Unemployment down, Participation rate up

Long story shorter. That was not what cased the crash.

I see Iriemon has covered a few of the bases but, in general there was a loosening of restrictions over the years that was in part responsible. It was not until the very end of the Clinton Administration that Phil Gramm sponsored a bill to repeal Glass-Steagall which opened the door to the creation of the financial instruments that led to the crash. This started to erode the walls between retail and investment banking.

Further deregulation occurred under Bush. Up until around 2003 there was not that much sub-prime. It really ramped up under Bush and there are all kinds of charts you can pull up to see the trend.

The biggest problem, again occurring under Bush, was the packaging of these bad mortgages into collatoralized debt instruments such as mortgage backed securities. Under Bush there was a complete lack of oversight - they did nothing to even attempt to manage the growing problem which they knew existed.

The ratings agencies were giving AAA ratings to garbage. The other problem was the credit default swaps which allowed one to buy insurance (for pennies on the dollar) 1000 dollars or less could insure 100,000. You did not have to own the underlying security - like insurance on your house and so this became a huge gambling racked with AIG selling way more insurance than it should have - taking on far too much leverage.

That is what is meant by too big to fail. If they would have allowed the securities that AIG sold insurance on to fail, AIG would have been on the hook for huge losses due to the swaps kicking in. Some swaps did pay out before the bank broke and folks like Paulsen cashed in Big. Paulsen actually selected the garbage that went into one of the funds and then went out and bet that the fund would default ... cashing in big.

It was a massive Ponzi scheme .. the biggest ever created in fact.

Do not believe it when folks like the Fed Heads saying "we didn't know". They did know. Lots of people knew what was happening and why it was happening and there were many warnings that went unheeded.

The story from start to finish is told in a documentary called "The Inside Job". This is so well done that many Universities now have this documentary as part of the course material.

It was an "Inside Job".

 

S.190 was a better bill, that offered much stronger regulations. However, the bill never made it to the Senate floor for a vote. There were 20 members of the Senate banking committee. At the time there were11 Republicans and 9 Democrats, 12 votes are needed to bring it out of committee. The Democrats stuck to the party line and the bill never got the 12 votes necessary to advance. The Democrats killed any chance of properly regulating the GSE's, until it was too late. The left has tried to sell a false narrative all along.

They said there was nothing wrong at Fannie and Freddie when there obviously was.

 

Sure ... why not. It was probably some plot by gay folks to spread the gay religion by taking down the financial system. Sure that makes sense !! No ?

 

They had the power to obstruct which they did in the Senate.

 

Some further information for you.

 

They didn't need to have Democratic votes to bring it out of committee, as a simple majority will do.

Over 60% of the Dems voted in favor of the House bill, supported by over 90% of the Republicans, proving that the Dems would support a bill to regulate F/F.

But Bush blocked it and instead we got ... nothing.

In 2003 F/F were fine.

In fact, according to the Bush administration, F/F was fine right up to summer 2008:

Here's is the Bush administration, through the OFHEO, which was then responsible for oversight of Fannie and Freddie including the adequacy of their capital structure, sounding the warning about F/F's financial problems:

March 31, 2003
WASHINGTON, D.C. — Armando Falcon, Jr., Director of the Office of Federal Housing Enterprise Oversight (OFHEO), safety and soundness regulator for Fannie Mae and Freddie Mac (the Enterprises), has determined that the Enterprises were adequately capitalized under OFHEO’s capital standards as of December 31, 2002.
http://www.fhfa.gov/webfiles/805/cc33103.pdf

March 31, 2004
WASHINGTON, D.C. — Armando Falcon, Jr., Director of the Office of Federal Housing Enterprise Oversight (OFHEO), safety and soundness regulator for Fannie Mae and Freddie Mac (the Enterprises), has determined that the Enterprises were adequately capitalized under OFHEO’s capital standards as of December 31, 2003. Although OFHEO imposed a capital surcharge for Freddie Mac in January 2004 due to increased operational risk, that surcharge does not impact past periods, including the fourth quarter 2003.
http://www.fhfa.gov/webfiles/798/capclass33104.pdf

