How we got here

[TexasDevilDog]

Ben Stein's article in non-pc terms.

Start around 1995. Groups involved with civil rights issues and activities for poor people began to complain that poor people and especially non-white poor people got mortgages much less often than white well to do people. Many economists, including me, explained that it was not at all surprising that poorer, less credit worthy people were often turned down for credit. That's how credit is supposed to work: you lend to people who will pay you back.

But the advocates for poor and black people had immense political clout. Under President Bill Clinton, they passed legislation that called on banks to be required to lend to non credit worthy borrowers. The laws, including the Community Reinvestment Act, the CRA, required two large government sponsored enterprises, Fannie Mae and Freddie Mac, to buy those lower quality mortgages from the banks, guarantee them, and sell them to the public. These were bundled into immense pools of subprime mortgages as they were called, and sold all over the world.

http://finance.yahoo.com/expert/article/yourlife/115733

[Mustangman_2000]

Good read. I learned something.

[01WhiteCobra]

Great read except it is bullshit... like most of the shit Stein writes.

See my other threads about bullshit people blaming the CRA. None of my questions have been answered yet.

I'll take an answer to two questions to start...

What part of the CRA required banks to make 100% loans?

What part of the CRA required S&P and Moody's to rate junk as "AAA"?

[TexasDevilDog]

The banking regulations need to be changed to require a down payment. No more 100% loans.

We need to quit using only two rating services (monopoly) to rate all debt. That is like only two stock advisors rating all the stocks in the country.

Anytime government gets involved in the the economy it creates distortions. The distortions to the economy were in the form of tax credits to bank for loaning to people with bad credit. As longs as prices were going up, the game worked.

Easy credit has gotten us in to this mess, just as it did during the great depression. Cheap money from Japan and the US flowed all around the world. Huge amounts of money and wealth was created out of a bubble again. We learned nothing from history.

This time the total debt load for Americans is about 270% of GDP, higher than it was before the great depression. I said back in the summer that the FED was going to lower interest rate due to deflation and a liquidity trap. Asset prices are just as inflationary/deflationary as cash and monetary base. The US economy has lost about $3 Trillion in housing values and $2 Trillion in equity values. That is hugely deflationary. The FED is trying to blow a bigger bubble but it will not work this time, just as it did not work in Japan.

We are in a deflationary spirl, as assets go lower, people feel poorer, they spend less, companies do worst, lay off people, company values go down, people feel poorer, ect.

[01WhiteCobra]

What a find hilarious from the Fannie/Freddie/CRA talking heads is that over 84% of the sub-prime loans in this country were issued by private lending institutions. Only 1 of the top 25 largest subprime mortgage holders was subject to any federal regulation.

The private institutions made 83% of the loans to low and moderate income buyers.

But again, loans to low and moderate income buyers was just a small portion of the overall mortgage picture.

Ironically, while the subprime mess was exploding in volume (04-06), Fannie and Freddie went from holding 46% of their portfolio in subprimes to 24% because they were both held to higher standards.

Ultra low interest rates, malleable accounting rules and easy money got us in this mess. Ultra low interest rates, malleable accounting rules and easy money is what the emergency bailout plan is all about. Like giving a crackhead some crack.