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The genesis of our economic crisis

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    Posted: February/19/2009 at 12:57
With all the "gay" postings today I thought perhaps I could "snap" the forums back to reality with a serious post.  Besides, Ed needs more college credit.
 
Tell me if you agree.................
 
I am a little concerned over the genesis of the whole economic situation we find ourselves in as a country.  Wanting to avoid and/or identify future recurrence of our nightmare situation I ask why we are in the position we are in?

You hear repeatedly how "things in banking weren't regulated enough" and "irresponsible banking".  I find those two statements to be false.

The banking / housing / lending / mortgage crisis comes from TWO things if you ask me.  Unfortunately it DOES seem that our current economic downturn ALSO has it's genesis in the mortgage crisis....but connecting those two things is a different discussion and I don't intend to link them here.  So getting back to what was the major factor that precipitated the mortgage crisis....

TWO things caused this if you ask me. 

First Cause of our crisis
Irresponsible personal finances, and by that I mean two significant errors a LOT of families have been making since our culture took a dastardly turn in the 90s.

Error #1, as a whole there has been a disturbing trend for people SPEND more than they EARN.  You can see that in this graph.  I recall I brought up this issue and this graph on with various friends quite some time ago.  I first became aware of this graph in 2005.  My personal notes on the graph are from 2005.....



Error #2 (closely related to #1), and I have heard many bankers, mortgage brokers, etc. verify these facts from Maine to Florida, to Hawaii and all parts between...... that people over-bought houses, constantly kept themselves in new cars financed over longer terms, financed "living large" with Credit Cards and the like.  This created two things, false home values and false demand.  Both things have subsequently come to a head.

Second Cause of our crisis
The government and/or the culture forcing loans to be made to families that had no business owning a home and could not afford one.  Enter Fannie and Freddie.  Not only was this government organization coerced for political reasons on a false premise, but a bunch of thieves calculated themselves bonuses and exacerbated the problem.

A little further explanation......Fannie Mae goes all the way back to 1938, with a significant change to the two organizations in 1968, but the real turn down the wrong path came in the late 90's when it was decided (somehow) that it wise to expand lending as is a "right" that everyone should be able to get financing even if it was clear that the buyer would likely not be able to repay the loan.
So there you have it, I find these two things as the overriding cause of the mortgage crisis and the cause of our situation today. Sure, GM with too strong of a union, sure we spent treasure in Iraq and Afghanistan, sure factors like this caused localized economic problems, but the genesis of the problem lies with these two "big picture" items.


Edited by Ick - February/19/2009 at 12:58
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Post Options Post Options   Thanks (0) Thanks(0)   Quote RifleDude Quote  Post ReplyReply Direct Link To This Post Posted: February/19/2009 at 13:17
Published in the NY Times on 9/30/1999.
 
Read every word carefully...
 
Fannie Mae Eases Credit To Aid Mortgage Lending
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By STEVEN A. HOLMES
September 30, 1999

In a move that could help increase home ownership rates among minorities and low-income consumers, the Fannie Mae Corporation is easing the credit requirements on loans that it will purchase from banks and other lenders.

The action, which will begin as a pilot program involving 24 banks in 15 markets -- including the New York metropolitan region -- will encourage those banks to extend home mortgages to individuals whose credit is generally not good enough to qualify for conventional loans. Fannie Mae officials say they hope to make it a nationwide program by next spring.

Fannie Mae, the nation's biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people and felt pressure from stock holders to maintain its phenomenal growth in profits.

In addition, banks, thrift institutions and mortgage companies have been pressing Fannie Mae to help them make more loans to so-called subprime borrowers. These borrowers whose incomes, credit ratings and savings are not good enough to qualify for conventional loans, can only get loans from finance companies that charge much higher interest rates -- anywhere from three to four percentage points higher than conventional loans.

''Fannie Mae has expanded home ownership for millions of families in the 1990's by reducing down payment requirements,'' said Franklin D. Raines, Fannie Mae's chairman and chief executive officer. ''Yet there remain too many borrowers whose credit is just a notch below what our underwriting has required who have been relegated to paying significantly higher mortgage rates in the so-called subprime market.''

Demographic information on these borrowers is sketchy. But at least one study indicates that 18 percent of the loans in the subprime market went to black borrowers, compared to 5 per cent of loans in the conventional loan market.

In moving, even tentatively, into this new area of lending, Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980's.

