Why our financial system nearly collapsed – UPDATED

Yes, I know is voice is grating, yes I know he can be too rude by half on his program, but take the time to listen to this audio of last Friday’s Mark Levin show. (H/T Ace) You want the breakdown of what happened and why it happened? Levin gives it to you in plain language. Listen to it, even if you really don’t want to. I didn’t want to, but it’s important that we understand what happened, here, historically, that we don’t simply succumb to spin. Look past Levin’s politics and his cranky yelling, and just get the history.

He talks about how the foundation for the crisis was laid down in 1977 by Jimmy Carter (a point which the editors of Investor’s Business Daily go into here) and the Community Reinvestment Act (CRA) which came into being under his watch.

Levin talks about how the sub-prime mortgages began to take off with Bear Sterns in the 1990′s, which is again explained in more detail here [All Emphasis Mine - admin]:

To hear today’s Democrats, you’d think all this started in the last couple years…the Carter-era Community Reinvestment Act forced banks to lend to uncreditworthy borrowers, mostly in minority areas.

Age-old standards of banking prudence got thrown out the window. In their place came harsh new regulations requiring banks not only to lend to uncreditworthy borrowers, but to do so on the basis of race.

These well-intended rules were supercharged in the early 1990s by President Clinton. Despite warnings from GOP members of Congress in 1992, Clinton pushed extensive changes to the rules requiring lenders to make questionable loans.

Lenders who refused would find themselves castigated publicly as racists. As noted this week in an IBD editorial, no fewer than four federal bank regulators scrutinized financial firms’ books to make sure they were in compliance.

Failure to comply meant your bank might not be allowed to expand lending, add new branches or merge with other companies. Banks were given a so-called “CRA rating” that graded how diverse their lending portfolio was.

Explains Levin: “the federal government compelled this activity, compelled this behavior” beginning January 31, 1995, under Clinton administration regulatory revisions which authorized sub-prime loans in the secondary market – loans with no savings, no collateral, to back them up. The first securitization of CRA loans began in 1997, with Bear Stearns.

Meanwhile, Congress gave Fannie and Freddie the go-ahead to finance it all by buying loans from banks, then repackaging and securitizing them for resale on the open market.

…With those changes, the subprime market took off. From a mere $35 billion in loans in 1994, it soared to $1 trillion by 2008.

Wall Street eagerly sold the new mortgage-backed securities. Not only were they pooled investments, mixing good and bad, but they were backed with the implicit guarantee of government.

Fannie Mae and Freddie Mac grew to become monsters, accounting for nearly half of all U.S. mortgage loans…As they grew, Fannie and Freddie grew heavily involved in “community development,” giving money to local housing rights groups and “empowering” the groups, such as ACORN, for whom Barack Obama once worked in Chicago.
[...]
Since 1989, Fannie and Freddie have spent an estimated $140 million on lobbying Washington. They contributed millions to politicians, mostly Democrats, including Senator Chris Dodd (No. 1 recipient) and Barack Obama (No. 3 recipient, despite only three years in office).

There is plenty of blame to go around. Well-intentioned people started the ball rolling – with a very noble idea; break down the wall of discrimination that was keeping middle class minorities from owning their own homes. That was a good notion; others exploited the good intentions, and also strong-armed banks to do more and more. Wall street got greedy. The folks funny Fanny & Fred got greedy. We homeowners and the general public got greedy. Everyone wanted easy money and lots of credit, and no one wanted to think to much about what was backing it up; whether there were sufficient securities behind all the loans.

Levin also talks about how President Bush tried – in 2003 – to get Congress to pay attention to the household finance markets and Freddie and Fanny, and his ideas never got out of committees. This is how he was rebuked by Barney Frank, among others,


The Bush administration today recommended
the most significant regulatory overhaul in the housing finance industry since the savings and loan crisis a decade ago.

Under the plan, disclosed at a Congressional hearing today, a new agency would be created within the Treasury Department to assume supervision of Fannie Mae and Freddie Mac, the government-sponsored companies that are the two largest players in the mortgage lending industry.

The new agency would have the authority, which now rests with Congress, to set one of the two capital-reserve requirements for the companies. It would exercise authority over any new lines of business. And it would determine whether the two are adequately managing the risks of their ballooning portfolios.

The plan is an acknowledgment by the administration that oversight of Fannie Mae and Freddie Mac — which together have issued more than $1.5 trillion in outstanding debt — is broken. A report by outside investigators in July concluded that Freddie Mac manipulated its accounting to mislead investors, and critics have said Fannie Mae does not adequately hedge against rising interest rates.

“These two entities — Fannie Mae and Freddie Mac — are not facing any kind of financial crisis,” said Representative Barney Frank of Massachusetts, the ranking Democrat on the Financial Services Committee. “The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing.”

Representative Melvin L. Watt, Democrat of North Carolina, agreed.

“I don’t see much other than a shell game going on here, moving something from one agency to another and in the process weakening the bargaining power of poorer families and their ability to get affordable housing,” Mr. Watt said. – [all emphasis mine - admin]

Here’s Investor’s Business Daily, again:

Congress has been surprisingly passive. As Sen. Majority Leader Harry Reid put it, “no one knows what to do” right now.

Funny, since it was a Democrat-led Congress that helped cause the problems in the first place.

When House Speaker Nancy Pelosi recently barked “no” at reporters for daring to ask if Democrats deserved any blame for the meltdown, you saw denial in action. Pelosi and her followers would have you believe this all happened because of President Bush and his loyal Senate lapdog, John McCain. Or that big, bad predatory Wall Street banks deserve all the blame.

“The American people are not protected from the risk-taking and the greed of these financial institutions,” Pelosi said recently, as she vowed congressional hearings.

Only one problem: It’s untrue.

