Who is to Blame? (Revisited)

[Anonymous]

The decline of middle class is a result of globalization.
On the other hand, the political need to avoid recession caused the loose flow of money and bubbles.
The quality of life for regular people will keep declining.

[underdose]

“On the other hand, the political need to avoid recession…”

I’d rephrase that as “the political need to avoid the acknowledgment of recession”. I’ve said it on many other threads, but at the risk of repeating myself I’d like to make the point again.

We are in a recession. We have been in a recession for a long time. Arguably, we were in a recession for the entire decade, all through the housing bubble.

The government will not call it officially a recession unless there are two quarters of declining real GDP. This is a bogus number. It is very easy to cause the GDP to increase in “real” terms. Step 1, rain money from the sky, causing a nominal increase in GDP because the new money all gets spent. This can be done through tax rebates or lowering the Fed funds rate. Step 2, understate inflation and use a ludicrously low GDP deflator to adjust the nominal GDP to “real” GDP. As long as the number always comes out positive, hooray, no recession. Enron cooked their books. Would we expect any less from good ol’ Uncle Sam?

Furthermore, the idea of GDP is silly. How much money changed hands during the year? That’s the measure of the health of the country? What if I measured my financial health that way. Well, as long as I borrow and spend more money than I did last year, I am in “expansion” and therefore doing well. Obviously, this is idiotic. Volume of transactions says nothing about quality of transactions. If the bulk of GDP is borrowing and spending, a growing GDP is a bad thing. In my own life, the best measure of my financial health is how much I make vs. how much I spend, and how much I’ve saved vs. how much I owe. For companies these are measured on the income statement (make vs. spend) and balance sheet (saved vs. owe). For a country, I’d offer trade balance and savings rate. During the whole bubble, the US ran a trade deficit of $700-800 billion per year. That indicates borrow and spend, which the GDP fails to indicate. Similarly the savings rate was negative. Again, bad. So the economy was always in a bad state, or at least a precarious state. Sure, there were jobs in real estate and mortgage lending and construction. But it was all short lived and phony. But it looked good politically. It was all smoke and mirrors, but at least Bush and co. never had to acknowledge a recession officially.

[underdose]

“On the other hand, the political need to avoid recession…”

I’d rephrase that as “the political need to avoid the acknowledgment of recession”. I’ve said it on many other threads, but at the risk of repeating myself I’d like to make the point again.

We are in a recession. We have been in a recession for a long time. Arguably, we were in a recession for the entire decade, all through the housing bubble.

The government will not call it officially a recession unless there are two quarters of declining real GDP. This is a bogus number. It is very easy to cause the GDP to increase in “real” terms. Step 1, rain money from the sky, causing a nominal increase in GDP because the new money all gets spent. This can be done through tax rebates or lowering the Fed funds rate. Step 2, understate inflation and use a ludicrously low GDP deflator to adjust the nominal GDP to “real” GDP. As long as the number always comes out positive, hooray, no recession. Enron cooked their books. Would we expect any less from good ol’ Uncle Sam?

Furthermore, the idea of GDP is silly. How much money changed hands during the year? That’s the measure of the health of the country? What if I measured my financial health that way. Well, as long as I borrow and spend more money than I did last year, I am in “expansion” and therefore doing well. Obviously, this is idiotic. Volume of transactions says nothing about quality of transactions. If the bulk of GDP is borrowing and spending, a growing GDP is a bad thing. In my own life, the best measure of my financial health is how much I make vs. how much I spend, and how much I’ve saved vs. how much I owe. For companies these are measured on the income statement (make vs. spend) and balance sheet (saved vs. owe). For a country, I’d offer trade balance and savings rate. During the whole bubble, the US ran a trade deficit of $700-800 billion per year. That indicates borrow and spend, which the GDP fails to indicate. Similarly the savings rate was negative. Again, bad. So the economy was always in a bad state, or at least a precarious state. Sure, there were jobs in real estate and mortgage lending and construction. But it was all short lived and phony. But it looked good politically. It was all smoke and mirrors, but at least Bush and co. never had to acknowledge a recession officially.

[underdose]

“On the other hand, the political need to avoid recession…”

I’d rephrase that as “the political need to avoid the acknowledgment of recession”. I’ve said it on many other threads, but at the risk of repeating myself I’d like to make the point again.

We are in a recession. We have been in a recession for a long time. Arguably, we were in a recession for the entire decade, all through the housing bubble.