''From the perspective of many people, including me, this is another thrift industry growing up around us,'' said Peter Wallison a resident fellow at the American Enterprise Institute. ''If they fail, the government will have to step up and bail them out the way it stepped up and bailed out the thrift industry.''

Under Fannie Mae's pilot program, consumers who qualify can secure a mortgage with an interest rate one percentage point above that of a conventional, 30-year fixed rate mortgage of less than $240,000 -- a rate that currently averages about 7.76 per cent. If the borrower makes his or her monthly payments on time for two years, the one percentage point premium is dropped.

Fannie Mae, the nation's biggest underwriter of home mortgages, does not lend money directly to consumers. Instead, it purchases loans that banks make on what is called the secondary market. By expanding the type of loans that it will buy, Fannie Mae is hoping to spur banks to make more loans to people with less-than-stellar credit ratings.

Fannie Mae officials stress that the new mortgages will be extended to all potential borrowers who can qualify for a mortgage. But they add that the move is intended in part to increase the number of minority and low income home owners who tend to have worse credit ratings than non-Hispanic whites.

Home ownership has, in fact, exploded among minorities during the economic boom of the 1990's. The number of mortgages extended to Hispanic applicants jumped by 87.2 per cent from 1993 to 1998, according to Harvard University's Joint Center for Housing Studies. During that same period the number of African Americans who got mortgages to buy a home increased by 71.9 per cent and the number of Asian Americans by 46.3 per cent.

In contrast, the number of non-Hispanic whites who received loans for homes increased by 31.2 per cent.

Despite these gains, home ownership rates for minorities continue to lag behind non-Hispanic whites, in part because blacks and Hispanics in particular tend to have on average worse credit ratings.

In July, the Department of Housing and Urban Development proposed that by the year 2001, 50 percent of Fannie Mae's and Freddie Mac's portfolio be made up of loans to low and moderate-income borrowers. Last year, 44 percent of the loans Fannie Mae purchased were from these groups.

The change in policy also comes at the same time that HUD is investigating allegations of racial discrimination in the automated underwriting systems used by Fannie Mae and Freddie Mac to determine the credit-worthiness of credit applicants.

Ted


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Post Options Post Options   Thanks (0) Thanks(0)   Quote Dogger Quote  Post ReplyReply Direct Link To This Post Posted: February/19/2009 at 13:26
1. Fannie Mae, the nation's biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people
 
2. In moving, even tentatively, into this new area of lending, Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn
 
3. Despite these gains, home ownership rates for minorities continue to lag behind non-Hispanic whites, in part because blacks and Hispanics in particular tend to have on average worse credit ratings
 
 
Just gotta shake your head at their wisdom.  Maybe the freakin' poor credit rating was there for a reason guys!


Edited by Dogger - February/19/2009 at 13:26
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Post Options Post Options   Thanks (0) Thanks(0)   Quote Ick Quote  Post ReplyReply Direct Link To This Post Posted: February/19/2009 at 13:26
Good find Ted, good find.  Who'da thought 1999 would end up being just another product like the new.......
 
Do you guys find those two things to be the genesis of our economic woes?


Edited by Ick - February/19/2009 at 13:26
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Post Options Post Options   Thanks (0) Thanks(0)   Quote cyborg Quote  Post ReplyReply Direct Link To This Post Posted: February/19/2009 at 13:42
The Democratic rule...........Brought to you by the same folks that sponsored the economic crisis. Coming up next............ Mortgaging the future of freedom.
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Post Options Post Options   Thanks (0) Thanks(0)   Quote swtucker Quote  Post ReplyReply Direct Link To This Post Posted: February/19/2009 at 13:55
I think our society changed also....a lot of people decided that they wanted all of the really nice things in life NOW.  Nobody wanted to save their money until they could afford a big house, they just took out a loan and got one.
Don't forget about the credit card companies getting young kids (18 or 19) up to their eyes in debt as soon as they went to college.
Our country is going to be forced to change our 'buying culture'.


