time when the subprime market exploded”. This is a single cell snapshot in a full length animated movie…. in other words, that lipsticked pig don’t fly. Economic events don’t happen immediately. This is all a result of a snowball that was pushed over the edge of a snow covered mountain in Jan of 1995.

Let me recap the sequence of events from my original post, a “perfect storm” of housing and lending events.

The housing prices are instrumental in this failure. Housing prices started taking a serious uptick from the norm from 1997 to 2000. This was directly in response to Bill Clinton’s Sec’y of the Treasury rewriting of the CRA compliance regulations – effective Jan 1st, 1995. Clinton had his Sec’y do this to dodge possible rejection by the new GOP majority coming in.

This regulation rewrite started the snowball rolling because you had the influx of more buyers and these risky loans. This raised the demand side of housing, which started driving up the prices for the existing inventory.

(Graph for past 33 years of US housing prices)

During those years, the mortgage rates were still in flux…. rates were still able to curtail the housing prices and inflation… as it’s designed to do.

Now look at the speed of housing prices after 2000, to 2007. Why? We had 911 and an economic hit. Mortgage rates went low, and stayed low. This opened the flood gates of big dollar risky loans with low rates. You’ll be able to see that from 2000 to 2006, the housing prices doubled/tripled their rate of increase. This, of course due to the demand of a flood of buyers, overwhelming the inventory.

Multiple offers on homes and overbidding became the norm. Money was cheap, easy… and sellers created new housing values based on inflated sales instead of actual mortgage values from comparable history in the past few months. This price increase was unsustainable. Housing prices could not remain that high without rates staying low. If you have no way to stem the rates, you can’t control inflation and prices. If you stopped where it was…. as the market did naturally… everyone was caught with overleveraged houses. Bingo… welcome to today.

SUMMARIZING….

So the CRA was the first leg in the “perfect storm”, 911 and the low mortgage rates, leading to an even bigger flood of buyers and driving up housing prices, and finally when those that had ARMs that reset, and refi’s were impossible because the artificially inflated homes weren’t worth the money of the note.

Bundling? Only a problem because Congress encouraged a high demand, bad product to bundle.

INRE Mr. Weisenthal’s notion that the DNC wasn’t in charge? This all started being noticable in 1997. After 2000 it was even more prevalent, and the Bush WH and many GOPers started suggesting tighter oversight and regulations on Fannie/Freddie. But the DNC – and just enough GOPers – wouldn’t hear of it.

So most of the blame lies on the shoulders of the DNC for kicking the snowball over the cliff. Together, with too many in the GOP, they prevented any genuine prevention or reform from happening. The problem is that there are too many socialist-Dems with an R behind their names… or RINOs. Then again, I’m of the belief the only genuine conservatives out there are not anywhere to be found in an elected office.

And now… I’m afraid to say that Bush’s choice of Bernanke and Paulson has revealed extremely poor judgment. This bailout is not something that will weigh well on Bush’s legacy. Wall-Street-insiders-turned-govenment-appointees constructed this social intervention by Government. Mr. Weisenthal wants to know why they would? Because they will sell those bad notes at or above the prices they paid for them, Larry. If it were up to the free market, they’d be taking a loss on the fire sale.

This new goal of not losing their shirts in a fire sale put the traditional fat cat Wall Streeter squarely in the camp of progressive liberal Democrats. A new unholy alliance was born and – together with the aid of a media who refused to give substantial air time to alternative economists – they have swept thru legislation that has forever altered the US financial system.

Had other economists written the legislation, it would not have been government buying bad notes, but preferred stocks, a new version of an HOLC and and RTC/RFC. But Congress refused to consider alternatives, and the public never exposed to a “Plan B”.

Now, as I pointed in in my What a Rescue… we’re bailing but the boat’s still taking on water post, we’ve got ourselves into what many be a never ending pickle of business and US state welfare lines.

What can McCain do? All he can do can do is leave it to the 527s, and the blogosphere to bring out the truth of everyone’s culpability. And while the DNC stinks to high heaven here, the GOP ain’t coming out smelling like a rose either.

And none of us have enough air freshener to clear the nation’s air from both their stenches.

About MataHarley

Vietnam era Navy wife, indy/conservative, and an official California escapee now residing as a red speck in the sea of Oregon blue.
This entry was posted in Economy, Real Estate & Lending. Bookmark the permalink. Saturday, October 4th, 2008 at 12:09 pm
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11 Responses to Countering the DNC blame game on the bail out, and the financial crisis

  1. Neo says: 1

    Don’t leave out this gem … Obama Sued Citibank Under CRA to Force it to Make Bad Loans

    While saying Obama forced “Bad Loans” may or may not be a stretch, this puts Obama squarely in the game, near the beginning of the runaway.

    ReplyReply
  2. MataHarley says: 2

    Thanks for the cross reference on that, Neo. I actually posted a comment back to yours elaborating on that Dec 2007 news on the “what a rescue” thread. This was about Obama’s only in court appearance as a trial lawyer for Calvin Roberson suing over redlining. So I’ve relinked that comment here.