March 31, 2005
WASHINGTON, D.C. — Armando Falcon, Jr., Director of the Office of Federal Housing Enterprise Oversight (OFHEO), safety and soundness regulator for Fannie Mae and Freddie Mac (the Enterprises), has classified Freddie Mac as adequately capitalized as of December 31, 2004.
http://www.fhfa.gov/webfiles/792/capclassfreddie33105.pdf


March 31, 2006
WASHINGTON, D.C. — Stephen Blumenthal, Acting Director of the Office of Federal Housing Enterprise Oversight (OFHEO), safety and soundness regulator for Fannie Mae and Freddie Mac (the Enterprises), classified Fannie Mae and Freddie Mac as adequately capitalized as of December 31, 2005.
http://www.fhfa.gov/webfiles/787/capclass33106.pdf

March 30, 2007
WASHINGTON, DC — James B. Lockhart III, Director of the Office of Federal Housing Enterprise Oversight (OFHEO), the safety and soundness regulator for Fannie Mae and Freddie Mac, classified Fannie Mae and Freddie Mac as adequately capitalized as of December 31, 2006. Fannie Mae’s classification is based on estimated numbers submitted by Fannie Mae and not financial statements released to shareholders. Freddie Mac’s classification is based upon numbers consistent with the information statement and annual report it released on March 23, 2007.
http://www.fhfa.gov/webfiles/2235/4Q06capclass.pdf


Sept 27, 2007
WASHINGTON, DC . James B. Lockhart, Director of the Office of Federal Housing Enterprise Oversight (OFHEO), the safety and soundness regulator for Fannie Mae and Freddie Mac, classified Fannie Mae and Freddie Mac as adequately capitalized as of June 30, 2007.
http://www.fhfa.gov/webfiles/780/OFHEO_mincap_2q07.PDF

March 11, 2008
WASHINGTON, DC . James B. Lockhart, Director of the Office of Federal Housing Enterprise Oversight (OFHEO), the safety and soundness regulator for Fannie Mae and Freddie Mac, classified Fannie Mae and Freddie Mac as adequately capitalized as of December 31, 2007. Both Fannie Mae and Freddie Mac have publicly released financial results for year-end 2007 and OFHEO.s results are consistent with those publicly released data.
http://www.fhfa.gov/webfiles/777/OFHEO_mincap_4q07.PDF

June 9, 2008
WASHINGTON, DC . James B. Lockhart, Director of the Office of Federal Housing Enterprise Oversight (OFHEO), the safety and soundness regulator for Fannie Mae and Freddie Mac, classified Fannie Mae and Freddie Mac as adequately capitalized as of March 31, 2008. Both Fannie Mae and Freddie Mac have publicly released financial results for the first quarter 2008 and OFHEO.s results are consistent with those publicly released data.

http://www.fhfa.gov/webfiles/776/OFHEO_mincap_1q08.PDF

October 9, 2008
FHFA ANNOUNCES SUSPENSION OF CAPITAL CLASSIFICATIONS DURING CONSERVATORSHIP AND DISCLOSES MINIMUM AND RISK-BASED CAPITAL CLASSIFICATIONS AS UNDERCAPITALIZED FOR THE SECOND QUARTER 2008 FOR FANNIE MAE AND FREDDIE MAC ... Director Lockhart is classifying Fannie Mae and Freddie Mac as of June 30, 2008, prior to the conservatorship, as undercapitalized using FHFA.s discretionary authority provided in the statute.

http://www.fhfa.gov/webfiles/775/FHFA_Suspension.PDF
http://www.fhfa.gov/Default.aspx?Page=178&ListNumber=0&ListYear=2002

Ooops.

 

And yet he gave the "one fingered salute" to quote REPUBLICAN Mike Oxely, to the only bill ever passed by a chamber of the REPUBLICAN controlled Congress to regulate F/F.

Actions speak louder than words, don't they?

 

Except they didn't. The Dems proved they would support F/F regulation with the House bill passed with over 90% of the Republican vote.

