The Causes Of The 2008 Financial Meltdown And The Reforms Enacted - Are They Enough?
85The Causes Of The 2008 Financial Meltdown
The 2008 financial meltdown was the worst economic crisis for the United States since the stock market crash of 1929 and the subsequent Great Depression. The root of the problem resided in the collapse of the housing market. There were several other factors that also contributed or exacerbated the problem. Democrats and Republicans point fingers at different issues as the causes of the meltdown. The issues they choose to stress are selected to implicate the other party more heavily as being responsible for causing it. Most politicians have not examined this financial fiasco in its entirety with an unjaundiced eye. I have attempted to do so in this article and have identified eight major causes for the meltdown. None of these causes on its own was responsible for causing it. Even combining a few together would not have sparked the slide. All of them building upon one another created a toxic brew that tumbled this house of cards. The whole economy was soon brought to the brink of ruin. I will describe in this Hub two groups of causes. The first group entails three causes that set the foundation from which the housing bubble could develop and grow. The next group of five causes were the engine that drove the home mortgage market out of control and finally off the cliff. Finally I will examine the steps that have been taken to alleviate these causes as well as the steps still needed to be taken to ensure that this debacle never reoccurs. This is vital to the U.S. taxpayer since he and she are always on the hook for the bill to clean up any financial mess of this magnitude.
Let us first turn back to the 1990's to discover the root causes of the financial meltdown. The first cause was the repeal of the main aspects of the Glass-Steagall Act. This law was enacted in 1933 in response to the massive bank failures that occurred after the stock market crash of 1929. The main purpose of the act was to shield the deposits of bank customers from investment risk. Commercial depository banks and investment banks were now to be totally separate entities. This arrangement worked very well for the U.S. throughout the subsequent years. Steady growth with no major financial calamities held sway in the markets. The banking industry did begin lobbying for the easing or eliminating of this separation in the 1980's due to increased international competition. The 1994 election brought Republican majorities to both houses of Congress. This led to a more accommodative Clinton Administration on many issues including loosening regulations on industry. Federal Reserve Chairman Alan Greenspan was a supreme proponent of freeing up industry from regulations also. This confluence of political factors paved the way for the banking industry to have their prayers answered with the repeal of most of the Glass-Steagall Act in 1999. Commercial banks were now free to invest their own funds as well as owning their own investment bank units for the benefit of their clients. This was the first step towards greasing the skids for increased risky trading. The next move that further increased risks was the decision to greatly encourage home ownership levels by way of the Fannie Mae and Freddie Mac companies. The Federal National Mortgage Association (FNMA) was created as a government agency in 1938 to provide banks with funds for home loans. The purpose was to facilitate a fluid market and create stability in the system. It was also created to increase affordable housing. FNMA was converted into a publicly held company in 1968 but was and is still a government sponsored enterprise. FNMA was further authorized to purchase private mortgages not already insured by other federal agencies. The Federal Home Loan Mortgage Corporation, also known as Freddie Mac, was created in 1970 to handle this function as well as to compete with Fannie Mae. President George H.W. Bush signed the Housing and Community Development Act in 1992. This act was created to amend the charters of Fannie Mae and Freddie Mac to encourage low and moderate income housing. The Clinton Administration further pressed these companies to emphasize these mandates in 1999. This renewed emphasis soon led to higher risk loans and relaxed credit standards. A third factor that paved the way and fueled the financial meltdown was the reaction of the Federal Reserve to the 9/11 terrorist attacks. The United States population was understandably fearful and confused after the attacks. The stock market fell sharply and it was unclear how far the economy might sink. Fed Chairman Greenspan rightfully decided to lower interest rates to keep the economy from crashing. The strategy worked and the economy soon steadied and began growing again in 2002. Unfortunately Greenspan and the Fed kept the rates tremendously low for far too long. Easy money was now awash in the country and needing to be put to work. Interest rates were not significantly raised again until 2006 when the Fed was headed by Ben Bernanke. This was done to stem inflation from growing out of control. The foundation for the overheated housing market was now in place.