Yes, banks did over-leverage and take risks they shouldn’t have. But the fact is, President Bush in 2003 tried desperately to stop Fannie Mae and Freddie Mac from metastasizing into the problem they have since become.
[...]
It’s pretty clear who was on the right side of that debate.

As for presidential contender John McCain, just two years after Bush’s plan, McCain also called for badly needed reforms to prevent a crisis like the one we’re now in.

“If Congress does not act,” McCain said in 2005, “American taxpayers will continue to be exposed to the enormous risk that Fannie Mae and Freddie Mac pose to the housing market, the overall financial system and the economy as a whole.”

Sounds like McCain was spot on. But his warnings, too, were ignored by Congress.

Levin insists that it is disingenuous to suggest that political parties should not be mentioned – that accountability demands it. I understand why people would prefer to keep politics out of any solution that comes about, this really should be above political sniping. But I see the press already trying to pin all of this on poor President Bush – the guy who tried to reform this nonsense in 2003. Bush has been blamed with a lot; should be blamed for a lot, but it seems to me that it is simply “too easy” and also plain falsehood to simply dump all of this on Bush’s shoulders.

Levin quotes the GOP senate in 2003 on their worries and their desire to address the coming problem. He also quotes the Democrats who blocked it. He has a lot of citations, here are a few:

In August of 2007, Sen. Chuck Schumer (D-NY) and Sen. Chris Dodd (D-CT), heading the Senate Banking Committee argued to life the portfolio cap from Freddy & Fannie to create more loans and allow F&F to buy more sub-prime mortgages “to calm the market.”

Senate Majority Leader Harry Reid, (D-NV) in 2005, in response to an effort by the GOP to trim Fanny & Freddy’s portfolios: “The legislation from the Senate banking committee, passed today on a party line vote by the Republican majority, includes measures that could cripple the ability of Fannie Mae and Freddie Mac to carry out their mission of expanding homeownership,” said Sen. Harry Reid, D-Nev., the Senate Minority Leader Thursday…”While I favor improving oversight by our federal housing regulators to ensure safety and soundness, we cannot pass legislation that could limit Americans from owning homes and potentially harm our economy in the process,” Reid said.

Writing in the Wall St. Journal with Mayor Michael Bloomberg, Sen. Chuck Schumer (D-NY) argued to reduce the regulations passed after Enron. He plays an audio clip of Schumer trashing Bush and trying to get what he wants.

Do listen to Levin. He gets loud and shrill sometimes; he is certainly passionate. But he is also very, very informative, especially about the “corrosive cronyism,” as Levin describes it. I had not realized that so many of Barack Obama’s top financial advisors are people who made millions running Fan & Fred. And yes, that’s troubling. It would be troubling if it was true of McCain’s campaign, too. But it’s more troubling about Obama, because Obama has not done anything. He’s running for president on 140 days of experience in the Senate. It feels, increasingly, like he’s simply being put into place to maintain the status quo.

They wouldn’t work together in 2003 or 2005, but Schumer is making bi-partisan noises. One hopes he means it. Really. But one also cannot but remember how the Democrats in the Senate – led by Schumer – filibustered just about everything that Bush tried to do, whether it was address this problem, address Social Security, address the energy situation (we still don’t have the upgraded power grids we needed in 2003) they filibustered like mad on EVERYTHING until they got into power in 2007, at which time they stopped legislating at all, which may in the end be to our benefit. Remember those words: DEMOCRAT FILIBUSTERS. They used the filibuster constantly to prevent Bush from doing anything.

Gateway Pundit notes: repeated attempts in 2008 by the Bush administration to prevent what happened last week Couldn’t get the Dems to pay attention.

And please note: Social Security? The thing Congress would not work with Bush on, because they put partisanship before country? Obama is busily walking back his plans, there. You know…it’s okay to pray for wisdom for our leadership. They seem to need it.

UPDATE: Doug Ross gives you the history of the crisis, in pictures.

Meanwhile: Paulsen, like McCain, says the fundamentals of our economy are sound.

Instapundit links to the proposed bail out legislation.

Lorie Byrd
calls McCain The Paul Revere of the F&F disaster, at least in this campaign.

Ace notes that Obama’s finance chair is “the queen of sub-prime mortgages” and notices that the Huffpo talked about that back in February of ’08.

The New Yorker
talks about the recklessness of Lehman Brothers and Bear Sterns

Melissa Clothier
has more thoughts and a good round-up

Rick at Brutally Honest: Who is responsible?

About Elizabeth Scalia
  • http://vita-nostra-in-ecclesia.blogspot.com/ Bender B. Rodriguez

    The thing is, don’t hold your breath waiting for the Republican Party or the McCain campaign to push the truth about all of this. Because in order to do that, they would have to show that George W. Bush was right! Bush tried and tried and tried to do what needed to be done — as he has often done — but he was shot down.

    To tell the truth would mean that the Republicans and McCain would have to actually say something positive about Bush, they would actually have to stand up for Bush — something they have positively refused to do, deciding instead that they are going to treat Bush with contempt, as if he were radioactive or something. It is not only the Dems that have BDS, there is a fair amount of it on the Republican side as well.

  • http://www.eternityroad.info fporretto

    Yet another case of left-liberal thuggery labeled as “compassion,” and used to bludgeon businessmen into destructive behavior — destructive not merely for themselves, but for the entire country.

    Hearken to the late William E. Simon, Treasury Secretary under Richard Nixon and Gerald Ford:

    “As is so often the case in our society, when the liberals orchestrate a nationwide uproar over good versus evil, all those defined as evil suffer an acute loss of nerve. Businessmen and bankers, who seem to value respectability more than their lives, are incapable of tolerating this moral abuse. Invariably they collapse psychologically. And whatever they may think and say in private, in public they either go mute or stumble frantically over their own feet as they rush to join the moral bandwagon.”

    No one has ever said it better.