 

WOW...that pretty well covers everything during GWB term...Great post professor. Now let's go back into the history.


You will find many people Hank Paulson would blame for the Crisis, most however are from before GWB took office.



http://content.time.com/time/specials/packages/article/0,28804,1877351_1877350_1877341,00.html

Then click; 25 people to blame.....FOR THE FINANCIAL CRISIS.

 

No it doesn't -- far from it. That just covers Bush's action in killing the only bill ever passed by the Republican controlled congress to regulate F/F.

I have never claimed Bush was solely responsible for the great housing bubble and recession it caused. You could blamed people back to the invention of money; and I think I've heard them all.

But the undisputed fact is that while that bubble was blowing up to its absurd levels and started crashing, Bush and the Republicans were in charge of the government. Some of his keystone policies and philosophies -- "business can regulate itself" that prompted a hands off approach to regulation -- an "ownership society" program that expanded policies for more people to be able to borrow more money for home buying, and investment tax cuts which incentivized investment in stock and real estate over production and earning, where significant factors in the speculative bubble.

 

IMO, if all along, local banks, bank branches or saving and loans, had the final say over qualified applicants to barrow home loans, the problem would have never happened. Yes, and it happened often, some mistakes were made and poorly run operations failed, filed bankruptcy, liquidated and most their customers only noticed a sigh change. However you configure it, Congress along with at least the Presidents from the 1950's, advocating for home ownership, which literally started getting out of hand in the 90's, climaxing while Bush was in office. I felt then and do so today, that if banks had filed bankruptcy or reorganized as they had before through the courts, the bubble would have dissolved in months.

Financial crisis have happened, yes since money was created...the Tech Bubble and the Savings and Loan Bubble...worked their own way out of problems or dissolved, as have ( no idea how many) small to corporate level business, over the years.

Instead and this is current, one administration, one President, six years with an obliging Senate leader...we're doing the same things again with Housing, College Cost and in many way's Medical Care. We're already 18T$ in actual debt, with over 120T$ (Federal/State) obligations. There is no room for Government period (Local/State/Federal) to micro manage who succeeds or fails.

 

Freddie Mac Tried to Kill Republican Regulatory Bill in 2005

OOoopppsss!

 

Why would you post stuff from 2007/2008 when the crisis/fire was already a raging inferno.

The idea is to 1) stop the fire from happening to begin with and 2) if one does start, to put it out as quickly as possible.

Bush did not understand high finance and so it is pointless to point to him for blame or praise. For the Fed Heads on the other hand, it is a different story.

 

Are you suggesting the GW Bush, that was the 43rd President, didn't understand Finance, or several members of his staff. As for the FED Heads, I might suggest "Interest Rates" being controlled, opposed to floating with the market, have done more harm than even Obama, even if they do so at his command, yes then they should know better.

 

Doing a masters in Business administration does not necessarily give one understanding of these issues (and in the vast majority of cases it does not) and it is not like the President has time on a daily basis to monitor such things.

There are many different paths on can take in doing a BA and the vast majority of those with a BA do not have much of a clue about the causes of the crash... although when explained to them they would be more likely to understand. He would not have taken much "Finance" doing a "Management" degree.

What was a huge joke was the Fed heads wandering around claiming "we didn't know". Well if the Fed heads did not know then how on earth would Bush know ?

The fact of the matter is that at least some of the Fed Heads did know. This at least is what is taught in
Universities these days some of which show the documentary "The Inside Job" as part of the curriculum.

The crash happened because of the huge Ponzi Scheme (arguably the biggest in history).

I would agree that it is quite possible that Bush knew this. Definitely some of his staff did and 100% the Fed did.

 

Because the bill didn't go far enough and in his opinion would have made matters worse. But then you know that.

 

Why would you ignore the fact that the Bush administration raised red flags back in 2001 and later in 2003 upgraded that warning to indicate the systemic nature of the possible problem with Fanny and Freddie and the administrations efforts to push Congress in to creating a new federal agency to serve as a watchdog over Freddie and Fanny?