Let us now turn to the mismanaged elements of the home mortgage market that most immediately caused this house of cards to crumble. Financial institutions now recognized that huge profits could be made by packaging new mortgages into a security and then selling it. The housing and stock markets were growing at unprecedented levels and profits appeared limitless. The Government National Mortgage Association (GNMA) which is a government agency, had been packaging mortgages into securities and then selling them for many years. The purpose of this was to create a more fluid home mortgage market. Financial institutions now entered into this market in a big way. They not only decided to enter it but they shunned selling only this "vanilla" variety of securities. instead they spiced it up so they could reap even greater profits. Packaged mortgage securities have a beneficial purpose for the home mortgage market by diversifying risks of foreclosure among several financial institutions. This also encourages more lending due to the decreased risk for any one institution. Problems soon arose. These mortgage securities began to create an insatiable appetite for new mortgages. Soon countless mortgage lending companies sprang up all over the country to cash in on this phenomenon. The problem was that most states had little or no regulations in regards to them. Therefore these companies could sell home mortgages with very little concern as to the creditworthiness of the home buyer because they would be passing the mortgage on to other financial institutions. They received large fees for this service with little or no risk. This led them to develop creative loans that would allow poorer customers the ability to obtain home loans that they could afford though only initially. The monthly mortgages would be affordable for the first few years but they would adjust much higher especially if interest rates rose. The mortgage lenders rarely disclosed the terms clearly to these unsophisticated borrowers. The theory behind these loans was that the borrowers would be able to sell the home before the mortgages adjusted higher and make a profit on their home due to the constantly rising home prices. These customers could not qualify for an ordinary mortgage due to their lack of adequate income, collateral, and down payment. The mortgage lenders now could profit from an expanded pool of borrowers. Both government regulatory agencies and financial institutions that traded mortgage securities turned a blind eye to this practice so as not to kill the mortgage security "gravy train". The next culprits in this debacle are the credit ratings companies. These companies such as Standard & Poors and Moodys were well respected conservative organizations. Unfortunately their revenues increasingly became dependent on retaining as clients the institutions whose financial instruments they rated. This occurred just as the proliferation of these mortgage securities exploded both in quantity and complexity. They were becoming increasingly specialized. The highest quality mortgages were being placed in one type of security while the highest risk mortgages were placed in others. There were many different grades of mortgages in between. Credit ratings companies began to cut corners because of the need to retain clients and due to the fact that they simply did not understand all the intricacies contained within many of these securities. Most of these securities were simply rated AAA no matter what the quality was of the mortgages that were contained within the security. Investors relied on these ratings and were now being misinformed. The next factor that accelerated the crash and exponentially increased the complexity and confusion of the market were the dreaded derivatives. The specific derivative involved with the mortgage security market was the Collateralized Debt Obligation or CDO. A CDO is basically an insurance policy that hedges the risk of the mortgage securities on to a third party. The result of this practice was a housing market feeling ever more secure and complacent. The sky seemed to be the limit for the housing market and there was now an insurance instrument if it failed. A further complication was the complexity of these CDO's. Very few people understood their contents and there was a very thin trading market for them. No one knew what these CDO's were truly worth until they were sold. This created a ticking time bomb if the housing market fell precipitously. AIG and then the American taxpayer would discover this beginning in 2008 when the market fell. AIG was the prime issuer of these CDO's. They would have to pay out to the holders of these CDO's when the housing market crashed to the tune of many billions of dollars. AIG became insolvent and was unable to pay out on this seemingly endless wave of claims. They owed so much that it threatened to take the entire financial system down. The U.S. government and thus the American taxpayer took them over in 2008 to prevent this from happening.
This leads me to the final and most overwhelmingly critical factor causing this financial meltdown. It was the total neglect and failure of the risk management functions in all government regulatory agencies and financial institutions involved in the housing market. The runaway rise in home prices and the stock market between 2002 and 2008 led to complacency in these organizations. Very few leaders thought this run up would end any time soon. Complex financial instruments seemingly insured a back stop against any downturn. Unfortunately no one fully understood what was contained within those instruments. Even fewer people saw what was going on with the entire housing picture as I have outlined it. They would have seen the fragility of the entire structure if they had bothered to do their full due diligence. All government regulatory agencies missed it either through incompetency or apathy. Financial institution risk managers only saw massive profits and ignored any red flags lest they potentially lessen any of their profits. Finally interest rates were raised beginning in 2006. Home prices began falling the next year. Mortgage security mutual funds began to fail in 2007. The financial institutions themselves began to fail in early 2008. The rest is history.