Edited by swtucker - February/19/2009 at 13:56
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Post Options Post Options   Thanks (0) Thanks(0)   Quote Dogger Quote  Post ReplyReply Direct Link To This Post Posted: February/19/2009 at 13:57
Exactly swtucker - no different here.  People just don't want to wait until they can afford things
 
There seems to be a real "entitlement mentality" today.
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Post Options Post Options   Thanks (0) Thanks(0)   Quote scooter65 Quote  Post ReplyReply Direct Link To This Post Posted: February/19/2009 at 14:02
Interesting article in our local paper today.  Rush Limbaugh has been talking about this too lately.  There was an electronic run on the money market (banks) back in Sept of 08 to the tune of 550 billion in a matter of a couple of hours.  The feds stepped in with 105 billion to keep it afloat but had to shut down the money market to prevent an economic crash... They then upped the federal guarentee to 250k to prevent further runs and calm the storm.  They estimated had it kept going it would have been 5.5 trillion by 2 pm that afternoon collapsing not only our monetary system, but the world economy as we know it. 
 
Apparently Bush alluded to this back in Sept by issuing ambiqous statements of warning concerning that market manipulation was being investigated etc  but never got into details.... Like a bit of a message to those that may have been involved.  This article hinted that if true and speculated who could have done it and why (possibly forgeign govts with interest in steering our election for their own agendas) 
 
A rep from Penn had spoken about it but gotten little to ZERO media coverage.  To this day, little has been said nor explained concerning the whole incident. 
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Post Options Post Options   Thanks (0) Thanks(0)   Quote 8shots Quote  Post ReplyReply Direct Link To This Post Posted: February/20/2009 at 01:21
Ick, you are quite correct in your analysis. The fundamental issue is that people spent money that they did not have. This money came from the banks who lent it on the basis that property prices would continue to escalate. They calculated that the over valued collateral would over time increase in value and provide ongoing security for the loans. Now who does one blame for this state of affairs? The consumer for excercising poor judgement and lack of economic savvy? Do you blame TV and other advertising campaigns for creating the "must have it " culture, or the banks for their greed to offer 110% financing schemes (with huge bonusses for the excutives as an incentive)? Certainly these bright clever excutives were better educated and informed then the average consumer.
Really a chicken and egg situation, and the chickens have come home to roost.
I would say that the whole world has just re-learnt the lesson that you cannot escape sound economic principles, and you cannot keep spending what you do not have. One of the principles remain that you have to have the correct borrowing to earning ratio or "gearing" in order to make the economy sustainable. And this is what is taught in Business Economics 101, which the Big Bankers should know and should be accountable for.


Edited by 8shots - February/20/2009 at 01:22
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Post Options Post Options   Thanks (0) Thanks(0)   Quote anweis Quote  Post ReplyReply Direct Link To This Post Posted: February/20/2009 at 06:17
Originally posted by Ick Ick wrote:


Second Cause of our crisis
The government and/or the culture forcing loans to be made to families that had no business owning a home and could not afford one.  
 Sure, GM with too strong of a union, sure we spent treasure in Iraq and Afghanistan, sure factors like this caused localized economic problems, but the genesis of the problem lies with these two "big picture" items.
 
Not exactly. The government did not force those loans to be made. Rather, the conservative government took the "no government regulation" stance, and sat and watched while those loans were being made. 
 
GM's troubles started long ago, when they focused primarily on gas guzzling SUVs. When gasoline hit the $4 mark, they died. I am sure that unions did not help (it's interesting how in other countries like Germany or Sweden unions work with the management to better the company), but the problem is more complicated that that: our health insurance companies are becoming blood sucking monsters - and health costs in America are greater than anywhere else in the world. But then again, we also have, on average, worse health than any other developed country, no doubt because of our eating, lifestyle habits, and high stress caused by poor social protection systems.  
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Post Options Post Options   Thanks (0) Thanks(0)   Quote anweis Quote  Post ReplyReply Direct Link To This Post Posted: February/20/2009 at 06:28
Originally posted by cyborg cyborg wrote:

The Democratic rule...........Brought to you by the same folks that sponsored the economic crisis. Coming up next............ Mortgaging the future of freedom.
 
Don't blame only the democrats for all this. This is a crisis that unfolded in the last 10 years. It was during the 8 years of Republican rule that the mortgage scams, home speculating, and "spend money to grow the economy" happened. Remember what GW Bush said in his first speech after 9/11: "go shopping to make the economy grow".  He did not say: let's grieve, let's save money, let's be wise. He said: go shopping.
Shop, they did.
 
On the other hand, if any government, Dem or Rep., would have stepped in to stop the unsustainable lending, people like you would have screamed about communism, and "we don't want big government" and all that.
 