  • http://rightwingnation.com rightwingprof

    “with a very noble idea; break down the wall of discrimination that was keeping middle class minorities from owning their own homes.”

    Well, it would have been a noble idea, had there been any discrimination. But you see, not lending to people who can’t pay back the loan isn’t discrimination. It was a bone-headed, feel-good idea, not a noble one.

  • Joseph

    The Republican Congress and the Republican Presidency had all the power necessary between them to “fix” this problem, if they truly thought it needed fixing. The notion that it required “bipartisanship” is a joke. Almost nothing required “bipartisanship” from 2002-2004 and absolutely nothing required “bipartisanship” between 2004-2006. It was as complete a one-party government as has been seen in modern America. It didn’t get fixed because it was still profitable to lend and foreclose all the way up to and through 2006.

    And John McCain was on the majority side of the aisle all that time, whatever he may or may not have had read into the Congressional Record.

    Absolutely nothing that was or is in any way making anyone any private profit–whatever the costs and dangers to the public interest–has been interfered with by this Administration or by the tame Republican debating society it had on Capitol Hill until 2006. Nothing.

    Another joke is the notion that these loans were secured with no collateral. The collateral was the real estate involved. At no point between 1977 and 2001 was there any problem with the lenders recouping the value. It only began to be a problem when Alan Greenspan was forced to drive interest rates unbelievably low to keep a mild recession from turning into a major depression. That, combined with the illusion that the real estate values could only move one way–up–created another classic bubble of the price speculation that has dogged this country since the deregulation orgy of the Reagan Administration. And, as usual, nobody making money off the loan interest prior to foreclosure saw any “problem” with it at all–until the value of the collateral began to tumble.

    Why was Greenspan forced to do this? Because of the insane spiral of Federal borrowing combined with irrational tax cutting by a President who has run the United States of America with exactly the same fecklessness as the private businesses that he ruined before he entered politics–a fecklessness so open as to have been stated explicitly, and on the public record, as “deficits don’t matter”. Why? Because if you are the Government you don’t ever have to pay back the principal–you can keep refinancing the debt indefinitely. After all, no one can foreclose us out of the United States of America, now can they?

    What would be a joke if it were not so absolutely enraging and inane, is the general refusal to acknowledge the role that this insane level of Federal deficit spending to “fight terrorism”, and to secure the blessings of oil profits for ourselves and our posterity, has had in this affair.

    By the way, I seem to remember a dialog between us way down the blogroll back when I was already aware and insistent on the dangers of the real estate bubble. I think you pointed out what a wonderful thing it was that some friends could borrow against the steadily growing value of their home in order to take a well-deserved vacation.

    It was pretty wonderful for them then. I wonder if it’s so wonderful for them now? Since they are not one of those pesky low income borrowers whose job stability and contracting income potential make them such bad credit risks prone to foreclosure, I presume they have been able to manage–and, of course, home “equity” is an illusion sustained by slow bleed of debt service. But do they even have the illusion of accumulating wealth to comfort them now? Or is debt service all they have left?

    [Joseph, I'm out all day today so I'll keep this short and sweet; you're not going to change what happened, the history of what happened, by burying it in words. The GOP did NOT have the power you claim because of two little words: DEMOCRAT FILIBUSTERS. The bills Bush and McCain tried to get through to reform Fan & Fred never even made it out of the committees thanks to the Dems marching in lockstep, with resounding NO's to anything Bush wanted, and they were helped along by the one or two Republicans they needed on each committee to hold back legislation. What they couldn't hold back, like judicial nominees, the energy plan etc, they FILIBUSTERED. Since the GOP did not have 60 seats, the Dems - led by Schumer - effectively shut down every constructive thing Bush tried to do about Social Security (remember- when they struck down privitization, Bush said, "I'm open to all ideas, bring me suggestions and solutions."..the Dems responded with a big fat SILENCE), same with the energy policy (we still have no movement on the updating our power grids). If you choose to forget what the Democrats were like from 2003 until they regained power (and promptly decided to do nothing) in 2007, then you're choosing to forget a lot. -admin]

  • Ruy Diaz

    “Well-intentioned people started the ball rolling – with a very noble idea; break down the wall of discrimination that was keeping middle class minorities from owning their own homes.”

    No, no, no! Not even that is true. The “noble idea” was a pernicious fallacy at best, an ignoble lie at worst. What happens is that certain minorities were denied credit more often than whites with the same earnings. But that doesn’t mean their credit-worthiness was similar. Other things go into credit; debt, assets, credit history, and so on.

    Other minorities–East Asians–receive credit more often than whites.

    That was never a good idea to begin with.

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  • http://www.masterlimitedpartnerships.net joewxman

    If i had one wish it would have been to be a fly on the wall of that meeting between Paulson, Bernake and Congressional leaders. I can only imagine the picture was painted of the disaster we were facing. To have Chuck Shummer come out and be totally non partisan almost sent me to the ER.

    As someone who trades oil and gas for a living and follows the markets let me tell you…it can not be emphasized enough how close we came Thursday to a world wide financial disaster. It was certainly one of the scariest moments in my lifetime. The prospect of going to a cash machine and finding nothing was real. You don’t think about these things. Its not in our mindset. It might be in the mindset of generations before us but certainly not in ours.

    Heading to church. Good idea to offer prayers of thanks and guidance.

    joe

    the espresso monk coffee is a medium grind so you can use less and get more! And its fabulous.

  • T

    While there is certainly enough blame to go around, it is interesting to watch Democrats try and paint this as another Bush failure (read greedy Republican Wall Street capitalist failure).

    In fact, this is another example of a well meaning socialist program gone bad because it was basically economically unsound (loan money to those least likely to repay it). Of course, most socialist policies ARE economically unsound because their goal is not a sound fiscal policy, but a “feel good” social program. This is a classic example.

