Wednesday, March 18, 2009

Looking for Someone to Blame

By Alan Caruba

Barney Frank makes me want to puke.

I would like to blame the entire financial meltdown on him, but unfortunately there are plenty of others in Congress on whom the blame must fall. In the case of AIG, TARP, Fannie Mae, Freddie Mac, and all the other assaults on every dollar any one of us plus our children will earn, the blame must fall on Congress. Not just this Congress, but those stretching back to the late 1960s and earlier.

As of March 15, 2009, according to the Congressional Budget Office, the national debt had reached $11 trillion, the largest in U.S. history. The annual Gross Domestic Product, the value of all the goods and services the U.S. sells to the world is estimated to be between $13 and $14 trillion. Do the arithmetic.

Then pause and consider that a vast portion of the annual federal budget is already committed to entitlement programs like Social Security that began in the 1930s as a response to the Great Depression.

Social Security, along with Medicare and the endless permutations of programs that redistribute money from the public treasury, constitute at least two-thirds of any budget from the gitgo. It breaks down to Social Security: 23%; Medicare: 12%; Medicaid: 7%; other means-tested entitlements: 6%; mandatory payments (pensions, etc.): 6%; and the net interest on debt: 11%.

The wailing about AIG paying bonuses is pure populist political theatre. Because of various regulations regarding the highest levels of compensation, financial houses have always sought ways to reward productive executives by other means, among them being bonuses.

The history of this mess can be fairly easily tracked, going back to 1968 when the government converted the Federal National Mortgage Association (Fannie Mae) from a government entity to a “government sponsored enterprise” purchasing and securitizing mortgages. This removed Fannie Mae’s debt from the government’s books. Two years later in 1970, the Federal Home Loan Mortgage Corporation (Freddie Mac) was created by Congress to buy mortgages in the secondary market.

The notion that the government had to get involved in the private mortgage loan marketplace goes back to the geniuses who prolonged the Great Depression during the successive administrations of Franklin D. Roosevelt, a Democrat, a liberal, and a man with absolutely no experience in the private sector.

Congress continued to pass one piece of legislation after another to involve itself in the banking sector of the nation all in the name of social justice and things like community investment. In essence they encouraged people to take on more debt than they could afford.

In 1974, household debt was $705 billion. By 2000, it would total $7.4 trillion. Since by then people could not deduct interest on their consumer loans such as credit cards and auto loans, but could take out home equity loans to pay off debt, they were sucked down a rabbit hole of mortgage-related debt.

The fragility of the banking system was evident to all when, starting around 1989, savings and loan banks began collapsing, requiring the government to create a Resolution Trust Corporation which closed hundreds of insolvent banks. It cost the government $105 billion to resolve the crisis and the net loss to taxpayers was estimated to be $40 billion by the end of 1999. Chump change compared to the enormity of the present problem that is also tied to bad loans and the subsequent securitizing (bundling) and resale of such loans.

At the heart of the issue was the government requirement that banking and mortgage loan companies abandon centuries of knowledge and experience when it comes to evaluating who qualifies to receive a loan in favor of making loans to virtually anyone with a pulse.

By 2000 there were $160 billion in subprime loans, up from $40 billion in 1994. Fannie Mae and Freddie Mac could not buy this essentially worthless paper fast enough. The Department of Housing and Urban Development would soon require Fannie Mae to dedicate 50% of its business to low and moderate-income families with the goal of financing more than $500 billion under the auspices of the Community Reinvestment Act.

In 2004 U.S. home ownership peaked at 69.2%. The actual re-sale value of homes began to dip leaving homeowners with properties against which they could no longer acquire equity loans. Although it must be said that the vast majority of mortgages are still being paid today, many were unable to meet their payments. (The government’s answer, of course, is to use public monies to bail them out or to directly interfere with the terms of their mortgages.)

