So we've seen how are current disaster started. Artificially low interest rates led to a collapse of risk premiums, an unsustainable appetite (and misunderstanding) of risk, and inadequate capitalization. The moral hazard created by Fannie Mae, Freddie Mac and Mortgage Backed Securities encouraged irresponsible lending practices. And political pressure to keep the party going added fuel to the bonfire. So here is my rogue's gallery of villains. These are neccessarily in order of degree of blame.
Villain #1 Artifically low interest rates: the root cause in my view - see my first post for why.
Villain #2 Congress but especially Barney Frank, Christopher Dodd and Maxine Waters: Many of you hear their populist rantings about the evil lenders, George Bush, the Republicans and greedy financiers being to blame. Mr. Frank, I call BULLSHIT on you. While many people, myself included, had for years warned of the excesses of the housing market and Fannie and Freddie in particular, here's what Barney said just a few years ago:
"Critics exaggerate a threat of safety" and "conjure up the possibility of serious financial losses to the Treasury, which I do not see"
Gee, Barney is $300 billion (so far) not a "serious" loss??
Maxine Waters: "We do not have a crisis at Freddie Mac and in particular Fannie Mae, under the outstanding leadership of Mr Raines"
Mr Raines resigned after the $11 billion accounting scandal at Fannie.
President Bush called for reform at Fannie and Freddie in 2004.
Maxine responded that reforms "must be done in a manner so as not to impede their affordable housing mission, a mission that has seen innovation flourish from desktop underwriting* to 100 percent loans"
* A software program for underwriting loans that is "built to reason and underwrite loans with incomplete, unverified and conflicting data." This is from a Fannie press release touting the system.
In fact, in June 2004, 76 democrats in the House sent President Bush a letter defending Fannie and Freddie insisting that "a... focus on safety and soundness is likely to come, in practice, at the expense of affordable housing". Nice to know these folks were not worried about protecting the taxpayer. The signers included Nancy Pelosi, Charles Rangel, Barney Frank and Maxine Waters.
But it wasn't only democrats, Republican senator Kit Bond tried to cut the budget of the Office of Federal Housing Enterprise Oversight after OFHEO issued a scathing report on Fannie and Freddie. Our old friend Barney stated "It is clear that a leadership change at OFHEO is overdue". That's a good way to reward someone who was trying to protect us from the disaster to come, Barney.
Hmm, here are a few interesting facts:
'Fannie and Freddies PACs and employees donated more than $5 million to current members of Congress
Christopher Dodd received $165,000
Kit Bond $95,000'
Christopher Dodd received an unusually favorable mortgage from Countrywide, saving him an estimated $75,000...
- Thomas Sowell, The Housing Boom and Bust
villain #3: Federal Regulators: They get a small v because they were largely hamstrung by Fannie and Freddies bought-off cronies in Congress.
Villain #4 The Real Estate Industry and their media shills: The national association of realtors, national association ofhomebuilders, et al. these buffoons and hucksters touted a home as 'your best investment' and kept telling people that home prices don't go down. They have and do go down. The media constantly touted the boom sometimes outright telling their readers and viewers that they were stupid for not participating - funny, they did the same thing with the stock market and cost lots of people tons of money...
Villain #5 The Borrowers: I am sick and tired of the media portraying homeowners as victims. Sure, there are some people out there who got into trouble through little or no fault of their own. But the fact is that most of these people borrowed way more money than they could ever afford to repay and counted on ever-increasing appreciation (and refinancing) to get them out of it. if you borrowed more than2 or 3 times your income, you deserve to lose your house. If you lied about your income, you're a fraud and should be prosecuted.
Remember our little discussion about Moral Hazard in post 1? What do you think bailing out people who made bad decisions will lead to? Anyone? Anyone? Bueller?? Did I hear 'more bad decisions'? You get an A and are dismissed from class early today.
Think about this the next time you hear about another bailout for homeowners or our esteemed president's 'stimulus'. You are paying for their mistake. Literally. Your tax dollars and trillions of dollars of debt are being spent on people who largely deserve to suffer the consequences of their actions.
Personal Responsibility - Pass it On!
