Another Letter to the Editor

I wrote this Letter to the Editor in response to a letter that was written by a man named Robert in the September 25, 2008 issue of The Chief (my home town newspaper).

Robert wrote, "Did any of the loyal Republicans take notice of the 500-point drop in the DOW the other day? For those who believe that Republican economic policies are good for America, I have to say...WHAT!

Republican economic policies lead to financial disaster. The 'Financial Panic' of 1873, the Great Depression, and the blooming recession of today, are all a direct result of Republican economic policies. Make no doubt about it...

...If you enjoy enjoy inflation and the driving down of the financial markets (DOW, S&P 500, etc.), then you should vote Republican.

If you want to set new record 'highs' in home foreclosures, bankruptcies, and the national debt, then you should vote Republican."

Wow...unbelievable. He had a lot more things to say and they were a lot more absurd. I plan on addressing those issues in next week's Letter to the Editor.

Here is my reponse to his remarks above.

People…please…open your eyes and stop being lead around by your nose. Stop listening to partisan politics and a liberal media that only tells you want they want you to hear and start thinking for yourselves. If you don't, then you're just sheep being led to the slaughter.

The current crisis we are seeing on Wall Street and in the housing market are tied together and it is rather simplistic to attribute such a complex problem to false accusations that it is due to failed Republican economic policies. The actual causes of the crisis are many and can be traced back to decisions made over the past four decades.

First, in 1933, in response to the failure of nearly 9000 banks and massive loan failures during the “Great Depression”, President Roosevelt signed into law the Glass-Steagall Act, which created the Federal Deposit Insurance Corp and separated the operations of commercial banks and investment banks to reduce chances for another stock market bubble.

For thirty years the Glass-Steagall Act remained unmolested. Until the 1960’s when commercial banks began lobbying Congress to allow them to enter the municipal bonds market; followed by brokerage firms in the 1970’s beginning to encroach on commercial banking territory.

Then during late 1986 thru 1987 the Federal government began to ease the regulations of the Glass-Steagall Act and began allowing some commercial banks to enter into “a culture of risk which was the securities business”, instead of being confined to “a culture of protection of deposits which was the culture of banking”; thus also allowing them to compete with their foreign counterparts.

Throughout the 1980’s and into the mid-1990’s, Congress tried repeatedly to repeal the Glass-Steagall Act to no avail.

Finally, in October of 1999, after 12 attempts over 25 years, Congress succeeded in repealing the Glass-Steagall Act and on November 4 of that year, President Clinton signed the repeal into law.

By repealing the Glass-Steagall Act, the Republican Congress and President Clinton once again allowed for the "merging of banks, securities firms, and insurance companies into huge financial conglomerates", like those that have failed in recent weeks.

Second, the record numbers of home foreclosures are a direct result of failed lending practices created by the Community Reinvestment Act (CRA) passed into law by President Carter in 1977.

The CRA bill encouraged mortgage lending through two government sponsored enterprises (GSE’s). One, the Federal National Mortgage Association or Fannie Mae, enabled mortgage companies, savings and loans, commercial banks, credit unions, and state and local housing finance agencies to lend to home buyers. While the other, the Federal Home Loan Mortgage Corporation or Freddie Mac, would buy mortgages on the secondary market and sell them as mortgage-backed securities on the open market. The CRA also required the Federal Reserve System to implement the CRA through ensuring banks and savings and loans met their CRA obligations.

The CRA was barely enforced until 1995 after President Clinton ordered new regulations which increased access to mortgage credit for inner city and distressed rural communities. Clinton’s new rules took effect on January 31, 1995 and its features included, according to Wikipedia, "requiring strictly numerical assessments to get a satisfactory CRA rating; using federal home-loan data broken down by neighborhood, income group, and race; encouraging community groups (liked ACORN) to complain when banks were not loaning enough to specified neighborhoods, income groups, and races; and allowing community groups (like ACORN) that marketed loans to targeted groups to collect a fee from the banks."

As a result of Clinton’s new regulations, undue pressure was put on lending institutions to provide home loans to low-income and moderate-income families who may or may not be able to afford to pay them back. To avoid Federal prosecution banks gave loans to people without requiring proof that they had an income sufficient to pay back their loans. Although, many of these loans were worthless, they were sold as mortgage-backed securities on the open market over and over again and many investors used them as collateral…worthless collateral.

Third, subprime loans or loans given to people with a bad credit record and which have an interest rate likely to be a lot higher than a regular bank loan, accounted for 9 percent of all mortgage loans during 1996-2004, but increased to 21 percent during 2004-2006. These loans helped boost the level of home ownership to 69 percent of all households in 2005. However, the downside of these subprime loans is that in February of 2008, 24 percent of those loans were either delinquent or in foreclosure.

Fourth, the same people who are crying about the Wall Street and housing market crisis; and the same people we are expecting to fix the mess; are the same people who are partly responsible for the crisis. These are the same people who ignored pleas from President Bush, Fed Chairman Alan Greenspan and John McCain to increase regulations of Fannie Mae and Freddie Mac. These are the same people who buried their proverbial heads in the sand and said the sky wasn’t falling. These are the same Democrats in Congress lead by Barney Frank and Charles Schumer, who are standing in front of the camera and accusing the Bush Administration of not instituting more regulations.

The following time line comes from "Just the Facts: The Administration's Unheeded Warnings About the Systemic Risk Posed by the GSE's" (JTF) and a video from FOX News Channel (FNC).