    In an article in the Washington Post (Dec 9, 2007, Sec B 01) Professor Robert Maranto (Villanova University) notes that liberal philosophies characteristically exhibit an “ideological isolation from society.” For example:

    “As political scientist Steven Teles showed in his book “Whose Welfare?,” the public had determined by the 1970s that welfare wasn’t working — yet many sociology professors even now deny that ’70s-style welfare programs were bad for their recipients.”

    This crisis is just the latest example of how the left will continue to insist that it wasn’t the idea that was fundamentally flawed, but only its execution. They will refuse to recognize that the concept of lending money to those unable to repay it is not “lending,” but welfare.

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  • pbuchta

    “The Economy is Strong!” John McCain before the collapse of Fannie and Freddie.

    McCain wants to fire Chris Cox head of the SEC. Doesn’t he know who put this man in office? George Dub’ya Bush.

    Actually this happened on the GOPs watch my friend. The GOP’s hands off, and deregulation policies had much to do with this.

    The GOP Senate may have worried about this in 2003 but they didn’t do a blessed thing about it when they were in control of both houses and the executive branch of the government. If they were sooooo concerned they would have done something about it then, but they didn’t!

    A few days after the Supreme Court made George W. Bush president in 2000, Phil Gramm stuck something called the Commodity Futures Modernization Act into the budget bill. Nobody knew that the Texas senator was slipping America a 262 page poison pill. The Gramm Guts America Act was designed to keep regulators from controlling new financial tools described as credit “swaps.” These are instruments like sub-prime mortgages bundled up and sold as securities. Under the Gramm law, neither the SEC nor the Commodities Futures Trading Commission (CFTC) were able to examine financial institutions like hedge funds or investment banks to guarantee they had the assets necessary to cover losses they were guaranteeing. And Senator Phil Gramm wanted it completely unregulated. Gramm didn’t just make a fairy tale world for Wall Street, though. He included in his bill a provision that prevented the regulation of energy trading markets, which led us to the Enron collapse. There was no collapse of the house of Gramm, however, because his wife Wendy, who once headed up the Commodities Futures Trading Commission, took a job on the Enron board that provided almost $2 million to their household kitty. And why not? Wendy got a CFTC rule passed that kept the federal government from regulating energy futures contracts at Enron.

    If John McCain gets elected and chooses Phil Gramm as his Treasury Secretary, which many politico types see as likely, they will be able to talk about the good old days when Gramm was in congress and McCain was in the senate and they were in the midst of the Savings and Loan crisis.

    And lastly lest you forget the incident with the Keating 5.

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  • Regina

    “It all started with Jimmy Carter.”
    Let that sink in a minute.
    Remember that we say the same thing when talking about Iran.
    Remember that Carter won the election because so many people wanted to “teach the Republicans a lesson” after Watergate and Nixon’s pardon.
    Granted, Carter’s presidency gave way to Ronald Reagan, but at what cost? A nuclear-armed Mullahocracy and an almost collapsed financial system.
    Think about that in November. I for one don’t want to be paying for a lesson to the Republicans for the next 30 (or more) years.

  • Acer Palmatum

    Levin was spot on for this. Don’t let anyone fool you about the seeds of this mess, they were long in coming.

    Let’s also get a little more optimistic (not foolish just not completely pessimissitic). The problem is lack of transparancy and a lack of accountability. We can fix this. And as for the cost of the bailout–the way it is being structured we should get most of it back (as crazy as it may seem, the government might even make a profit). This is not so much a bailout but a temporary take over. Risky? For sure. Irrational or irresponsible? No.

  • http://rightwingnation.com rightwingprof

    Liberals will never own up to this for two reasons: They are not mature enough to admit that they were ever wrong, and they are utterly apathetic about the consequences of their actions. The only thing that is important is feeling good about doing something “compassionate.” Before this, they gave us urban housing. Remember that? Great big, multi-storey crack houses and gang refuges. Hypodermics littered on the ground and in the stairwells, drive-by shootings. All brought to you by liberals because they wanted to feel good about themselves.

  • T

    Regina,

    You are absolutely correct. I’ve been saying since February that Obama is another Carter. Carter’s legacy is astounding. It took us a decade to get out of the double digit inflation trap that his administration caused. His refusal to support the shah allowed the mullahs to take power in Iran (because he felt Wahabi-ism was an improvement in human rights over the shah’s regime), and his administration, some 30 years ago, sowed the seeds of this current financial crisis.

    As I said above, classic leftist “feel good — look good” programs that have no basis in reality. Now, even with the current economic crisis, Obama is talking about increasing from 25 to 50 billion our contribution to the UN global war on poverty and one of his economic advisors is quoted as saying we should be “donating” .7% of our GDP to worldwide causes.

    I, too, do not want to be paying for the next 30 years for reruns of Carter’s mistakes.

  • http://hillaryneedsavacation.blogspot.com/ HNAV

    Interesting post.

    Mr. Levin is rather fascinating.

    Ironically, so many are trying to blame the Bush Administration.

    John McCain sounded like Nancy Pelosi, wildly pushing populism, and rants about firing those a President simply cannot.

    But what is worse, the Bush Administration was leading all along, and Congress _ which McCain, Pelosi, Obama, Kerry, Clinton, Kennedy, Conyers, Boxer, etc., did nothing.

    See the mighty GP post:
    “Bush Called For Reform of Fannie Mae & Freddie Mac 17 Times in 2008 Alone… Dems Ignored Warnings

    For many years the President and his Administration have not only warned of the systemic consequences of financial turmoil at a housing government-sponsored enterprise (GSE) but also put forward thoughtful plans to reduce the risk that either Fannie Mae or Freddie Mac would encounter such difficulties. President Bush publicly called for GSE reform 17 times in 2008 alone before Congress acted.