As far as mortgaging the future of freedom: you cannot have freedom and rule of law and democracy for long in a country that is not economically viable. Hungry people want food before freedom. So,  whatever they are doing, let's hope that it works.
 
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Post Options Post Options   Thanks (0) Thanks(0)   Quote anweis Quote  Post ReplyReply Direct Link To This Post Posted: February/20/2009 at 06:31
Originally posted by anweis anweis wrote:

Originally posted by cyborg cyborg wrote:

The Democratic rule...........Brought to you by the same folks that sponsored the economic crisis. Coming up next............ Mortgaging the future of freedom.
 
Don't blame only the democrats for all this. This is a crisis that unfolded in the last 10 years. It was during the 8 years of Republican rule that the mortgage scams, home speculating, and "spend money to grow the economy" happened. Remember what GW Bush said in his first speech after 9/11: "go shopping to make the economy grow".  He did not say: let's grieve, let's save money, let's be wise. He said: go shopping.
Shop, they did.
 
On the other hand, if any government, Dem or Rep., would have stepped in to stop the unsustainable lending, people like you would have screamed about communism, and "we don't want big government" and all that.
 
As far as mortgaging the future of freedom: you cannot have freedom and rule of law and democracy for long in a country that is not economically viable. Hungry people want food before freedom. And if you don't understand this, you probably have never been been hungry enough. So,  whatever they are doing, let's hope that it works.
 
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Post Options Post Options   Thanks (0) Thanks(0)   Quote Steelbenz Quote  Post ReplyReply Direct Link To This Post Posted: February/20/2009 at 06:35
Originally posted by anweis anweis wrote:

Originally posted by Ick Ick wrote:


Second Cause of our crisis
The government and/or the culture forcing loans to be made to families that had no business owning a home and could not afford one.  
 Sure, GM with too strong of a union, sure we spent treasure in Iraq and Afghanistan, sure factors like this caused localized economic problems, but the genesis of the problem lies with these two "big picture" items.
 
Not exactly. The government did not force those loans to be made. Rather, the conservative government took the "no government regulation" stance, and sat and watched while those loans were being made. 
 
GM's troubles started long ago, when they focused primarily on gas guzzling SUVs. When gasoline hit the $4 mark, they died. I am sure that unions did not help (it's interesting how in other countries like Germany or Sweden unions work with the management to better the company), but the problem is more complicated that that: our health insurance companies are becoming blood sucking monsters - and health costs in America are greater than anywhere else in the world. But then again, we also have, on average, worse health than any other developed country, no doubt because of our eating, lifestyle habits, and high stress caused by poor social protection systems.  


Not exactly anweis, the Government DID in fact raise the banks debt to capital ratio and forced the banks to make loans or else.  From a banker whose bank has now gone under and he's a friend of mine  that predicted this happening years ago.
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Post Options Post Options   Thanks (0) Thanks(0)   Quote Kickboxer Quote  Post ReplyReply Direct Link To This Post Posted: February/20/2009 at 06:42
Originally posted by scooter65 scooter65 wrote:

Interesting article in our local paper today.  Rush Limbaugh has been talking about this too lately.  There was an electronic run on the money market (banks) back in Sept of 08 to the tune of 550 billion in a matter of a couple of hours.  The feds stepped in with 105 billion to keep it afloat but had to shut down the money market to prevent an economic crash... They then upped the federal guarentee to 250k to prevent further runs and calm the storm.  They estimated had it kept going it would have been 5.5 trillion by 2 pm that afternoon collapsing not only our monetary system, but the world economy as we know it. 
 
Apparently Bush alluded to this back in Sept by issuing ambiqous statements of warning concerning that market manipulation was being investigated etc  but never got into details.... Like a bit of a message to those that may have been involved.  This article hinted that if true and speculated who could have done it and why (possibly forgeign govts with interest in steering our election for their own agendas) 
 
A rep from Penn had spoken about it but gotten little to ZERO media coverage.  To this day, little has been said nor explained concerning the whole incident. 
I believe George Soros and his affiliates (large sections of UN members) are behind this.  It is the way Soros could intervene and 1) impact the election, 2) quietly stand behind a move to socialize the American economical and political atmosphere.  Soros hands are dirty on this and I believe he will be found out and/or state his involvement out of arrogance.
 