The government will not call it officially a recession unless there are two quarters of declining real GDP. This is a bogus number. It is very easy to cause the GDP to increase in “real” terms. Step 1, rain money from the sky, causing a nominal increase in GDP because the new money all gets spent. This can be done through tax rebates or lowering the Fed funds rate. Step 2, understate inflation and use a ludicrously low GDP deflator to adjust the nominal GDP to “real” GDP. As long as the number always comes out positive, hooray, no recession. Enron cooked their books. Would we expect any less from good ol’ Uncle Sam?

Furthermore, the idea of GDP is silly. How much money changed hands during the year? That’s the measure of the health of the country? What if I measured my financial health that way. Well, as long as I borrow and spend more money than I did last year, I am in “expansion” and therefore doing well. Obviously, this is idiotic. Volume of transactions says nothing about quality of transactions. If the bulk of GDP is borrowing and spending, a growing GDP is a bad thing. In my own life, the best measure of my financial health is how much I make vs. how much I spend, and how much I’ve saved vs. how much I owe. For companies these are measured on the income statement (make vs. spend) and balance sheet (saved vs. owe). For a country, I’d offer trade balance and savings rate. During the whole bubble, the US ran a trade deficit of $700-800 billion per year. That indicates borrow and spend, which the GDP fails to indicate. Similarly the savings rate was negative. Again, bad. So the economy was always in a bad state, or at least a precarious state. Sure, there were jobs in real estate and mortgage lending and construction. But it was all short lived and phony. But it looked good politically. It was all smoke and mirrors, but at least Bush and co. never had to acknowledge a recession officially.

[underdose]

“On the other hand, the political need to avoid recession…”

I’d rephrase that as “the political need to avoid the acknowledgment of recession”. I’ve said it on many other threads, but at the risk of repeating myself I’d like to make the point again.

We are in a recession. We have been in a recession for a long time. Arguably, we were in a recession for the entire decade, all through the housing bubble.

The government will not call it officially a recession unless there are two quarters of declining real GDP. This is a bogus number. It is very easy to cause the GDP to increase in “real” terms. Step 1, rain money from the sky, causing a nominal increase in GDP because the new money all gets spent. This can be done through tax rebates or lowering the Fed funds rate. Step 2, understate inflation and use a ludicrously low GDP deflator to adjust the nominal GDP to “real” GDP. As long as the number always comes out positive, hooray, no recession. Enron cooked their books. Would we expect any less from good ol’ Uncle Sam?

Furthermore, the idea of GDP is silly. How much money changed hands during the year? That’s the measure of the health of the country? What if I measured my financial health that way. Well, as long as I borrow and spend more money than I did last year, I am in “expansion” and therefore doing well. Obviously, this is idiotic. Volume of transactions says nothing about quality of transactions. If the bulk of GDP is borrowing and spending, a growing GDP is a bad thing. In my own life, the best measure of my financial health is how much I make vs. how much I spend, and how much I’ve saved vs. how much I owe. For companies these are measured on the income statement (make vs. spend) and balance sheet (saved vs. owe). For a country, I’d offer trade balance and savings rate. During the whole bubble, the US ran a trade deficit of $700-800 billion per year. That indicates borrow and spend, which the GDP fails to indicate. Similarly the savings rate was negative. Again, bad. So the economy was always in a bad state, or at least a precarious state. Sure, there were jobs in real estate and mortgage lending and construction. But it was all short lived and phony. But it looked good politically. It was all smoke and mirrors, but at least Bush and co. never had to acknowledge a recession officially.

[underdose]

“On the other hand, the political need to avoid recession…”

I’d rephrase that as “the political need to avoid the acknowledgment of recession”. I’ve said it on many other threads, but at the risk of repeating myself I’d like to make the point again.

We are in a recession. We have been in a recession for a long time. Arguably, we were in a recession for the entire decade, all through the housing bubble.

The government will not call it officially a recession unless there are two quarters of declining real GDP. This is a bogus number. It is very easy to cause the GDP to increase in “real” terms. Step 1, rain money from the sky, causing a nominal increase in GDP because the new money all gets spent. This can be done through tax rebates or lowering the Fed funds rate. Step 2, understate inflation and use a ludicrously low GDP deflator to adjust the nominal GDP to “real” GDP. As long as the number always comes out positive, hooray, no recession. Enron cooked their books. Would we expect any less from good ol’ Uncle Sam?