    Unfortunately, these warnings went unheeded, as the President’s repeated attempts to reform the supervision of these entities were thwarted by the legislative maneuvering of those who emphatically denied there were problems.

    The White House released this list of attempts by President Bush to reform Freddie Mae and Freddie Mac since he took office in 2001.
    Unfortunately, Congress did not act on the president’s warnings:

    ** 2001
    April: The Administration’s FY02 budget declares that the size of Fannie Mae and Freddie Mac is “a potential problem,” because “financial trouble of a large GSE could cause strong repercussions in financial markets, affecting Federally insured entities and economic activity.”

    http://gatewaypundit.blogspot.com/2008/09/bush-called-for-reform-of-fannie-mae.html

    I don’t cite this to focus blame, only to respond to the vapid, unethical Washington Celebrities in Congress, and a number of Elite Pundits, even ‘know it all’ Bloggers, who are screaming “BLAME-BLAME”.

    In reality, the Congress has been a disaster, and McCain shares the responsibility of those he is willing to debase (even with mindless ‘betrayed the trust’ claims), for his own personal political gain.

    Unfortunately this week, we witness two vapid Senate Candidates, one Liberal Socialist Newcomer with no clue as to what to do, and another who is a testy, bitter, Beltway Insider who has no idea as to what he is talking about.

    It is truly regretful to see both of these offerings.

  • http://VocalMinority.typepad.com ericthered

    Thank you for the yeoman’s job of covering this. I too was listening to Levin’s show Friday thinking: Someone needs to transcribe this!

    http://VocalMinority.typepad.com
    Jewish and Republican?? Oy gevalt

  • Clare Krishan

    I am untoward to make my first reply one of dissent?
    While I am no political hack, as a Catholic promoting BXVI’s critique of the malaise (to use a Carterism) as being the dictatorship of relativism, I fail to see in the authoress’s nor her commenters analysis the point when the train deviated from the tracks to cause such a train wreck!

    The history of this debacle was writ w-a-a-a-y before the nuclear-sub-vet was charged to serve a government of the people, for the people, by the people and was left to guard the stable long after the horses had bolted!

    Credit began to corrupt the markets when a certain central bank used a legal privilege granted to it by Congress to print money with its name on it, ex nihilo, out of nothing (our moeny is called “dollars” they’re actually named “Federal Reserve Notes.” Now ask yourself “Why?” when you’ve answered that question you may proceed to debate the merits of what political powers can do to compete with that sort of hegemenoy).

    This monetary policy is called FIAT currency, ‘cos the Treasury says “thy will be done” whenever the Fed uses its legal privileges granted by the Congress to set prices (by way of interest rates). Long have our Western Church theologians argued that a ‘pris fixe’ does not a ‘pris juste’ make: see Fr. Bernard Dempsey, S.J. “Interest and Usury” 1944.

    We Roman Catholics must learn to resist a very real worldly temptation to go with the flow of the mercantilist “labor theory of value” (aka the Protestant Work Ethic, reincarnated under Karl Marx in Das Kapital) that denies 2,000 years of hellenized wisdom synthesized by the Church Fathers. Read up on the Austrian School (and follow Ron Paul’s tracks these last 5 years as he foretold this very demise of corporate fraud under fractional reserve banking as it has always failed even as far back as the Roman Empire)

    We do not need corporate-statists (why else did the founding fathers declare independence in 1776) to manage our affairs for us, we are perfectly capable of assessing commercial risks with prudential judgment inherent in human nature, as endowed ‘a priori’ by our Creator (unless you’re a Calvinist Free Churcher and deny we can know anything a priori nor possess the free will to weigh in the balance the good-and-the-true from illusions offered in its place).

    Be careful of substituting partisan loyalties for common sense — the people who denied there was a “just war” doctrine have now done the same to “just price” dogma. If you care to stick it to the Magisterium go ahead, but be honest about your intentions: you’re as cafeteria Catholic as the vincibly ignorant “propose not impose” pro-choicers who worship in the liberal wing of the Church sitting check by jowl beside us at Mass each Sunday. The path is narrow – watch your step!

    If you want to “propose not impose” sound money, feel free, but 500 years of Gresham’s law is working against you!

    P.S. read anything from the Austrian School at mises.org to get up to speed, look forward to a more rigourous Catholic-themed debate ASAP
    P.P.S BXVI is working closely with an Austrian School economist on his next encyclical, I hope it arrives in time to help the neoCon American Exceptionalists to get over themselves (Mrs Palin’s chaste Alaska credentials didn’t last long once Washington’s empty suits got hold of her, sorry to say, she promoting cannabilism of the weakest like her partner in crime) and rebuild what’s left of our national reputation, we don’t want our gummint attacking the global dollar-based economy any longer!

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  • Terrye

    I have to admit I do not like Levin, but I think he is right about this.

    I also think that blaming Bush for this will be difficult because everyone knows the Democrats have been involved in all this from the beginning, and they have had control of the Congress for the last two years themselves.

    I read some time ago about Bush and McCain trying in vain to bring about reforms in recent years, but I think this was like terrorism in a way. People just refused to believe it could happen, until it did.

    I think Schumer might be willing to work with the Bush administration for the first time because I think this scared a lot of people. Really scared them.

  • Terrye

    pbuchta:

    McCain was cleared of all wrong doing in the Keating 5. That is more than can be said for Jim Johnson and Franklin Raines of the Fannie Mae and Freddie Mac fame. And Obama has had dealings with both of them.

  • Acer Palmatum
  • Clare Krishan

    Being a newly subscribed commenter, I’m not sure if my earlier contribution met with approval of the moderator, so here’s a postscript in support of my arguments:

    “The core issue is that there is nothing to restrain money creation.”
    http://www.mises.org/story/3118
    “…in August 15, 1971… Nixon severed the last tie of the dollar to gold, the world’s monetary system has not been restrained by anything physical. We’ve depended on the discretion of central bankers. We can’t trust that, and this crisis shows precisely why.”

