I am in receipt of Representative Tulsi Gabbard’s latest update. She cosponsored legislation to reinstate portions of Glass-Steagall in an effort to eliminate another potential financial crisis (like the 2008 bank collapse). At writing, this “bi-partisan” legislation was cosponsored by 25 Democrats and one Republican. Gabbard appears to believe the 1999 repeal of portions of the Glass-Steagall act caused this crisis by removing restrictions on the kinds of business banks could legally pursue. I don’t claim to be a finance expert, but a quick glance at the history of the 2008 housing crisis reveals the actual cause was more likely Democrat Razzle-Dazzle.
Gabbard’s short version is that banks simply went out of control in a government vacuum and began engaging in risky behavior because… well… they COULD… or something. I admire her a great deal and she is certainly the most cogent of Hawaii Democrats, so it is rather mysterious to me that she ignores the overwhelming evidence of the ACTUAL cause of the housing collapse.
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Beginning in the Clinton Administration, banks were pressured to make more mortgage loans to lower income borrowers (in accordance with the Community Reinvestment Act). The idea was to make home ownership affordable to a wider range of Americans. This lofty liberal goal was to be accomplished by a significant loosening of credit requirements, reductions (and eventual elimination) of required down payments, removing proof of income requirements, making more loans in economically depressed neighborhoods, and holding down interest rates.
As interest rates continued to decline in the post-Reagan/Bush era, housing prices climbed in lock-step. Lower interest rates mean lower payments, which mean higher priced houses are more affordable to more people. To make the problem worse, the federal government guaranteed up to two trillion dollars worth of these loans. These Fannie-Mae and Freddie-Mac loan guarantees virtually eliminated the bank’s exposure to bad loans (or so they thought).
As the mid-late 90’s came and went interest rates were held artificially low and housing prices continued to climb. Millions of “low-doc”, low income, weak credit, inflated appraisals, and generally, questionable mortgages were written.
Basically, if you CLAIMED you made $100,000 a year, your credit wasn’t hideous, and someone swore the house was worth the amount of the mortgage, you qualified. Nobody actually bothered to check to see if you actually MADE $100,000 a year or not. Who cares? After all the bank examiners wanted you to make these loans and if you default, the government will cover the bank’s losses. Many people would buy a home, go out and get a home improvement loan or second mortgage, pay off their credit card debt or their new car, and plan to sell the house when the market rose another 15%. Many bought a home they could barely afford with a 5-year adjustable-rate mortgage at an artificially low teaser rate of 3 or 4% or so, assuming that they could sell the home when the rate went up and they’d turn a nice profit.
The destruction of well-established loan requirements created by a hundred years of sound lending practices, spread to every aspect of the mortgage business. These liberal loan policies spurred ordinary people to buy second homes or upgrade to homes they could barely afford on the belief that home prices would continue to rise. People took out second mortgages to buy cars and go on vacations, pay off credit cards and put spas in the back yard, buy boats and expensive watches.
While, in the shadows, business threw it’s share of gasoline on the burgeoning fire. Fraudulent loans swamped the system. Unscrupulous loan brokers falsified applications, paid crooked appraisers to inflate the values of millions of homes, swallowed up legitimate down payments in broker fees, and made enormous profits off the broken loan approval system. Houses all over the country were sold over and over, each time they appraised for more and loans were granted until an $80,000 home carried a mortgage of as much as $250,000 or more. These were bundled with millions of other high-risk loans and sold off to investors as virtually risk-free, ‘mortgage-backed securities’.
Then… uh-oh. While business and government were both distracted by the perceived threat of massive millennium computer crashes, the time-bomb ticked. When the summer of 2000 came along and interest rates had been climbing for over a year, housing prices had begun to fall, and many were seeing their adjustable-rate mortgages rise precipitously. Their interest-only loans, their 2% teaser loans, their negative-interest loans, their balloon payment loans, all began to mature. Unable to afford the higher payments, and with no equity, and a home worth less than they paid for it, refinancing was no longer an option. These homeowners began to default. In droves.
The Bush Administration knew about this ticking time bomb. A couple of years into the Bush Administration, whistle-blowers had begun to scream “the sky is falling” and the administration attempted to halt the free-fall with legislation to pull back the throttle on the Community Reinvestment Act. His attempt was promptly blocked by Democrats. Most plans and bills never even made it out of the democrat-controlled committees. In the meantime, Twin Towers, war, and psycho suicide jihadists demanded front-page space. And the clock ticked into 2005 and beyond.
Ironically, the loans more likely to fail were not the loans made to low-income homeowners in depressed neighborhoods, but rather the middle-class loans made to those who expected to profit from them and found they could not. These people, these financial mercenaries simply packed up their shit and moved out, leaving the homes in foreclosure, or stopped paying the mortgage and lived rent-free for months and sometimes years.
As more people defaulted, the street-level criminal element now got involved. More vacant properties popped up everywhere and particularly in depressed neighborhoods. The house on the corner that was last year’s shining achievement for a low-income homeowner became a vacant magnet for drug dealers, meth labs, gang activity, and the homeless, further depressing the values of neighboring properties. This explosion of vacant property became a plethora of meth labs which spread meth and other illegal drugs throughout the country and concentrated it in the same depressed neighborhoods the Democrats claimed to be helping.
A normally manageable .25% to 1% of loans in default doubled, and slowly this level of default doubled again. Before it ended upwards of 6% of home loans would be in default and the people, the country, and the world would be in financial chaos.
So, back to the original reason for this diatribe. Representative Gabbard (normally bright, informed and immune to partisan hog-wash) blames the relaxation of government controls on big banks for this boondoggle and is promoting a return to Glass-Steagall. While the repeal of Glass-Steagall HAS had some unexpected consequences, to blame the housing crisis on that is to treat the cough and ignore the pneumonia.
The underlying CAUSE of the catastrophe was the Clinton Administration’s strong-arm tactics on mortgage banks in the 80’s to get them to loosen their loan requirements for low-income buyers. These misguided policies continued during the early Bush Administration. If a bank wanted to open a new branch, expand, or merge, it had to have an impressive percentage of low-income loans in depressed neighborhoods. Smaller banks would purposely swell their loan portfolios with these high-risk loans to become take-over targets for larger banks. Larger banks would swallow them up knowing they had a disproportionate number of high-risk paper to balance the larger bank’s more conservative (anti-Clinton) loan portfolios.
Admittedly, there were some Smith-Barney culprits among them, but most banks were simply responding to government pressure and doing what the regulators insisted they do. To believe that every bank in America suddenly decided to make shitty loans in a complete government vacuum is to subscribe to the Flat Earth Society. GOVERNMENT MEDDLING caused the 2008 crisis. Liberal politics lead to liberal loan practices. Liberal loan practices led to loan defaults. Loan defaults led to the housing bubble, and it led to the financial chaos.
A return to Glass-Steagall will not address the pneumonia. It will merely increase government control and limit our financial institutions from competing on the world financial stage. It will simply reinstate the obstacles that led to it’s repeal in the first place. American financial institutions must be free to compete with those in other countries on a level playing field. As we were in danger of becoming a second-rate financial power in the late 70’s and early 80’s, to hamstring our banks with non-competitive obstacles merely limits their ability to remain world financial leaders. Don’t fall for the Democrat Razzle-Dazzle. Compare it to the AFFORDABLE healthcare Razzle-Dazzle. I urge you to contact your local lawmakers and insist they reign in the Federal bureaucracy first!