What has been done since this catastrophe occurred to mitigate these problems? What still needs to be done? The Dodd-Frank Wall Street Reform and Consumer Protection Act passed in 2010 addresses many of these issues. The Glass-Steagall repeal was allowed to stand in this act but an important restriction was imposed. Banks are now limited to investing only up to 3% of their Tier I capital thus greatly limiting their risk. I believe this is sensible and saves the banks from themselves. I also feel that they should keep clear divisions between their commercial banking and investment banking businesses. This was not addressed in the Act but I believe it should be imposed to limit the risk that they put on their commercial banking customers. The Obama Administration has proposed some possible new changes for Fannie Mae and Freddie Mac. The most extreme of the proposals would probably phase out the two agencies over time. The proposal would gradually withdraw them from funding home loans altogether. Instead they propose having groups of lenders and investors taking on this role. I feel that this is an ill-advised proposal. For years these two companies played a vital role in fostering new home ownership. Only after unwise government prodding to loosen loan standards did the system begin to implode. They conduct a legitimate function in maintaining a fluid home loan market. The only change I would like to see is legislation mandating that they maintain proper and sound credit requirements. The Dodd-Frank Reform Act requires this of financial institutions. Why not simply require the same of Fannie Mae and Freddie Mac? There is not a lot that can be done about the Federal Reserve keeping interest rates too low for too long. The Fed is independent and should remain so to keep them immune from the political winds. They depend on their collective experience and knowledge of the financial markets and economics to make the right calls in these situations. Hopefully Fed officials have learned this lesson and will tighten their policies at the proper times.
The Dodd-Frank Wall Street Reform and Consumer Protection Act also addresses the factors that relate directly to the home mortgage market and does so in excellent fashion. As I stated earlier in this article, mortgage backed securities serve a sound purpose in maintaining the liquidity of the home mortgage market. This reform act thankfully leaves this largely intact but strengthens oversight. It requires financial institutions to retain at least 5% ownership in the securities they issue. This is a prudent change and ensures that these organizations have "skin in the game" which incentivizes them to maintain proper risk management. The Mortgage Reform and Anti-Predatory lending section of this new legislation addresses thoroughly the problems of mortgage lending. It establishes minimum standards and requires all mortgage lenders to fully and clearly explain all terms of their home loans. I will not list all the changes but it is fair to say that they have made excellent moves to clean up mortgage lending and have addressed most of my concerns that I wrote about earlier in this article. Additionally I hope that all states will move to pass legislation that will require all mortgage lenders in their respective states to be licensed and properly regulated. The Dodd-Frank Act also took very impressive steps to clean up the credit ratings company problem. They created an Office of Credit Ratings within the Securities and Exchange Commission (SEC) which will create new rules and have annual reviews of the credit ratings companies. The new rules would mandate these companies rate financial instruments impartially with no improper input or excessive compensation from the issuing institutions. These credit ratings companies will need to fully disclose any pertinent information on all new and revised ratings. The reform act also included a section which will add needed transparency to the derivatives market. They will now be traded either on an exchange or in a clearinghouse. This will allow the trading public and financial institutions to know the value of these derivatives at any given time. An inter-agency government group will be formed to monitor this market.
Finally I would like to address the overarching issue that helped to cause this financial meltdown. It was the disturbing absence of competent risk management in both the financial industry and government. The financial institutions have belatedly reinforced their risk management teams after feeling the intense pain of the 2008 crisis. They appear to be getting the message. Unfortunately they have swung so far in the direction of safety that home loans and loans of all types have slowed to a crawl. I believe this to be ridiculously prudent. Most financial institutions are sitting on a hoard of cash. It is true that the Obama Administration conducted stress tests on them in 2009 and forced them to maintain a higher level of reserves to guard against losses. The cash holdings for most banks are now far above this level. They simply need to return to the loan standards that they maintained before 1999. These were prudent loans as well as being quite profitable. The Dodd-Frank Wall Street Reform and Consumer Protection Act has set up a new framework for government regulation of the financial markets. The key for government regulators now is to set up proper and efficient rules and enforce them effectively. My call for market vigilance extends to government regulators just as I have for financial institutions. Regulations are only as good as the people who enforce them. They become totally ineffective if government only pays lip service to them. Furthermore all participants in the financial markets must guard against becoming blinded by a bull market and high profits. History lessons must be continually taught, remembered, and reinforced. Financial crashes have occurred throughout our history. The circumstances that cause them change but not the underlying reasons. Hubris, complacency, greed, and incompetency always begin to raise their ugly heads and assert themselves over the financial markets when the participants forget the causes and effects of the previous crash. We the United States taxpayers must constantly remind our government and financial leaders that we expect their absolute highest vigilance when managing and safeguarding this country's wealth. Ultimately it is we who suffer through a recession or depression and bail the financial markets out. We must demand accountability from all parties. Too many people have suffered exorbitantly as a result of this latest financial meltdown. We the American people must also take responsibility and insist that this never happen again. We are the ultimate guarantors of this system. We can vote our leaders out of office and we can withdraw our money from derelict financial institutions. Pay constant attention to how your money is being handled and watched over. This is the only way we can perform our own risk management over the system and prevent another financial disaster.