    So instead of an easily-assayed precious metal that is practically inert (so doesn’t rust away or diminish in value if left to the vagaries of the climate) we are told to put our faith in, to believe in, to trust, wee paper banknotes issued in the name of a federal agglomeration of private regional bankers, underwritten by? The public purse managed by the US Treasury? These wee sheets of green paper which when left to the vagaries of the climate are now actively under attack by financial interests at home and abroad leveraged by capital from sovereign wealth funds. If the traditional model of banking that served most commercially advanced cultures going back to Roman times (*) still applied, such a debasement in currency would be grounds for the deposit holder to sue the deposit holder for embezzlement. Instead our government siphons off a seignorage from our scarce private property resources without our consent, heck without our even understanding what “seignorage” is, right readers? Well Bernanke understands what seignorage is, here’s his contribution to the standard economics text book on the subject;
    http://www.nightfall.it/wp-content/uploads/2008/02/seignorage-and-inflation-tax.pdf (see chart a on page 4 for the sizeable cut the government takes from the money supply/demand curve during inflationary ie bubble cycles – this is how Bush has paid for the Iraq war)

    Whose is custodian of the national currency? Well, perhaps the candidates will include that as one of their innovations, create an office with that Title, ‘cos currently NO ONE cares whose in custody of the value of the wee dollars., NOT Congress, so long as there’s a hog or two’s worth of pork barrel spending for there districts back home and NOT the financial institutions who are loath to surrender their license to play fast and loose with the money they print per FIAT.

    ____
    * the scrolly L of the pound sterling £ symbol is from librum, the basic Roman unit of weight used by money changers to balance the scales during exchanges of trade, see chapter 2 for more examples of historical violations of legal principles of deposit banking, for example what could be considered the first central bank: in the Alexandria of the hellenic Ptolemy dynasty (of Cleopatra fame) “it is almost certain that a fractional reserve system was used and that the bank’s huge profits were appropriated by the Ptolemies.” http://www.mises.org/books/desoto.pdf

  • pbuchta

    Speaking of Social Security Privatization. Imagine the horrific mess we would be in today if that thing ever went through.

    Younger people would have had a loss; near – retirees would not have. But wow…good thing we have done NOTHING about ss, instead, right? Meanwhile, Obama is out-and-out LYING to elders about their social security this weekend. “Change” alright. Same old politics.-admin

  • Clare Krishan

    Are my posts considered spam since they make liberal use of URL citations? Sorry, one neophyte in need of guidance. I’ll be praying for those charged with navigating very choppy waters, lets hope they use the “morning star” (Christ) for guidance and not some esoteric loyalty to their skull’n'crossbones vows of secrecy!

    COmments are moderated…everything is waiting to be released – admin

  • Clare Krishan

    Ok third times a charm, sorry my two previous posts didn’t make it.

  • Clare Krishan

    Let me just say that those who permit seignorage (*) only have themselves to blame if the Fed’s FIAT powers wipe out the dollar’s value on the global financial markets. Read Jesus Huerta de Soto at the Mises institute blog on the historical violations of the legal principles in deposit banking going as far back as the Alexandian central bank of Cleopatra et al: “it is almost certain that a fractional reserve system was used and that the bank’s huge profits were appropriated by the Ptolemies” (his book is available online in pdf format)
    __
    * if you don’t understand the term, you’re in the dark about sound money, and thus are ill-equipped to guage the severity of the mess we’re in (700 billion is someone’s “wild-guess, best estimate”, its sure to end up costing a heck of a lot more): read up on the Austrian School, one of whose illustrious number is advising BXVI on his upcoming social encyclical (on the natural law arguments to be made in favor of really free markets, not the ‘corporatist statism’ of “most-favored nations” mercantilist trade we’ve been served up for the past several decades). Also Fr. Bernard Dempsey S.J. warned in “Interst and Usury” back in 1944 that institutional usury of fractional reserve banking untethered from legal precedence would have serious ramifications on the financial playing field, and that was before Nixon in ’71 removed the last ties to the gold standard. Lord have mercy… for as the dollar loses popularity as a fungible commodity, investors will put the capital to use elsewhere chasing scarce supplies of fungibles like wheat and rice, driving the prices up as the capital competes for the commodity. People are already starving in Africa and Asia from natural calamaties, we must pray that an American-wrough man-made calamity does not drive them into a perpetual famine that could spread to more developed regions of the world (Pakistan and the Phillipines both recently suffered wheat and rice shortages). Civil unrest is sure to occur and China and India have more millions more men of draftable age than we do (thanks to sex-selective abortions funded by our UN dollars. Hah! Culture wars and The economy – two perennials that never get the respect they are due after the ballot box)

  • Gina

    Commenter Clare: “Catholic themed” debate equals a discussion of libertarianism? I have never been able to credit lib philosophy as being compatible with traditional Christianity.

  • http://www.gesthemanegarden.blogspot.com Hislittlelamb

    I heard Mark Levin on the radio Friday night and then yesterday downloaded the mp3 and listened to again.

    Today I followed up with a websearch finding this Taki’s Magazine “The Diversity Recession, or How Affirmative Action Helped Cause the Housing Crisis” Posted by Steve Sailer.

    It’s very, very, long. It completely substantiates what Mark Levin was saying, EXCEPT, it also says that Bush got on the gravy train as well. It starts out leaving no minority group without blame, even blaming Mexican immigrants, but reading much further down it says a couple of things worth noting:

    >>For four decades, political leaders have viewed subsidizing minority home buying as insuring social peace. The “if they own it they won’t burn it’ was the maxim of the time” which was proved false with the ’92 race riots.

