Background and Causes of the Financial Crisis
I am not an economist but as an investor I’ve been trying to understand the causes of the 2008 Financial Crisis that triggered our current problems. As an armature Political Scientist and History buff I feel we need to Understand the past in order to avoid the same mistakes in the future. So here is my take on this calamity. Basically, there is enough blame to go around if you were just trying to blame a political party. But the causes were really a chain of events starting with the Community Investment Act under the Carter Administration. Essentially, this started the Philosophy that Government should encourage the Banking industry to “make home mortgages affordable to low income individuals that couldn’t afford them” – an Oxymoron if there ever was one. The government also encouraged Fannie and Freddie to insure these mortgages. With this encouragement the Banks and Mortgage Brokers broke with their conservative traditions and started to create mortgages that had lower or no interest, interest only payments etc. Why not, they were making money. It wasn’t only the low income folks who were taking advantage of this, the investment approach of Flipping (buying a property before the building was complete and selling it at a profit before you had to make any payments), ran rampant. While this was going on the market was booming and the Banks and Financial Institutions began to bundle “High Risk” loans with other loans in an instrument known as a Derivative (essentially these were insurance policies to cover the risks) and it went well until Bankers Trust sold a Derivative to Proctor and Gamble and it went bust. P&G then sued Bankers Trust which brought the whole Derivative mess to the attention of the Chairwoman of a small Commission called the Commodities and Futures Trading Commission. Her name was Brooksley Born but when she decided to “Regulate” this market she was shut down by Allan Greenspan (Federal Reserve), Bob Rubin (Treasury Secretary) and Rubin’s Enforcer Larry Summers. Also involved was one of Summer’s Assistants Timothy Geitner.
Following are some Video clips that discuss the events of this time including the efforts by Congress to support Fannie and Freddie and deny that there were any problems. Eventually, a small group from the Financial Advisory Board to developed a requirement for all Companies and Banks to implement “Mark to Market” which triggered our most recent decline of Banks, the Real Estate Market and the Market in total. There were other issues of course such as Credit Default Swaps but the videos below should give us all a good idea as to what the causes were.
The Warning – a PBS Video showing how the Chairwoman of the Commodities and Futures Trading Commission, Brooksley Born discovered how the Banks were bundling Toxic Assets in to Derivatives (Essentially and Black Box used as insurance hedge against investment risks) and decided they should be regulated. However, the Financial leaders at the time, Allan Greenspan, Bob Rubin (Treasury), and his assistant Larry Summers succumbed to pressure from the Banking Lobbyists and Ordered her not to pursue this issue. Greenspan was a disciple of Ayan Rand and essentially believed that if there was any fraud, the Markets would correct themselves.
Bret Baer Report on Regulatory Efforts by GOP
Various debates and Comments on Financial Regulations especially Fanny and Freddie
Barney Frank Lies about his position on easing home ownership rules
Clinton, Obama and Acorn also pressure banks to make risky loans and Fannie and Fred to underwrite them.
If you have any other comments or input, please add them as a comment to this blog so we can all see them.
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