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I agree with you, William, that greed played a very major role in the 2008 financial meltdown. This is true of just about every financial mess. I tried to examine systematically the 8 causes I could identify more or less in the order they occurred. Of course some overlapped or blended in with others. I believe greed is embedded in the causes I stated. My purpose was to elucidate what caused the housing bubble to grow and burst and how it affected the rest of the economy. You are right and Gordon Gekko said it best in the movie Wall Street. "Greed is good". He of course said it from a self indulgent and crooked point of view. Greed often makes the market go round but it also brings it down. I simply illustrated the mechanics. Thank you for commenting.
It's a whole new generation of 'take the money and run' and I think ENRON was just the whole generation of greedy, heartless, people with no ethics that personified the group of people who worship money above all else. Since 1974, the height of the first big inflation, Americans have been losing to big business since then. America has allowed those scoundrels to become too entrenched in our very government too. Great hub.
Dear HSchneider,
As usual, your writing skills are unmatched! Every issue that you touch is handled in such a clear and concise manner, how can anyone disagree!
I was a realtor from 1992 to 1996 and saw so many of the mortgage schemes that were designed to put people into homes that they could never afford! I would never allow my clients to sign with lenders that I thought were in it for their own benefit. It often included arguing with my buyers and trying to explain to them the pitfalls of certain mortgages. Ultimately, the arguments usually forced them to buy a much cheaper home that I knew they could stay in versus the dream home that I knew they would lose should their finances become compromised in even a small way. It meant less money for me, but I slept at night, knowing that I had not been a party to cheating anyone.
It boils down to ethics, and that is a rare, but much needed commodity. Government is run by mostly greedy people and the corporate sector is overrun by greedy people. Can greed be regulated or controlled? You are more optimistic than I am!
Bobbi, You are right that part of the problem was that people from the financial industry became part of the regulatory agencies and allowed them to run wild. The SEC was run by Christopher Cox who had been a California Congressman in the leadership. They preach de-regulation and we have seen what comes of that. The sad part of all of this was that the ball got rolling with the Clinton Administration. Clinton's Treasury Secretary Robert Rubin was a huge proponent of repealing Glass-Steagall. Of course he had run Goldman Sachs. And the beat goes on. Thanks for commenting.
Thank you for your compliments and commenting Jillian. I commend you for your ethics as a realtor. I am sure there are very, very few who would sacrifice some profits for their client's sake. The problem of course is that no one else looks at it that way. You are correct that it boils down to ethics and I am actually not all that optimistic. I feel that lessons need to be constantly reinforced from this meltdown and others so they do not repeat themselves. Ultimately they always do. Time passes by. Profits skyrocket. Everyone forgets. The new reform act put in place some great regulations. They are only as good as the people and administration that enforces them. I am confident the Obama Administration will do so but beyond that, I don't know. Besides, the next crisis will probably involve all new scams.
I believe that your outlook is realistic and not, as some may say, pessimistic.
I will say that another financial meltdown does not have to happen if we, as citizens, begin to take a more active role in helping to determine financial policy. Of course, active citizen involvement on a large scale is a big hope, one that has not been historically validated for many issues in the US.
However, I frankly have to remain optimistic about our prospects of a better America.
You are correct Progressive that we the people to remain involved and vigilant. This would not happen again if we truly did that. But times passes and people forget and move on to their everyday lives. Our regulators must stay engaged and keep the financial institutions engaged. I am also as always optimistic about a better America but there are always obstacles. That is why you and I remain engaged in the issues and everyone else should also. If we don't, special interests will put fixes in that will game the system for themselves. Thanks for commenting.
‘We are the ultimate guarantors of this system.’ I particularly like that sentence; it’s so true. Although, I have to admit that I’m just useless regarding matters of the economy, but I avoid like the plague debt, for that reason.