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Post Options Post Options   Thanks (0) Thanks(0)   Quote Kickboxer Quote  Post ReplyReply Direct Link To This Post Posted: February/20/2009 at 06:50
Originally posted by Steelbenz Steelbenz wrote:

Originally posted by anweis anweis wrote:

Originally posted by Ick Ick wrote:


Second Cause of our crisis
The government and/or the culture forcing loans to be made to families that had no business owning a home and could not afford one.  
 Sure, GM with too strong of a union, sure we spent treasure in Iraq and Afghanistan, sure factors like this caused localized economic problems, but the genesis of the problem lies with these two "big picture" items.
 
Not exactly. The government did not force those loans to be made. Rather, the conservative government took the "no government regulation" stance, and sat and watched while those loans were being made. 
 
GM's troubles started long ago, when they focused primarily on gas guzzling SUVs. When gasoline hit the $4 mark, they died. I am sure that unions did not help (it's interesting how in other countries like Germany or Sweden unions work with the management to better the company), but the problem is more complicated that that: our health insurance companies are becoming blood sucking monsters - and health costs in America are greater than anywhere else in the world. But then again, we also have, on average, worse health than any other developed country, no doubt because of our eating, lifestyle habits, and high stress caused by poor social protection systems.  


Not exactly anweis, the Government DID in fact raise the banks debt to capital ratio and forced the banks to make loans or else.  From a banker whose bank has now gone under and he's a friend of mine  that predicted this happening years ago.
I have a relative who does bank startups.  His comment for years has been that the PRESSURE by government to force banks/lending institutions to loan exorbitant amounts to people who clearly had no means to repay (not just houses, but cars and "signature loans" for cash) would create a crisis the likes of which we had never seen.  Now he just says, "I told you so".  As an aside, he purchased a "modest" home in an upscale community (not one of the high end units) which is now devalued to about 35% of the purchase price.  He sees no way to recover his stock market declines (losses) in his lifetime.  A recovery of an order of magnitude would not repair the losses.   


Edited by Kickboxer - February/20/2009 at 06:52
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Post Options Post Options   Thanks (0) Thanks(0)   Quote Duce Quote  Post ReplyReply Direct Link To This Post Posted: February/20/2009 at 11:27
As one that played the real estate game for years this is way oversimplified, you have to understand derivatives and cmb bonds and the effect deregulation had. Banks became brokers of cmb instead of lending money they made their money off selling the bonds.
 
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Post Options Post Options   Thanks (0) Thanks(0)   Quote cyborg Quote  Post ReplyReply Direct Link To This Post Posted: February/21/2009 at 00:06
Yes there is something by design at play here. Too much was known and nothing was done. There has to be an agenda.
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Post Options Post Options   Thanks (0) Thanks(0)   Quote opticsmike Quote  Post ReplyReply Direct Link To This Post Posted: February/21/2009 at 15:13

Economic gluttony with disregard for sustainability became the norm. The blame *AND* the accountability *MUST* ultimately belong to the people. Responsibility begins on the individual level and it is extremely dangerous to hold government ultimately accountable for individual responsibility, and it is dangerous to expect government to leverage our economic habit. If we can not remain individually responsible, we will need someone to do it for us and the end result *WILL* be the sacrifice of freedom. If we can not get out of the kitchen and refrain from economic gluttony, we will need a parent to make us stay in our room. If as a whole we can not maintain responsibility on the individual level, we have already chosen to live under socialism where government determines the things for us that should be determined for ourselves. This is the typical lesson of freedom versus responsibility.

People must wake up, become adults, and stop relying on something to pamper them. We already have too many crutches that enable individual economic irresponsibility. The nonchalant mother of 14 Nadya Suleman is the symbol that irresponsibility in this new era of economic gluttony with disregard for sustainability and we are all going to pay because socialists are gleaming with opportunity to pick up our slack in taking care of ourselves my friend.

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Post Options Post Options   Thanks (0) Thanks(0)   Quote Duce Quote  Post ReplyReply Direct Link To This Post Posted: February/21/2009 at 15:25
A little short note on derivatives
These things look like something Las Vegas would come up with instead of Wall Street, a least in Vegas you get free drinks at the craps table.
 
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Post Options Post Options   Thanks (0) Thanks(0)   Quote cheaptrick Quote  Post ReplyReply Direct Link To This Post Posted: February/21/2009 at 15:46
Originally posted by Duce Duce wrote:

a least in Vegas you get free drinks at the craps table.
 
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