In April of 2001, President Bush warned that the size of Fannie Mae and Freddie Mac is "a potential problem," because "financial trouble of a large GSE could cause strong repercussions in financial markets, affecting federally insured entities and economic activity." (OMB Prompt Letter to OFHEO, 5/29/02) (JTF)

In May of 2002, "President Bush called for the disclosure and corporate governance principles contained in his 10-point plan for corporate responsibility to apply to Fannie Mae and Freddie Mac." (OMB Prompt Letter to OFHEO, 5/29/02) (JTF)

In 2003, President Bush warned Congress that financial troubles of the GSE’s were a “systemic risk” and “could spread beyond the housing sector.” (FNC)

In the fall of 2003, the Bush Administration was pushing Congress to create a new Federal agency to regulate and supervise the GSE’s. Council of the Economic Advisers (CEA) Chairman Greg Mankiw explained that any "legislation to reform GSE regulation should empower the new regulator with sufficient strength and credibility to reduce systemic risk." To reduce the potential for systemic instability, the regulator would have "broad authority to set both risk-based and minimum capital standards" and "receivership powers necessary to wind down the affairs of a troubled GSE." ("Systemic Risk: Fannie Mae, Freddie Mac and the Role of OFHEO," OFHEO Report, 2/4/03) (JTF)

How did ranking House Member Barney Frank respond? He said, “Fannie Mae and Freddie Mac are not in a crisis.” He also said that, “the Federal government should be encouraging Fannie and Freddie to do more to get low-income families into homes.” (FNC)

Frank added that he thought too many people had a “sky is falling” mentality by saying, “The more people, in my judgment, exaggerate a threat of safety and soundness, the more people conjure up the possibility of serious financial losses to the treasury; which I do not see. I think we see entities that are fundamentally sound financially and withstand some of the disastrous scenarios. And even if there were a problem the Federal government doesn’t bail them out. But the more pressure there is there then the less I think we see in affordable housing.” (FNC)

Congress blocked the legislation the Bush Administration was asking for.

In February 2004, President Bush again highlighted "the risk posed by the explosive growth of the GSE’s and their low levels of required capital, and called for creation of a new, world-class regulator by saying, 'The Administration has determined that the safety and soundness regulators of the housing GSE’s lack sufficient power and stature to meet their responsibilities, and therefore…should be replaced with a new strengthened regulator.'" (2005 Budget Analytic Perspectives, pg. 83) (JTF)

In June 2004, Deputy Secretary of Treasury Samuel Bodman "spotlighted the risk posed by the GSE’s and called for reform, by saying, 'We do not have a world-class system of supervision of the housing government sponsored enterprises (GSE’s), even though the importance of the housing financial system that the GSE’s serve demands the best in supervision to ensure the long-term vitality of that system. Therefore, the Administration has called for a new, first class, regulatory supervisor for the three housing GSE’s: Fannie Mae, Freddie Mac, and the Federal Home Loan Banking System.'" (Samuel Bodman, House Financial Services Subcommittee on Oversight and Investigations Testimony, 6/16/04) (JFT)

In February 2005, after Fannie leaders admitted to major accounting errors, Fed Chairman Alan Greenspan warned, “…Enabling these institutions to increase in size, and they will once the crisis in their judgment passes, we are placing the total financial system of the future at a substantial risk.” (FNC)

Later, in April of 2005, at another hearing Greenspan added, “If we fail to strengthen GSE regulation, we increase the possibility of insolvency and crisis." (FNC)

How did Charles Schumer respond? He said, “…I think Fannie and Freddie over the years have done a good job and are an intrinsic part of making America the best-housed people in the world…if you look over the past 20 or whatever years, they’ve done a very, very good job.” (FNC)

In May 2006, Senator John McCain co-sponsored the Federal Housing Enterprise Regulatory Reform Act of 2005. In a speech he gave on the Senate floor, he said, “For years I have been concerned about the regulatory structure that governs Fannie Mae and Freddie Mac…and the sheer magnitude of these companies and the role they play in the housing market…the GSE’s need to be reformed without delay.”

Senator McCain continued by saying, “To underscore my support for quick passage of GSE regulatory reform legislation. If Congress does not act, American taxpayers will continue to be exposed to the enormous risk that Fannie Mae and Freddie Mac pose to the housing market, the overall financial system, and the economy as a whole. I urge my colleagues to support swift action on this GSE reform legislation.”

The legislation was never made into law and was cleared from the books at the end of the Legislative session.

In August 2007, President Bush called on Congress to "pass a reform package for Fannie Mae and Freddie Mac, saying 'first things first when it comes to those two institutions. Congress needs to get them reformed, get them streamlined, get them focused, and then I will consider other options.'" (President George W. Bush, Press Conference, The White House, 8/9/07) (JTF)

In December 2007, President Bush again warned Congress "of the need to pass legislation reforming GSE’s, saying 'These institutions provide liquidity in the mortgage market that benefits millions of homeowners, and it is vital they operate safely and operate soundly. So I've called on Congress to pass legislation that strengthens independent regulation of the GSE’s – and ensures they focus on their important housing mission. The GSE reform bill passed by the House earlier this year is a good start. But the Senate has not acted. And the United States Senate needs to pass this legislation soon.'" (President George W. Bush, Discusses Housing, The White House, 12/6/07) (JTF)

I’m not sure what else the Bush Administration could have done short of locking up every member of Congress until they pulled their heads out of the sand and took care of the problem before it reached the magnitude that it has.

This crisis has more to do with corporate and individual greed, failed lending policies and irresponsible legislators; and both political parties, past and present, share in the blame.