Furthermore, the idea of GDP is silly. How much money changed hands during the year? That’s the measure of the health of the country? What if I measured my financial health that way. Well, as long as I borrow and spend more money than I did last year, I am in “expansion” and therefore doing well. Obviously, this is idiotic. Volume of transactions says nothing about quality of transactions. If the bulk of GDP is borrowing and spending, a growing GDP is a bad thing. In my own life, the best measure of my financial health is how much I make vs. how much I spend, and how much I’ve saved vs. how much I owe. For companies these are measured on the income statement (make vs. spend) and balance sheet (saved vs. owe). For a country, I’d offer trade balance and savings rate. During the whole bubble, the US ran a trade deficit of $700-800 billion per year. That indicates borrow and spend, which the GDP fails to indicate. Similarly the savings rate was negative. Again, bad. So the economy was always in a bad state, or at least a precarious state. Sure, there were jobs in real estate and mortgage lending and construction. But it was all short lived and phony. But it looked good politically. It was all smoke and mirrors, but at least Bush and co. never had to acknowledge a recession officially.

[jonnycsd]

What is the causal link between repeal of Glass-Stegall and this mess caused by a collapsing real estate bubble? I just dont see any connection at all.

[jonnycsd]

What is the causal link between repeal of Glass-Stegall and this mess caused by a collapsing real estate bubble? I just dont see any connection at all.

[jonnycsd]

What is the causal link between repeal of Glass-Stegall and this mess caused by a collapsing real estate bubble? I just dont see any connection at all.

[jonnycsd]

What is the causal link between repeal of Glass-Stegall and this mess caused by a collapsing real estate bubble? I just dont see any connection at all.

[jonnycsd]

What is the causal link between repeal of Glass-Stegall and this mess caused by a collapsing real estate bubble? I just dont see any connection at all.

[jficquette]

Here is another prespective on how it all got started.

Market Commentary
Congress Lies Low To Avoid Bailout Blame:
BY TERRY JONES: INVESTOR’S BUSINESS DAILY
Congress says it likely will adjourn this month having done nothing on the most important issue in America right now: the financial meltdown from the subprime-lending crisis.

Can Congress just walk away from a problem it helped create? Maybe, maybe not.

There’s now some talk of a grand deal between the Treasury, the Fed and Congress for a “permanent” solution: creating a government agency to buy up all the bad subprime debt, just like the Resolution Trust Corp. did with bad real estate in the 1980s and 1990s.

Already, the U.S. Treasury and Federal Reserve are spending hundreds of billions of dollars to keep the subprime crisis from crashing the world economy. The collapse of twin mortgage giants Fannie Mae and Freddie Mac, along with the failures of Lehman Bros., Bear Stearns and insurer AIG, expose taxpayers to more than $1 trillion in liabilities.

Until now, 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 overleveraged 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.

Here’s the lead of a New York Times story on Sept. 11, 2003: “The Bush administration today recommended the most significant regulatory overhaul in the housing finance industry since the savings and loan crisis a decade ago.”

Bush tried to act. Who stopped him? Congress, especially Democrats with their deep financial and patronage ties to the two government-sponsored enterprises, Fannie and Freddie.”

These two entities — Fannie Mae and Freddie Mac — are not facing any kind of financial crisis,” said Rep. Barney Frank, then 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.”

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 were spot on.

But Congress, too, ignored his warnings.To hear today’s Democrats, you’d think all this started in the last couple years. But the crisis began much earlier. 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.

President Clinton supercharged these well-intended rules in the early 1990s. 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.It was economic hardball.”We have to use every means at our disposal to end discrimination and to end it as quickly as possible,” Clinton’s comptroller of the currency, Eugene Ludwig, told the Senate Banking Committee in 1993.

And they meant it.In the name of diversity, banks began making huge numbers of loans that they previously would not have. They opened branches in poor areas to lift their CRA ratings. 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.

That’s how the contagion began.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.

At the time of their bailouts this month, they held $5.4 trillion in loans on their books. About $1.4 trillion of those were subprime.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.Warning signals were everywhere. Yet at every turn, Democrats in Congress halted attempts to stop the madness. It happened in 1992, again in 2000, in 2003 and in 2005. It may happen this year, too.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).