    Again, McCain can’t go there easily without it looking like blaming minorities for Wall Street.

    ReplyReply
  3. Pete_Bondurant says: 3

    This issue too complex for Americans to understand? That is plain BS. I think McCain is going to blind side Obama in the next debate and he doesn’t want to let on how. If McCain isn’t going to go after Obama over the housing crisis in the next debate, then he deserves to lose.

    Why has Obama collected more than $125,000 in contributions from Fannie Mae executives in only three years? An average of $40,000 per year. That average is way above anybody else. What makes him so special? McCain should ask this question directly to Obama.

    Secondly, when Palin spoke about personal responsibility and living within in your means, those watching the debate were agreement. McCain should make clear that government mandated programs to get people owning homes was a complete failure and led to this mess. Many of these people had no business owning homes and now those who lived within their means are paying for it. This is not a racial issue. I believe people will respond to this.

    Thirdly, McCain should state over and over that he saw this coming. And when the empty suit claims that he saw this coming as well, Mccain should ask him why Obama did nothing about it. Bill Clinton gave Mccain a gift (purposely I believe) about the Democrats blocking reform of Fannie Mae. Fannie Mae reform being blocked, Obama silent, Obama gets $125,000 from Fannie Mae….you figure it out Mr. Voter.

    The “never again” line from Palin was a hit in the debate. McCain should pledge the same. Those on Wall Street who contributed to this mess IE Fannie Mae execs, will be held accountable in a McCain administration. Will they in an Obama administration?

    I’ll give the Jackass Party credit for one thing. They know how to dumb down a topic, associate names to the issue and repeat it over and over again ad nauseum….Cheney!! Halliburton!! Enron! Ken Lay! Bush! Body Armour! No WMds! Lies!! etc…..Going forward McCain should be hammering: Obama!! fannie Mae!! Most conributions!! Jim Johnston! Franklin Raines ! I saw it coming! Democrats blocked! Obama silent! Never again! Accountability! Prison time!

    It is there on a silver platter for McCain…take it.

    ReplyReply
  4. DocMartyn says: 4

    Rhis reminds me of the French approach to HIV in blood during the 1980’s. The officials detected HIV in blood, the therefore diluted the contaminated blood with more blood and dropped the HIV titre below detection levels.
    Of course this didn’t kill the virus, but what it did mean was that many more people were later exposed to HIV and then died from AIDS, from a whole range of blood products.

    ReplyReply
  5. Mark Schlosser says: 5

    Here are some great ads that hit the Dems hard on this http://rightchange.com/video3.php

    ReplyReply
  6. Craig says: 6

    Maybe we should send the link of this site (FA) to the McCain/Palin web site. There is so many good advices here. How about it Mata… or Curt, or Mike, or Scott, or Wordsmith, or Aye….?

    ReplyReply
  7. Craig says: 7

    See this great CARTOON, followed by an article of The Wall Street Journal:

    HOW THE GOVERNMENT STOKED THE MANIA
    http://www.antagoniste.net/?p=4181

    ReplyReply
  8. Craig says: 8

    http://www.americanthinker.com/blog/

    I keep hearing from people (politically involved or not) that the current bubble popping loudly on Wall Street results from “Deregulation,” which is, of course, deeply associated since Reagan’s times with Republicans. Certainly both Obama and Biden threw that word around a lot. What irritated me was that neither McCain nor Palin stepped up to explain the difference between Deregulation (which is a good thing) and the fact that, in a deregulated environment, the government’s appropriate role is as a policeman.

    Regarding the debacle on Wall Street, I wish someone would explain clearly the difference between deregulation and oversight, which is what McCain wanted, and government control without oversight, which is what the Democrats succeeded in doing, a fact that led us to the financial woes we face today.

    The problem on Wall Street wasn’t deregulation. Instead, it was a problem of too much regulation – that is, the government started telling banks how to loan money. The instructions required loans that went against banks’ financial interests, so banks started doing funny-money stuff to protect themselves – and they did so with Fannie’s and Freddie’s active participation. That was the Democratic side.

    None of this would have happened if there had been oversight. Oversight doesn’t mean telling Wall Street what to do, it means policing Wall Street to make sure that, when it makes business decisions, it does so honestly.

    Obama/Biden want to increase how much government dictates to Wall Street, and we’ve seen what a disaster that is. McCain/Palin want to get government out of bossing Wall Street around, and get government to do of its more natural and appropriate role of policing Wall Street.

    Those two concepts are hugely different from each other but, because nobody’s articulating this difference, including McCain and Palin, Obama and Biden are getting away with conflating the terms, muddying the waters, and besmirching McCain’s reputation and foresight.

    ReplyReply
  9. Pingback: Flopping Aces » Blog Archive » The Obama-Ayers TKO punch McCain should use… Linking radical ties to BHO’s failed educational & economic leadership

  10. Pingback: Flopping Aces » Blog Archive » US Economy - A “perfect storm” of housing and lending events

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