    >>Rather than make the fundamental reforms needed to help the bottom half actually become economically productive and domestically stable enough to afford to buy a home, the government tried to juice the home-ownership rate directly.

    >>Both the Clinton and Bush departments of Housing and Urban Development reapeatedly raised the GSE quotas. Bush raised Clinton era GSE quotas from 21% to 39%.

    >>George W. Bush campaigned in 2004 promoting his Zero Down Payment Program for FHA insured loans, thus giving Presidential respectability to the ruinous trend toward no money down deals.

    I think, but I’m not sure, this resulted in the FHA Modernization Act which Sen. John McCain opposed putting him squarely at odds with the Bush administration and Democratic leaders in the House and Senate, who were negotiating reform legislation that would cut FHA’s minimum to zero.

    “Policies should move toward ensuring that homeowners provide a responsible down payment of equity at the initial purchase of a home. I therefore oppose reducing the down payment requirement for FHA mortgages and believe that, as conditions allow, the down payment requirement should be raised. So many homeowners have found themselves owing more than their home is worth, because many never had much equity in the house to begin with. When conditions return to normal, GSEs (Government Sponsored Enterprises) should never insure loans when the homeowner clearly does not have skin in the game.” source?

    edited to admit links – admin

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  • VinceP1974

    One of the things the Lefties say is that Gramm’s banking reform law of 1999 is the reason this happened because it rescinded the banking regulations from the Depression era.

    What they omitt is that the Democrats demanded consesions be put into the bill so that no bank could enter the new markets that this bill opened up unless the bank met their subprime loan requirements.

    By doing this, the Democrats guaranteed that every bank entering into securities would infect the international banking system with bad loans.

    This is from the NYT 23 Oct 1999

    Treasury Secretary Lawrence H. Summers said in an interview, “At the end of the 20th century, we will at last be replacing an archaic set of restrictions with a legislative foundation for a 21st-century financial system.” The measure, he added, “would provide significant benefits to the national economy.”

    Senator Gramm said the measure “is the most important banking legislation in 60 years.”

    The legislation repeals the Glass-Steagall Act, or, as it is formally known, the Banking Act of 1933, which broke up the powerful House of Morgan and divided Wall Street between investment banks and commercial banks. It also makes significant changes to the Bank Holding Company Act of 1956, which had restricted what banks could do in the insurance business.

    The Glass-Steagall Act was enacted after the stock market crash of 1929 and the ensuing banking crisis and Great Depression. On the day it was signed, along with the National Industrial Recovery Act and other measures, President Franklin D. Roosevelt called the package “the most important and far-reaching legislation ever enacted by the American Congress.”

    The breakthrough in Friday’s legislation came in a backroom meeting at the Capitol soon after midnight, when a group of moderate Senate Democrats — led by Christopher Dodd of Connecticut and Charles E. Schumer of New York — forced a compromise between Gramm and the White House over the legislation’s effect on the Community Reinvestment Act, a 1977 anti-discrimination law intended to encourage lending to minorities and others historically denied access to credit.

    Dodd, whose state is home to the nation’s largest insurance companies, and Schumer, with strong ties to Wall Street, have long sought legislation to repeal the Glass-Steagall Act. Both men said in interviews Friday that they moved to strike a compromise after it became apparent that the legislation might be killed, as it was last year by Gramm, over the debate about the Community Reinvestment Act.

    Gramm had maintained that he did not want anything in the bill that would expand the application of the Community Reinvestment Act because it was, he said, unnecessarily burdensome to banks. He had sought a provision that would exempt thousands of smaller banks from the law. He also wanted a provision that would expose what he has described as the “extortion” committed by community groups against banks by requiring the groups to disclose any special financial deals the groups extract from the banks.

    But the White House found that provision unacceptable and had its own ideas about community lending. It wanted the legislation to prevent any bank with an unsatisfactory record of making loans to the disadvantaged from expanding into new areas, like insurance or securities.

    The White House had insisted that the President would veto any legislation that would scale back minority-lending requirements. Four days of intense negotiations between Summers, Gene Sperling, the President’s top economic policy adviser, and Gramm, while moving the two sides closer, failed to resolve the differences.

    ..
    After receiving calls from executives of some of the nation’s leading financial companies, Dodd and Schumer began trying to work out a compromise. An agreement was quickly reached on the issue of banks and expanded powers – no institution would be allowed to move into any new lines of business without a satisfactory lending record.

    The lawmakers bogged down on Gramm’s insistence that all community organizations disclose to the regulators what benefits they get from banks. Some Democrats expressed the fear that Gramm’s proposal would require the Boy Scouts to file reports with the regulators.

    Ultimately, the following provisions were drawn up and both the White House and Gramm said they could accept them:

    ¶Banks will not be able to move into new lines of business unless they have satisfactory lending records.

    ¶Community groups will have to make disclosures to regulators about certain kinds of financial deals with banks that they have pressed to make loans under the Community Reinvestment Act.

    ¶Wholesale financial institutions, a new kind of business that takes large, uninsured bank deposits, cannot be affiliated with commercial banks.

    ¶Small banks with satisfactory or excellent track records of lending to the underserved would be reviewed less frequently under the Community Reinvestment Act. As a practical matter smaller banks are reviewed about every three years. The deal struck today allows all rural banks and banks with less than $250 million in assets to undergo examination once every five years if their last exam resulted in an “outstanding” grade and every four years if they last scored “satisfactory.”

    For more than 20 years, Congress has tried unsuccessfully to rewrite the nation’s financial services laws and repeal Glass-Steagall, particularly as many other industrial nations had no similar restrictions on their banks. But until recently, the three main industries affected by the legislation — banks, securities companies and insurers — had competing interests and were able to lobby any legislation to a standstill.

