Charles Calomiris fingers the culprits.
There is no doubt that reductions in mortgage-underwriting standards were at the heart of the subprime crisis, and Fannie and Freddie’s losses reflect those declining standards. Yet the decline in underwriting standards was largely a response to mandates, beginning in the Clinton administration, that required Fannie Mae and Freddie Mac to steadily increase their mortgages or mortgage-backed securities that targeted low-income or minority borrowers and “underserved” locations.
The turning point was the spring and summer of 2004. Fannie and Freddie had kept their exposures low to loans made with little or no documentation (no-doc and low-doc loans), owing to their internal risk-management guidelines that limited such lending. In early 2004, however, senior management realized that the only way to meet the political mandates was to massively cut underwriting standards.
…
Now they are trying to deflect blame from Fannie and Freddie by suing the originators who fulfilled the politically motivated demands of the government-sponsored agencies that drove the mortgage crisis. If successful, all of those efforts will further postpone the ability of banks to grow the supply of credit, and they will sow the seeds of the next mortgage bust.
No doubt this is correct, but I came across a more fundamental cause identified by Stefan Molyneux. See:
http://sabhlokcity.com/2011/10/stefan-molyneuxs-deep-insight-into-the-regulatory-environment-of-banks/
I believe that the story that is emerging is even worse than I had thought.
Sanjeev Sabhlok
28 Oct 11 at 9:40 am
According to this article:
“The GSEs [Fannie Mae and Freddie Mac] and FHA bought or guaranteed 95% of all new mortgages in fiscal year 2011! Mind blowing numbers compared to when 40% market share was seen as high in the early 2000s.”
And these entitities are continuing to lose money thus requiring ongoing taxpayer-funder bailouts. So far $169 billion, and a further $51 billion will likely be required over the next ten years.
Capitalist Piggy
28 Oct 11 at 10:27 am
Peter Schweizer’s book Architects of Ruin covers this history in fine detail. It wasublished in 2009, but the MSM continue to this day to ignore the role of political activism and ultimately legislative coercion in setting up the banks for a fall.
Blogstrop
29 Oct 11 at 7:16 am
I still cant type on the ipad!
Blogstrop
29 Oct 11 at 7:17 am
But Sinc, was not Bush the POTUS in 2004?
What do you think of the proposition that, when Bush decided to go for Iraq and Afghanistan, he might also have had a review of the financial situation of the US, including the FMs? It seems that in going into Afghanistan and Iraq without such a review, Bush was actually stimulating the economy. Also devoting that much funding to the war was going to surely need some severe tweaking to existing programs to maintain any sort of financial stability? You know, plenty of money for bombs and bullets and make work for soldiers in delivering them, but hardly productive.
Serious question. Do you not agree with the proposition that making stuff to blow up on this scale is a stimulus to make the eyes of the Keynesians out there water in envy?
Marks
29 Oct 11 at 1:32 pm
The cost of the Iraq war is about $800billion, from 2003 through to the present. Obama signed off on more spending than that in his first four months.
So this notion that the wars are primarily responsible for the US government’s debt problems isn’t right.
daddy dave
29 Oct 11 at 1:37 pm
The Afghanistan/Iraq wars were not stimulatory. Wars are no different than any other government spending.
daddy dave
29 Oct 11 at 1:40 pm