Originally Posted by MiddleAgedAl
You left out what I consider to be a huge factor, which is Clinton's affordable housing act, which basically made it much easier for anyone with a pulse to get a mortgage. This drove prices to irrational levels, because the previous barrier to entry to get a mortgage was gone, so now you have dumb highschool dropouts who understand nothing about economics engaging in crazy bidding wars. Once they lose their shift at Jack in the Box, now they cant make the payments on their original mortgage, plus the HELOC they used to buy a new speedboat they couldnt afford either. That planted the seeds for the housing bubble, which, combined with the Acts described above, started the financial death spiral we are all too familiar with today.
I'm not saying Dubya was the finest president ever, but to blame him 100% for what happened is quite short sighted. Perhaps some of the posters are too young to remember what happened when Bill was in office.
Even as things started to collapse, in the final days of the dubya administration, I dont recall them saying the housing crisis is all Clinton's fault, the way the Obama administration likes to say it's all Bush's fault. Every president after Washington had to deal with the baggage of their predecessor, it comes with the job. I dont recall any of them pointing the finger at the previous administration as much as the current one does.
Regarding the bolded sentence, could I please trouble you to post the text in the law that caused banks to lend to people that couldn't afford to buy?
These are the mechanical causes of the great recession in my humble opinion, and there's plenty of blame to go around:
1. Greenspan lowered interest rates to 1 percent and kept them there for about a year. This causes anything priced in dollars to appreciate.
2. Low rates = poor yields from munis and treasurys. So money managers turned to high-yield MBS. Very few, if any, did any due diligence on them, didn't understand the instruments or the risk involved.
3. Fund managers relied on the ratings agencies that placed AAA ratings on these securities, claiming they were as safe as U.S. Treasurys.
4. Derivatives became unregulated via the Commodity Futures Modernization Act (pushed by Phil Gramm and signed into law by Clinton in 2000). They are exempt from all oversight, counter-party disclosure, exchange requirements, state insurance regs and reserve requirements. This is how AIG was able to write $3 trillion in derivatives with no reserves against future claims.
5. The SEC changed the leverage reqs for Goldman Sachs, Morgan Stanley, Merrill Lynch, Lehman Brothers and Bear Stearns in 2004. The exemption replaced the 1977 net capitalization rule’s 12-to-1 leverage limit with unlimited leverage for these firms, who proceeded to ratchet their leverage to 20-, 30-, 40-to-1.
6. The banking system's compensation system is skewed in favor of short-term performance.
7. The demand for high yield led Wall Street to start bundling mortgages. Subprime mortgages were the highest yielding, in markets that were dominated by non-bank originators (who were exempt from most regulations - think AHM, for example). The Federal Reserve could have supervised them. Greenspan let them go.
8. “Innovative” mortgages were created to reach more subprime borrowers. These include 2/28 ARMs, interest-only loans, piggy-bank mortgages and neg-am loans. These mortgages defaulted in significantly higher numbers than traditional 30-year fixed mortgages.
9. Mortgage originators didn't have to hold onto the mortgages for long and got 'creative' with their standards. Not because of regulations (Dick Fuld even admitted that he was never forced to fund a mortgage) but, I mean, why worry about the quality of your product if you're just going to dump it on someone else in a year or so? They just had to hold them long enough to bundle them and sell them to the highest bidding chump as AAA paper.
10. Traditional banks set up automated underwriting systems to keep up. Which were gamed by loan officers paid on loan volume (as opposed to loan quality).
11. Glass-Steagall repealed in 1998. Already mentioned, enough said.
12. Many states had anti-predatory lending laws on their books (along with lower defaults and foreclosure rates). In 2004, the OCC federally preempted state laws intended to regulate mortgage credit and national banks. Afterwards, national lenders sold their crap in those states, leading to higher default and foreclosure rates in those states.
I'll agree that Clinton bears some responsibility here due to Glass Steagal repeal and the CFMA of 2000. As does Bush with his ownership society and preemption, the ratings agencies, Congress, Greenspan, the SEC, etc, etc.
How do we leave the political crap behind and address the mechanical causes of the problem, several of which are unchanged?