This was very useful for someone like me, because it was clear to follow, not full of jargon and I’m often looking for clear answers to the questions you’ve covered here.
Voted up and useful - (I’m not sure what awesome actually means anymore.)
Thank you Amilar. I tried to make it clear to readers the steps that led up to this financial mess. Maybe people can be more vigilant if they understand better what happened and what is being done to correct the problem. If we don't care and phase out again, the greed of the people in the system will bring us down this road again.
Thanks H.S for putting these complex issues into plain English. I am concerned that we have government regulators with insufficient education and knowledge to deal with ever more sophisticated twists and turns in the financial markets. Derivatives? So much for MBA, you need mathmeticians. What happened in September 2008 can never be allowed to happen again. In the face of powerful lobbies and opposition from the financial market industry, Obama managed to get as much as he could in the way of correction
Your welcome Credence and thanks for commenting. You are right that people need an advanced degree in Math to understand and utilize these new instruments. Unfortunately many of them are so complex that they are used in automatic programs that are triggered via trading. Regulators are constantly playing catch-up with these complex innovations. President Obama did get an imperfect but still fairly impressive financial reform bill through which if implemented correctly and vigilantly, will work well.
Thank you so much for this comprehensive analysis of the financial crisis. Everytime I hear our present economic disaster compared to "kitchen table economics", I gag. Your analysis is in the language most people speak. It should be required reading.
Voted up/useful
You are very welcome Fay. I know that a lot of people only know about the aftermath of the collapse but have no understanding of the causes. Much of the news media reports on the sensational parts while the pundits play the blame game and yell at each other. I believe it is important that everyone knows the mechanics of what occurred and how it has been corrected. This way we have some understanding of the problem so we can competently keep our leaders feet to the fire to regulate the financial industry. We cannot afford to allow this to happen again.
Thankyou, HS. Very thorough and even-handed analysis. Wouldn't it great if the media could report things like this, rather through spin and soundbyte?
Have you also perhaps considered the impact of losing the gold standard back in the Nixon years? Once we (banks and governments) could print money without a lump of gold sitting in a vault, problems seem to have escalated.
Thank you for your kind comments. I think it is important to have everyone understand the problem involved. How else can we guard against its return? I do not advocate a return to the gold standard. It is true that less money would be printed therefore inflation and other problems would be curtailed. But it would limit what the Federal Reserve could do when an economy is hurting. I don't think it would have prevented this past financial meltdown and the Fed's drastic actions to prop it up would not have been possible and we surely would have gone into a depression.
Excellent hub that can serve as a documentary and needs a lot of considerations that this financial melt down will never be experienced again.
You are right Crystolite that we need to give this subject a lot of consideration because otherwise it will occur again. Thank you for your comments.
Excellent hub. I would argue that the earliest roots of the problem go back farther than the '90's, to the Carter administration. Greed also played a major role, and there was plenty of it to go around. Greedy bankers, greedy real estate agents, and greedy politicians. Remember Barney Frank (circa 2005) saying Fannie and Freddie were fine and needed no audit? And how many politicians got the "deals from Angelo"?
But lets not forget one of the most important players in this whole mess: the home buyer. Far too many people bought homes that should have never bought homes, or they bought homes that they could never afford. Granted, banks should never have approved loans for many of these people (or at the very least approved smaller loans), but at the same time, the people buying these homes should have known what they could afford. It will always baffle me why it is so hard for some people to figure out what they can and can't afford.
You are right AJ. Greed goes way back and contributes to all of these messes. I agree also with you that homebuyers should have known what they could afford but the new mortgage lenders were preying on these people. They were almost psychologists who knew what bells to ring to entice them. They also passed over much of the key information in the loans and made them sound affordable. Thank you for commenting.
Although I am really pretty ignorant when it comes to these high finance issues, you laid it out so well that I think even I have a grasp of the issues.
I find it frightening that the greed of some can so manipulate the levers that others pay the price.
The repercussions of the meltdown in the US were felt in the rest of the world too. Certainly the South African markets became extremely nervous at that time and have not fully recovered.
Thanks for this great Hub.
Love and peace
Tony
Thank you for your kind comments Tony. The greed was horrible and it certainly spread throughout the world. We also are just in the beginning of a recovery now. Unfortunately in the U.S., the Republicans won the last legislative elections and are looking to dismantle the reform program the Obama Administration passed in 2010. The fox wants to guard the henhouse again. I think my fellow citizens are waking up to their naked powerplays and the Democrats here are gaining the upper hand. Let's hope the nascent recovery continues for all of us around the world.