The Clinton White House used Fannie and Freddie as a patronage job bank. Former executives and board members read like a who’s who of the Clinton-era Democratic Party, including Franklin Raines, Jamie Gorelick, Jim Johnson and current Rep. Rahm Emanuel.Collectively, they and others made well more than $100 million from Fannie and Freddie, whose books were cooked Enron-style during the late 1990s and early 2000s to ensure executives got their massive bonuses.They got the bonuses. You get the bill.

[jficquette]

Here is another prespective on how it all got started.

Market Commentary
Congress Lies Low To Avoid Bailout Blame:
BY TERRY JONES: INVESTOR’S BUSINESS DAILY
Congress says it likely will adjourn this month having done nothing on the most important issue in America right now: the financial meltdown from the subprime-lending crisis.

Can Congress just walk away from a problem it helped create? Maybe, maybe not.

There’s now some talk of a grand deal between the Treasury, the Fed and Congress for a “permanent” solution: creating a government agency to buy up all the bad subprime debt, just like the Resolution Trust Corp. did with bad real estate in the 1980s and 1990s.

Already, the U.S. Treasury and Federal Reserve are spending hundreds of billions of dollars to keep the subprime crisis from crashing the world economy. The collapse of twin mortgage giants Fannie Mae and Freddie Mac, along with the failures of Lehman Bros., Bear Stearns and insurer AIG, expose taxpayers to more than $1 trillion in liabilities.

Until now, 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 overleveraged 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.

Here’s the lead of a New York Times story on Sept. 11, 2003: “The Bush administration today recommended the most significant regulatory overhaul in the housing finance industry since the savings and loan crisis a decade ago.”

Bush tried to act. Who stopped him? Congress, especially Democrats with their deep financial and patronage ties to the two government-sponsored enterprises, Fannie and Freddie.”

These two entities — Fannie Mae and Freddie Mac — are not facing any kind of financial crisis,” said Rep. Barney Frank, then 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.”

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 were spot on.

But Congress, too, ignored his warnings.To hear today’s Democrats, you’d think all this started in the last couple years. But the crisis began much earlier. 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.

President Clinton supercharged these well-intended rules in the early 1990s. 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.It was economic hardball.”We have to use every means at our disposal to end discrimination and to end it as quickly as possible,” Clinton’s comptroller of the currency, Eugene Ludwig, told the Senate Banking Committee in 1993.

And they meant it.In the name of diversity, banks began making huge numbers of loans that they previously would not have. They opened branches in poor areas to lift their CRA ratings. 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.

That’s how the contagion began.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.

At the time of their bailouts this month, they held $5.4 trillion in loans on their books. About $1.4 trillion of those were subprime.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.Warning signals were everywhere. Yet at every turn, Democrats in Congress halted attempts to stop the madness. It happened in 1992, again in 2000, in 2003 and in 2005. It may happen this year, too.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).

The Clinton White House used Fannie and Freddie as a patronage job bank. Former executives and board members read like a who’s who of the Clinton-era Democratic Party, including Franklin Raines, Jamie Gorelick, Jim Johnson and current Rep. Rahm Emanuel.Collectively, they and others made well more than $100 million from Fannie and Freddie, whose books were cooked Enron-style during the late 1990s and early 2000s to ensure executives got their massive bonuses.They got the bonuses. You get the bill.

[jficquette]

Here is another prespective on how it all got started.

Market Commentary
Congress Lies Low To Avoid Bailout Blame:
BY TERRY JONES: INVESTOR’S BUSINESS DAILY
Congress says it likely will adjourn this month having done nothing on the most important issue in America right now: the financial meltdown from the subprime-lending crisis.

Can Congress just walk away from a problem it helped create? Maybe, maybe not.

There’s now some talk of a grand deal between the Treasury, the Fed and Congress for a “permanent” solution: creating a government agency to buy up all the bad subprime debt, just like the Resolution Trust Corp. did with bad real estate in the 1980s and 1990s.

Already, the U.S. Treasury and Federal Reserve are spending hundreds of billions of dollars to keep the subprime crisis from crashing the world economy. The collapse of twin mortgage giants Fannie Mae and Freddie Mac, along with the failures of Lehman Bros., Bear Stearns and insurer AIG, expose taxpayers to more than $1 trillion in liabilities.

Until now, 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 overleveraged 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.

Here’s the lead of a New York Times story on Sept. 11, 2003: “The Bush administration today recommended the most significant regulatory overhaul in the housing finance industry since the savings and loan crisis a decade ago.”

Bush tried to act. Who stopped him? Congress, especially Democrats with their deep financial and patronage ties to the two government-sponsored enterprises, Fannie and Freddie.”

