Thursday, July 26, 2012

Why We Are Where We Are

In a few concise paragraphs in today's WSJ, Karl Rove explains the cause of the financial meltdown which led to the 2008 recession and, ironically, the disastrous Obama presidency.

"Though publicly traded companies, Fannie (Mae) and Freddie (Mac) are government-sponsored enterprises – GSE's – chartered by Congress. Because the US government implicitly backed them, they could borrow money more cheaply than competitors such as mortgage companies and banks. And borrow they did. It took from Fannie’s founding in 1938 until 1999 for the companies to acquire or guarantee $2,000,000,000,000 in mortgage backed securities. By 2005, they had snapped up another $2,000,000,000,000 in mortgages, many of them subprime.

The Bush administration supported S.P. 190 to provide more oversight to America's two largest financial institutions similar to that of the nation’s banks, savings and loans, and credit unions. A new regulator could examine their books, limit their mortgage portfolios, and set capital requirements.

After the banking committee passed a bill with 11 Republicans in support and nine Democrats opposed, Senate Democrats warned committee chairman Richard Shelby (R, Ala) that all of them – including an Illinois freshman named Barack Obama – would filibuster the bill if a were brought to the floor.

Democrats opposed regulation in part because the GSE's were an important source of funds for community groups allied with the Democratic Party, and they were run by Democratic power brokers like former Clinton office of management and budget director Franklin Raines and Walter Mondale's 1984 campaign Chairman, James Johnson. And so the Bush reform died.

For the next three years, the GSE's increased their purchases of mortgages and mortgage-backed securities by $1,200,000,000,000 to a total of $5,000,000,000,000, of which about $1,800,000,000,000 was in subprime, “liar loans” or other nonprime mortgages, according to Columbia business school’s Charles Calomiris.

At the end, Fannie and Freddie were drastically overextended, with loan-to-capital, or leverage, ratio of 70 to 1 or higher. In the summer of 2008, when housing prices declined, the value of their mortgage portfolios collapsed and the government put them into conservatorship. When the GSE's collapsed, they took down Lehman Brothers and then nearly America's entire financial sector. Democratic opposition to sensible regulation made this possible."

Rove concludes with,

"When Mr. Obama warns on the campaign trail against "the same failed ideas that got us into this mess," reporters might gently remind him of his role in helping create the mess by opposing regulation of Fannie and Freddie, then showing little inclination to fix the problem, and now seeming blind to how he's creating another financial debacle."

Sorry Karl. Reporters chiding Obama aint gonna happen.

Note - I wrote out the gargantuan numbers so as not to soften their impact. In his column, Rove uses the word trillion.

If you can't abide hearing the truth from the astute Mr. Rove, perhaps you'll be convinced by Democrats like Maxine "If it aint broke don't fix it" Waters and Barney "I want throw the dice a little bit more" Frank making Rove's case. (You Tube video linked below). Interestingly, one of the Dems shilling for the GSEs is Artur Davis who has since seen the error of his ways and has jumped to the Republicans.

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