I remember when people started buying those 'mcMansions' back in the 90s and wondering how so many people could afford these homes. I guess we know the answer now, they can't. The blame is not soley on the buyers when the realtors are so sneaky and the banks are only so willing to give out loans. Anyway, I hope you are right and that the economy is in a recovery. I work in sales and I've noticed that our business has been picking up. It's a good sign.
Great hub, I voted up and useful.
You are right Amy Marie. All buyers seemed to be moving up in the size and values of the homes they were buying. Financial institutions and government were encouraging this so the sharks were out smelling blood. I do feel the economy is improving but unfortunately housing has been much slower to recover. This I believe is because banks are so reluctant to take risks now. Even very creditworthy ones. Thank you very much for your comments.
You should read the article by Hernando de Soto in Bloomberg Business Week about loss of economic data.
Thank you for the link AKA Winston. The article brings up an excellent point. The parallel market of derivatives and CDO's were a mystery to everyone including those that created these monsters. They were built on the fallacy of a never-ending rising housing market. Of course it eventually declined. The resulting foreclosures built the momentum for this house of cards to crumble. I hope the powers that be follow through on creating exchanges for these instruments to ensure transparency. The government must maintain vigilance over these markets. It would also be nice if these huge firms would maintain high qualities of risk management over all of their markets especially since we the people bail them out when they fail. Thank you very much for commenting.
One thing you missed, unless I missed it cause this is along article - Who Rang the Alarm Bells on Fannie & Freddie? IN A TRUTHFUL WORLD, OBAMA WOULD BLAME HIS OWN PARTY FOR THE FINANCIAL MELTDOWN, NOT GEORGE BUSH. This video clearly shows that George Bush warned Congress, starting in 2001, that an economic crisis was coming, if something was not done. But Congress refused to listen, along with the arrogant congressman, Barney Frank. This video says it all. The liberal media reportedly did not want this video on You Tube; it was taken off. This link is of the same video, but is routed through Canada. Everyone in America needs to see this before it is yanked off the Internet again!
Thank you for your comments Tsadjatko. You are obviously a member of the Far Right because you refuse to blame President Bush and the Republicans at all. Bush regulated nothing for 8 years and this is what happens. Yes, there were other causes which I have enumerated in this article. The Clinton Administration stripped Glass-Steagall down which allowed the financial institutions to go wild. The mortgage lending industry in most states was either unregulated or barely regulated. Fannie Mae and Freddie Mac did allow and backed junk mortgages which contributed greatly to the mess. The ratings agencies gave all mortgage backed securities and derivatives AAA ratings even when they were backed with junk. That was because the financial institutions themselves pay the ratings agencies. There is plenty of blame to go around which I have outlined. But as usual, another Far Right conservative like yourself wants to absolve President Bush and his cronies. That opinion is ridiculous. I guess my article was too long, as you wrote, to bother absorbing any of it. Or else you are too doctrinaire to believe any of what I wrote. Please open your mind or move on. I blame everyone.
Well like the good liberal you are you resort to labels and name calling to deflect attention from the fact that you mention nothing of the efforts the Bush administration made to avert a catastrophe. Did I say I disagreed with your information. No! Did I proclaim any right wing dogma NO! All I did was point out a media report the information in which you purposely ignored to report about the matter. You obviously don't want to allow anyone to decide for themselves after watching the video so you attack me...I wonder why? - it seems you are the one with an agenda that is a bit far out.
You are wrong Tsadjatko. My article discussed the causes of the financial meltdown not what was done to mitigate the effects. The TARP program that Secretary of the Treasury Paulson pushed through, with great reluctance from Republicans, kept us from sliding into a Depression in 2008. That was a program that worked and I give President Bush tremendous praise for it. It was a heroic effort to go against his own party. I apologize for the labels I placed on you but when you place the entire blame for the 2008 meltdown on Fannie Mae and Freddie Mac and Barney Frank, then you are being dogmatic. These elements accelerated the bubble but they were being encouraged first by the Clinton Administration and then the Bush Administration. These agencies have always been Republican voodoo dolls because they have been Democratic creations. They served the purpose of backing housing especially for less affluent first time homeowners. The problem is when they sold stock and went public. They forgot their public mandate and simply sought higher profits. They were still a quasi-governmental agency. I believe they either should be public or private, not both. President Bush warned against them because in 2001 that was the predictably Republican thing to do. They were not yet out of control. That was yet to come and President Bush like his predecessor did nothing about them. His anti-regulatory nature allowed them to continue and accelerate going off the rails. This catastrophe was not just Democratic or Republican. Both sides bear tremendous blame as well as the private sector and the states. This housing boom was a gravy train that everyone was drinking out of and benefiting from. Like all bubbles, this one burst.