Subprime loan institutions began to go belly up. Having obeyed laws requiring that they make bad loans, they now were out of business. Companies like AIG that had bought billions in “securitized” mortgage packages found themselves with “toxic” paper, much of which could not even have a dollar value assessed.

By 2007, home sales continued to fall as fewer loans were being made as the collapse of the subprime mortgage industry reached warp speed. In April, the Federal Election Commission fined Freddie Mac $3.8 million for having made illegal campaign contributions to members of the House Committee on Financial Services that oversees it.

Suffice it to say that just about everything Congress did, along with Freddie Mac and Fannie Mae, worsened the situation for banking, investment, and insurance companies like AIG. Throughout the decline, those charged with the responsibility to oversee it were getting sweetheart mortgage deals and pulling in lots of campaign funding. In 2008, the economy headed south in terms of the stock market and existing home sales. It wasn’t a trickle. It was a flood.

By October 2008 the then-Secretary of the Treasury, Henry Paulson, asked for and received $700 billion in order to stem the bleeding in the banking and investment sector, but some went under anyway and others were purchased for pennies on the dollar. Some of the sales were made on the demand of government officials, including Timothy Geithner, the current Secretary of the Treasury.

All of which brings us to the latest round of House Committee hearings in which the perpetrators of the financial meltdown and current recession rant about AIG bonuses in an effort to divert public attention from their own malfeasance.

This recession is a wholly-owned result of the U.S. government’s involvement in the private sector. I like to remind people that the government has owned Amtrak for some forty years and it has never made a profit.

Did I mention that President Barack Obama received $101,000 in AIG contributions during his campaign?


Jack N said...

Amtrak-Postal Circus-Vietnam-publick eddication-etc.-etc..
You name it and if the gummint has had any input and/or relationship, the entity is faulty in some way..

Rich Kozlovich said...

The issue is still the Community Reinvestment Act. It is still on the books and I have to presume that the money the banks are being given is meant to continue the very practices that created this situation.

As for FDR having no business experience. I recently read, although I can't find it now, that he did get involved is some busnesses. Unfortunately were all failures.

Alan Caruba said...

You recently read the comments on FDR's lack of business acumen in one of my recent commentaries! Glad to know you're paying attention!

FDR often used class warfare, referring to the heads of corporations as "economic malafactors" and such. He was so charismatic he could get away with stuff like that.

Meanwhile, the nation remained mired in the Depression.

libertyforusa said...

Why is all this happening on the greatest nation on earth?

Everything we could ever hope for was given to this nation right from the start.

There is no other place one can go to find the opportunity that this nation provides.

Unfortunately many are voting for more than they deserve on false promises made by charlatans.

If you know somebody that thinks this country does not provide enough to the people please have them read this-

jae said...

I've been reading this blog for a couple of weeks. I'm sure glad I stumbled upon it, since I don't know of anyone else who thinks more like I do than Alan. WOW!

Guy said...

OK, now I'm getting mad. Have you heard about this?

Who's side is this moron on anyway? Some people are thinking this is all about furthering his anti-gun agenda, but it sure looks like he's on the wrong side of the war on terror to me. All I can say is "keep it up, Mr.Obama ... we're getting mad, and the American people WILL persevere".

Rich Kozlovich said...

In the past we have all commented that this whole mortgage meltdown, and ensuing economic crisis, came into being because of the Community Redevelopment Act signed into law in 1977 by Jimmy Carter.

In spite of the fact that this seriously flawed law caused this problem, there didn't seem to be any effort to repeal or ameliorate the most onerous provisions of it.

I assumed that since this law was still in effect, and there were those in government whose job it was to enforce it, that all this money they are giving to the banks is supposed to be used by the banks to continue down this financially destructive path.

Although the logic of this conclusion seemed obvious, it still seemed to be to crazy to be true. Surely they couln't be so foolish!

Let’s put any doubts aside. Here is an article dealing with this subject.

'Too cautious': FDIC criticizes bank with no bad loans^1793570&page=1

Alan Caruba said...'s just proof of your good taste in commentators! :-)