The Democratic Parties blame for the 2008 financial meltdown

[stuboyle]

I recently got into a discussion with a very conservative blogger regarding the financial meltdown of 2008. His logic went like this. The Democratic party is to blame for the financial meltdown of 2008 because Freddie and Fannie were forced under the provisions of the CRA Act to make lots of sub-prime loans to individuals with low-to-moderate incomes. He further stated that the Bush administration attempted to either restrict Freddie or Fannie activities or spin them off from GSE status which the Democrats blocked.

My version of the story is the Freddie and Fannie were just a side-show in the debacle. It was the private-label MBS that blew-up. It were these assets which did not have the implied government guarantees of the GSE's These were the "toxic assets" which brought down Bear Stearns, Lemhan, Merrill, Goldman, WAMU, Countrywide and the list goes on and on. Since the GSE's had the implied guarantee, these assets did not tank in market value. Further, the government didn't force Freddie or Fannie to undertake large amounts of subprime lending under the guise of CRA. Freddie and Fannie saw how much money WAMU and Countrywide were making and they were motivated by greed just like everyone else. However, it does seem that the Democrats do have a bit of a black-eye in the whole affair due to the Bush admin trying to change something about the way the GSE's operated prior to the meltdown. And it is certainly true that the Freddie and Fannie portion of the debacle will cost us, the taxpayers a couple hundred billion to bailout.

Any further clarification or unbiased information would be very helpful. When I look out on the net, a lot of the info comes from either Conservative or Liberal think-tanks.

[Yossarian]

Fannie and Freddie were part of the problem. So were the securitizations. And ratings agencies. And Congress. And buyers. Plenty of blame to go around.

[freein05]

The CRA Act does not force any bank to make loans. Greed is what caused the melt down. Standard loan underwriting and loan advance amounts were thrown out the window to make the fee income associated with mortgage loans. MBS and the private market were just as responsible probably even more then Fannie or Freddie. I retired from banking just as the melt down was starting and could not believe the loans that were being made. They were junk!!!! Ten years before these loans would not have been made. The MBAs fresh out of school thought the knew a lot more about how to make money in banking than us old time bankers knew.

Safe banking means relatively low profit margins and the MBAs did not understand this. They were go go go. Most of the loans made that caused the problems were made to middle class people not the poor and they were for Mac Mansions.

[ApatheticNoMore]

My understanding is the housing crisis is NOT all loans that would be classified as subprime. Subprime loans are only one small fraction of the loans in trouble. So then how do you explain the extent of the non-subprime crisis?

I mean sure it's nice to blame poor people for taking out mortgages they couldn't afford, but the reality is that nonsense was done by all incomes (well maybe not the super wealthy, but you know you get the idea).

[ApatheticNoMore]

Fannie and Freddie were part of the problem. So were the securitizations. And ratings agencies. And Congress. And buyers.

The Federal Reserve as well. For one thing they kept interest rates so low for years and years and years, for another thing my understanding is that it was within their regulatory power to prevent something like this and they didn't.

[stuboyle]

. . . Plenty of blame to go around.

Yes, it is hard to argue about that. It seems so apparent what was going to happen but at the time it was hard to see.

[stuboyle]

The Federal Reserve as well. For one thing they kept interest rates so low for years and years and years, for another thing my understanding is that it was within their regulatory power to prevent something like this and they didn't.

Wasn't the Fed Funds Rate about 5.25% before the crash? Mortgage rates were pretty low though. I agree there was a lot of "its not my job" going around within the financial regulatory community. Of course Alan Greenspan was a follower of Ayn Rand, who was the ultimate proponent of laissez faire economics. Greenspan basically admitted his was wrong. I wonder what Ayn Rand would say about the meltdown if she was alive today?

[stuboyle]

My understanding is the housing crisis is NOT all loans that would be classified as subprime. Subprime loans are only one small fraction of the loans in trouble. So then how do you explain the extent of the non-subprime crisis?

I mean sure it's nice to blame poor people for taking out mortgages they couldn't afford, but the reality is that nonsense was done by all incomes (well maybe not the super wealthy, but you know you get the idea).

I think there were a number of loans which were on long-term amortizations that ballooned after 5 or 7 years and a number people didn't have enough equity in their homes to refinance them. These were middle to high income borrowers.

[Lainey]

We've talked about this before, stuboyle. Point your friend to this summary in wikipedia: http://en.wikipedia.org/wiki/Community_Reinvestment_Act

and as others have said, 1) most of the mortgages that defaulted were *not* subprime; 2) most of the subprime mortgages were not from federally regulated banks, but instead, from companies like WAMU and Countrywide; 3) federally regulated banks were not "forced" to make subprime/high interest loans, as freein05 said.

[Rogar]

I read a book called Bailout Nation by Barry Ritholtz. It got good reviews and presented what I thought was an unbiased analysis. The end of the book has a list of those to blame, going all the way back to reagan's deregulation of the financial industry. The list had over 25 items or people. I don't recall the democratic party being among them, though Bill Clinton was on the list for a reason I don't recall.

Pretty much the top of the list was keeping interest rates so low. Greenspan took a lot of blame. Second was probably a handful of banking deregulation actions enacted by congress over a couple of decades. The SEC followed for not doing their job in keeping an eye on things and the rating agencies for not recognizing risk. Banking and consumer greed were all a part of things, but for the most part these folks were playing by the rules they were given or allowed. Apatheticnomore had the basics.

The reviews claimed the book simplified a complicated mess, but even at that there were so many parties involved it was hard to keep track. I've read a couple of the Michael Lewis books like The Big Short and found them more narrow infocus and harder to follow.

It's complicated for sure, but there are some root causes and they go way beyond consumer and banking greed.

[janharker]

All this is beyond my willingness to comprehend. What I do know is this: in 2004 a large bank tried to get me to take a larger loan than I needed so that I could buy a house bigger than what I needed. My credit rating allowed the bank to offer me that larger loan. Thing was, I knew how much I wanted in order to buy the house I wanted. I did not answer to the temptation. Thus, my take on it all is that the problem was 2-sided. First, the banks were out to make a buck on the little guy. Second, there were too many little guys who wanted more than they could afford. Greed on both sides.

Look into the issues that caused the Great Depression in the 30s. You'll see a repeat.