I agree with your last comment and your hub, basically. My point was never that YOU blamed Bush. I only stated in my comment, and I believe factually, that Obama blames Bush depite the fact that Bush attempted to head off an economic crisis starting in 2001, and that, in that respect the democrats deserve the blame OBAMA puts on Bush. If their is something in the reporting in the video that is a lie or right wing propaganda I'd like to see it pointed out 'cause it appeared to me to be fair reporting of the facts, facts which btw the main stream media tries hard not to tell the public...perhaps a reason why you did not even mention the content reported in the video in your hub? I think it is as relevant to the whole story as many other aspects of your hub, which I do commend you on for doing a thorough and I believe objective piece ... with the exception that you failed to include this information about Bush and the democrat stone wall of republican attempts to avert trouble.
On the other hand you say I am wrong "My article discussed the causes of the financial meltdown not what was done to mitigate the effects"
Well. touche! If you believe that efforts that were stone walled by democrats and would have mitigated the effects of the meltdown (by virtue of the fact they were tried too late and/or were stonewalled by democrats) could not in anyway have contributed to the causes of the meltdown then I suppose I can see your reasoning which is sound reasoning, so I am contrite in rendering you that technicality and therefore I must...
apologize for my misplaced analysis, for giving you the impression I was attacking the sincerety or accuracy of you hub and I thank you for pointing out my error - this in the end has been an educational experience for me and not the first time I have ever admitted I was wrong. Thank you for allowing my comments.
You are welcome Tsadjatko and I allow all comments. I have never deleted any and only would consider it if the comments were incredibly nasty or obscene. I never came close to considering your comments to be in that vain. The FOX news video you attached here is truthful but only one part of a multifaceted story. Of course FOX News, which is not fair and balanced but incredibly partisan, decided to zero in on this one aspect. I agree that more needed to be done to rein in Fannie and Freddie and Democrats are to blame for that. Their cause to get lower income families into home ownership was a good one but it allowed mortgage lenders to go wild. They in turn created these balloon mortgages that lured in new homeowners not knowing what was actually involved. Fed Chairman Greenspan is hypocritical here. He is a devotee of Ayn Rand and unfettered laissez faire capitalism. He allowed interest rates to be rock bottom for so long after 9/11 that it was a major cause of the housing bubble. Low rates were needed after that tragedy but not for the 4 years he allowed them to stay in effect. The economy turned back up long before that. This laissez faire adherent now wanted to rein in Fannie and Freddie. That was pure politics. He was a major force along with the Clinton Adminstration in taking the regulations off the financial industry. That was a huge mistake that set the stage for this housing meltdown. Everyone was to blame for this including the Bush Administration notwithstanding these Fannie and Freddie warnings. They were only one aspect of the problem. Also my comments about my article not dealing with efforts to mitigate the crisis referred to after the meltdown occurred not any possible efforts before it. The Republicans only focus on Fannie Mae and Freddie Mac because they are traditional Democratic agencies and they wish to push as much of the blame for the meltdown off themselves. Now they are pushing back on the Dodd-Frank bill which seeks to restore a stronger capitalized financial system with safeguards for consumers. It seems to me that they want to return back to Alan Greenspan's laissex faire course. Finally I truly due appreciate the dialogue I am having with you on this. My initial complaints were that it seemed you took that one video and used that as proof that it was all the Democrats fault. Start with President Clinton and work your way forward. But please do not excluse Alan Greenspan and President Bush. They are also culpable. The downfall occurred in the last year of Bush's administration. The Democrats obstructed some things but Bush regulated nothing for 8 years.
William F. Torpey Level 2 Commenter 15 months ago
A very competent analysis, HSchneider. I would only say that you may somewhat understate the greed that we've seen over the past few decades. Many of those who took advantage of the system to make huge profits conveniently cast a blind eye at obvious unjustified schemes that ultimately caused our present crisis. The business community, the Federal Reserve and our politicians all failed us.