who really caused the problem?
U.S. must fix its financial system
Calgary Herald
Published: Tuesday, September 30, 2008
Both private sector greed and government regulation are to blame for the subprime financial crisis that unfolded south of the border, including Monday's rejection of the $700-billion US rescue package and the subsequent meltdown in the world's financial markets.
This mess began 30 years ago during Jimmy Carter's presidency, with the Community Reinvestment Act, which planted the seeds that would later ripen into even more irresponsible lending.
That 1977 Act, sponsored by Democrats in Congress, was an attempt to force banks to lend more money to poor, inner-city neighbourhoods, including for housing. The claim was that banks would set up shop in low-income areas, take deposits, but then lend money to Americans in richer neighbourhoods.
The accusation, even if true, would be irrelevant: those with lower incomes are often "discriminated" against because of creditor concerns they won't be able to repay the money. It's how banks are supposed to act -- prudently.
The act had its origins in the perennial issue of race: poorer neighbourhoods were often African-American. So while the act maintained that lenders should lend "consistent with safe and sound lending practice" the reality was different.
In 1994, President Bill Clinton rewrote the act and new stipulations made the problem worse. Banks were given strict quotas to ensure their loan portfolios were "diversified," i.e., according to race, or face regulatory denials to expand their operations.
The Clinton administration rewrote the rules for Fannie Mae and Freddie Mac, the U.S. quasi-private mortgage companies that took on so many questionable subprime mortgages. Rule changes in the late 1990s allowed Fannie and Freddie to hold back just 2.5 per cent of capital as backing for investments; that compared to 10 per cent for banks.
The result of the regulations to force banks to lend where they ought not, and to encourage recklessness in the case of Fannie and Freddie, was the explosion in high-risk mortgages. Subprime lending shot up to $1 trillion by 1997, from just $35 billion in 1994.
Ironically, the man some blame for the mess, George W. Bush, tried 17 times to highlight the need for Fannie and Freddie reform since 2000. Bush was blocked by congressional Democrats and by some Republicans.
The U.S. government's historical regulatory push for risky lending was exa****ated by greed at Fannie and Freddie, where some Clinton appointees took in obscene $75 million to $100 million compensation packages over their terms at those two institutions. It was added to by avarice on Wall Street where lousy mortgages were repackaged as triple-A investments.
The response to this on Monday when a $700-billion bailout package failed, perhaps due in part due to Republicans recklessly reacting to a leading Democrat's attack on Bush, was an unwise, risky delay in restoring confidence around the world.
The package is necessary and not to bail out Wall Street which isn't happening anyway: witness the vapourizing of shareholder value in the now-collapsed Washington Mutual last week. The package is about making sure the U.S. and world credit and banking systems don't collapse from a lack of credit and confidence.
There is plenty of partisan blame to go around for the subprime implosion. Both parties need to end the blame game and get the U.S. financial house in order.
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