    That all changed in recent years as the lines between the industries began to blur and it became more broadly acknowledged that a deregulation of financial services could be beneficial to insurers, bankers and securities firms alike. Once the three industries rallied around the legislation, they became a formidable political force, raising millions of dollars for lawmakers and pressing both Republican leaders in Congress and the White House for new legislation.

    http://partners.nytimes.com/library/financial/102399banks-congress.html

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  • http://alazycowboy.com billhuber

    Thanks for the great post. There is a lot of good material in the post and in the comments. As the treasurer for a local Habitat for Humanity affiliate this subject is dear to my heart. I find it ironic that despite all of these efforts to increase home ownership in low income communities the community I work with is probably worse off than they were twenty years ago. The foreclosures far out number the new home owners we are bringing in. From my experience the combination of relaxed mortgage standards and easily available credit cards is lethal to home ownership.

  • Clare Krishan

    Wow – thanks Admin, my feeble first attempts made it!
    RE: #24 “.. SSI Privatization. Imagine the horrific mess we would be in …” and #26 ” … credit lib philosophy as being compatible with traditional Christianity”
    permit me to respond that with the good news first: those of us still working are transfering wealth to those SSI retirees enjoying our fidelity to the social contract. Bad news? The public purse is EMPTY (in case you weren’t listening the gummint just doubled the deficits) and any future retirees hoping to turn to SSI will find their working grandchildren (& new immigrants who took the jobs left vacant by the ones aborted) hobbled with $500 Trillion in unfunded liabilities to keep their ancestors “in a manner to which they have become accustomed.” The fairy tale we’re being told about social security has two possible endings,
    __ we string along with the communitarian fantasy of “one for all, all for one” and get a nasty shock when we retire and discover that the counter parties to the social contract played us and we lost bigtime, or
    __ we elect to redirect the deductions away from the counterparties holding the empty public purse and find vehicles in private commerce who make investments under generally accepted legal principles where the depositer of the funds remains the owner of the funds.

    Currently the financial markets look a smidgen better than the public purse, if for the simple reason each of us as free agent can choose to invest our private property in other currencies (while Fed and Wall Street was pulling the wool over our eyes about rising equity values measured in Federal reserve notes, the dollar’s value was sinking, in real terms over the last decade its a wash – our private property has stagnated) the euro for example is 16 % more valuable today than it was at the start of the second Bush term.

    The study of just prices (as the study of just war) has been a concern of traditional Christianity since ancient times. What many conservative fail to see in the mercantilism that has passed for capitalism in the US these past 5 decades is the underlying malfeasance of the banking sector of the economy using the money multiplier to create a 10-fold expansion in credit for every dollar deposited in a checking account or savings account. Sadly, the gummint makes matters worse by centrally planning this monetary shell game by abrogating to itself the power to set the price of the money (the interest rate, ie a comfort level with the attendent risk of transferring ownership of the asset to another for their private economic pursuits of gainful industry).

    Libertarians do not profess to make value judgments on ends (such as an individualist GOP ideology or a collectivist D mythology) but on means to attain an intended end. A bank’s intended end is to safeguard the deposits of its depositors right? If it is fit for purpose it will offer means for the depositor to dispose of his property in convenient ways, such as providing electronic funds transfer to purchase stock certificates when the depositor wants to become a shareholder, or checking facilities for day to day operating expenses, under a fee for service arrangement, much like a stable charges stable fees for taking care of a horse. Now if the stable takes the horse without your permission and enters into a prizewinning steeplechase race in their own name, and wins – who’s money is the prize money? And if the horse stumbles and dies at the first obstacle – who’s is the loss?

    What is happening in the fractional reserve banking system is a systemic flouting of sane legal practices which would permit a property owner to sue the embezzeler (the guy who “borrows” the horse at socialized risk for private gain).

    Many but not all Austrian school economists (and Milton Friedman of the Chicago School) call for 100% reserves and zero “moral hazard” from leverages that expand credit until a bubble bursts with the attendend bad social consequenced. Ill-informed demagogues like Steve Sailor want to blame a handful of inadequately counselled borrowers with the demise of the world as we know it? That’s mean -spirited at best or deeply dishonest at worst, a capacity of self-delusion unfortunately too many Bushies have cultivated for too long. The “labor-theory of value” does not conform with Catholic social teaching on free will (space is short to cover it here, but suffice it to say, Aristotle and Aquinas debunked it long ago)

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  • http://web.mac.com/writecoast/iWeb/Site/Blog/Blog.html PeggyMcGilligan

    Perhaps last but not least: many of the fat cats who circulate from board to board and from job to job throughout the financial industry are also members of the Bilderberg Group and or the Trilateral Commission, founded respectively in 1954, and in 1973, in New York City. When someone takes your money and steals your car, it makes an impression. When they belong to such a shadowy political clique, it leaves an indelible impression. Many elected officials even belong to these cabals, hence the secrecy. When Bill Clinton eased banking restrictions, he dished out $8-billion dollars for community reinvestment loans.

    When the financing schemes fell through, as is their wont whenever 30-million Mexican nationals buy inflated properties and default, it left banks in the lurch. Hillary Clinton counted on the loan giveaways to buy votes. Interestingly enough, had Hillary secured the nomination; she, instead of Barack Obama would preside over the bailout. So, where’s that $8-bilion plus dollars? Where’s Hillary? Why the caveat in Section 8 of the bailout: “Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency?”

    The Global Initiative people (code speak for car thieves) took my money; they stole my car. If you or I did half the things these people have done, we’d be serving consecutive life sentences. Wise up, get angry, and let the bubble burst. Besides, Ben Stein says we’re going to be just fine. You have my word on it too. Gentlemen, I want my money back. “You are a 
den of vipers and thieves. I intend to rout you out, and by the eternal God, I will rout you out.” –Andrew Jackson, to fraudulent financiers, 1832: http://theseedsof9-11.com