These two entities — Fannie Mae and Freddie Mac — are not facing any kind of financial crisis,” said Rep. Barney Frank, then 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.”

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 were spot on.

But Congress, too, ignored his warnings.To hear today’s Democrats, you’d think all this started in the last couple years. But the crisis began much earlier. 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.

President Clinton supercharged these well-intended rules in the early 1990s. 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.It was economic hardball.”We have to use every means at our disposal to end discrimination and to end it as quickly as possible,” Clinton’s comptroller of the currency, Eugene Ludwig, told the Senate Banking Committee in 1993.

And they meant it.In the name of diversity, banks began making huge numbers of loans that they previously would not have. They opened branches in poor areas to lift their CRA ratings. 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.

That’s how the contagion began.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.

At the time of their bailouts this month, they held $5.4 trillion in loans on their books. About $1.4 trillion of those were subprime.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.Warning signals were everywhere. Yet at every turn, Democrats in Congress halted attempts to stop the madness. It happened in 1992, again in 2000, in 2003 and in 2005. It may happen this year, too.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).

The Clinton White House used Fannie and Freddie as a patronage job bank. Former executives and board members read like a who’s who of the Clinton-era Democratic Party, including Franklin Raines, Jamie Gorelick, Jim Johnson and current Rep. Rahm Emanuel.Collectively, they and others made well more than $100 million from Fannie and Freddie, whose books were cooked Enron-style during the late 1990s and early 2000s to ensure executives got their massive bonuses.They got the bonuses. You get the bill.

[jficquette]

Here is another prespective on how it all got started.

Market Commentary
Congress Lies Low To Avoid Bailout Blame:
BY TERRY JONES: INVESTOR’S BUSINESS DAILY
Congress says it likely will adjourn this month having done nothing on the most important issue in America right now: the financial meltdown from the subprime-lending crisis.

Can Congress just walk away from a problem it helped create? Maybe, maybe not.

There’s now some talk of a grand deal between the Treasury, the Fed and Congress for a “permanent” solution: creating a government agency to buy up all the bad subprime debt, just like the Resolution Trust Corp. did with bad real estate in the 1980s and 1990s.

Already, the U.S. Treasury and Federal Reserve are spending hundreds of billions of dollars to keep the subprime crisis from crashing the world economy. The collapse of twin mortgage giants Fannie Mae and Freddie Mac, along with the failures of Lehman Bros., Bear Stearns and insurer AIG, expose taxpayers to more than $1 trillion in liabilities.

Until now, 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 overleveraged 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.

Here’s the lead of a New York Times story on Sept. 11, 2003: “The Bush administration today recommended the most significant regulatory overhaul in the housing finance industry since the savings and loan crisis a decade ago.”

Bush tried to act. Who stopped him? Congress, especially Democrats with their deep financial and patronage ties to the two government-sponsored enterprises, Fannie and Freddie.”

These two entities — Fannie Mae and Freddie Mac — are not facing any kind of financial crisis,” said Rep. Barney Frank, then 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.”

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 were spot on.

But Congress, too, ignored his warnings.To hear today’s Democrats, you’d think all this started in the last couple years. But the crisis began much earlier. 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.

President Clinton supercharged these well-intended rules in the early 1990s. 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.It was economic hardball.”We have to use every means at our disposal to end discrimination and to end it as quickly as possible,” Clinton’s comptroller of the currency, Eugene Ludwig, told the Senate Banking Committee in 1993.

And they meant it.In the name of diversity, banks began making huge numbers of loans that they previously would not have. They opened branches in poor areas to lift their CRA ratings. 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.

That’s how the contagion began.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.

At the time of their bailouts this month, they held $5.4 trillion in loans on their books. About $1.4 trillion of those were subprime.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.Warning signals were everywhere. Yet at every turn, Democrats in Congress halted attempts to stop the madness. It happened in 1992, again in 2000, in 2003 and in 2005. It may happen this year, too.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).

The Clinton White House used Fannie and Freddie as a patronage job bank. Former executives and board members read like a who’s who of the Clinton-era Democratic Party, including Franklin Raines, Jamie Gorelick, Jim Johnson and current Rep. Rahm Emanuel.Collectively, they and others made well more than $100 million from Fannie and Freddie, whose books were cooked Enron-style during the late 1990s and early 2000s to ensure executives got their massive bonuses.They got the bonuses. You get the bill.

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