 

If Bush knew there were red flags that early then he should have done something about it.

He had both chambers from Jan 2003 to Jan 2007. From 2001 to 2003 Bush had a majority in the house and a majority in the senate for part of the time.

The fact of the matter is that Bush did nothing even though he had full control of congress for 4 years and most of congress for the other 2.

What good does it do to raise a red flag and do nothing about it ?

This was a Ponzi scheme, complicated for sure but a Ponzi scheme no less and it was the Republican congress who presided over this mess.

Most of the congress is far to ignorant to understand such things, and likely Bush as well so it is wrong headed to completely blame these folks.

There were however, members of the Bush administration that did know and the Fed heads knew what was going on.

 

Bush often said two opposite things. While telling his conservative basis how bad government is, Mr. "Ownership Society" was pushing people to buy homes as fast as he could -- the percentage of homeowners was one of the few things he could brag about.

 

There was no deregulation under Bush, because Bush did not believe in deregulation or free markets, regardless of what he claimed. He loved govt intervention probably even more than you do.

The repeal of Glass-Steagall did not "open the door" to CDOs or CDS being created. These instruments were first created in the 80s (in the case of CDO) and in the early 90s (in the case of CDS.) The repeal of Glass-Steagall just removed the barriers between different financial institutions. The fact that it allowed companies to diversify their operations was a good thing, as evidenced by the fact that companies who had revenue streams from different business lines were much better off during and after the crisis than ones who did not (like Lehman Bros or Bear Stearns.)

What fueled the growth in the instruments you are referring to:
-stringent capital adequacy requirements; financial institutions could use CDO to circumvent such requirements
-a sharp increase in fixed income investment demand
-low interest rates that caused investors to go searching for yield. This is actually happening right now as well., which is increasing the demand for asset backed securities.

There was no oversight needed for these instruments. The exact same instruments are used on debt other than residential mortgage, and they operate just fine and have never been the cause of any crisis.

All that was needed was an end to the silly desire to increase homeownership at all costs.

 

What I said was:

The main cause of the insolvency of AIG was not CDO's themselves but the various derivatives such as Credit Default Swaps which allowed for the creation of huge leverage.

Long story short, what I said is correct although this is not the only thing that led to the crash.

Your claim that the cause was "the silly desire to increase home ownership at all costs" is way over simplistic and frankly, incorrect.

Giving garbage securities AAA ratings had a lot to do with the crash. Allowing huge leverage through selling credit default swaps against these garbage securities was what caused the downfall of AIG.

 

I know what you said. You said "the repeal Glass-Steagall which opened the door to the creation of the financial instruments that led to the crash." You were wrong. It did not open the door, as credit default swaps were around long before the repeal of that Act. Maybe you meant that it led to the massive growth in the CDS market? In which case you're still wrong, as the other 3 factors were much bigger drivers. The development of pricing models to price CDS was another big factor.

I have no problem with innovation disrupting or undermining regulation, nor should any of the institutions engaging in such innovation. Any activity which undermines unnecessary legislation is a huge gain. The problem is when that gain is offset by other intervention into the economy, as was the case leading up to the crisis. The desire for increasing homeownership goes back several decades, but I can't remember anyone who was more aggressive about it than Bush was. It's no coincidence that the crisis happened on his watch.

The financial instruments you mention are just pieces of paper. They are utilized in many different ways and on different kinds of debt. The only time they were involved in a catastrophic outcome was when there was massive govt intervention directly related to the underlying debt, as previously mentioned.

No need to make up stuff about instruments you don't understand.

 

What a goofy thing to say. What was made up ? If you disagree with what is stated in the link provided then refute what is said.

You have not done so. What financial instruments do I not understand ? What have I said about these instruments that is incorrect ?

 

That's a bunch of B.S. The unemployment rate has been fiddle around with since the 1990s. It's likely in the low or mid-20's I'd say. No way the rate is 5.5%...totally hiding something when those not in the labor force is an estimated 93.07 million!

 

Increase the minimum wage and put an end to all foreign tax shelters and the economy will be perfect.