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.
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.
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.
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.
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.