Root cause of the financial crisis

by Philip Brewer on 23 September 2008 84 comments
Photo: Jeff Turner

Several times recently, Treasury Secretary Paulson (and many others) have claimed that the "root cause" of the current financial crisis is "the housing correction."  This is completely wrong--and unless policy makers realize that it's completely wrong, they're not likely to make the right policy decisions.

Just today, in his testimony before the Senate Banking Committee, Paulson said:

And that root cause is the housing correction which has resulted in illiquid mortgage-related assets that are choking off the flow of credit which is so vitally important to our economy. We must address this underlying problem, and restore confidence in our financial markets and financial institutions so they can perform their mission of supporting future prosperity and growth.

Now, first of all, the proposal doesn't address the housing correction--it addresses the illiquid mortgage-related assets (by buying them)--so it's still a step removed from what Paulson claims is the root cause.  (Directly addressing the housing correction would involve buying houses, not buying loans.)  But that's neither here nor there, because the root cause is not the housing correction.  The root cause was the housing boom.

Roughly speaking, an average household needs to earn enough money to be able to afford an average house.  You can adjust that a bit--smaller, younger, poorer households can be left out of the calculation if you assume that they'll rent rather than own--but after leaving them out, it's just not sustainable for the average house to cost more than the average household can afford to pay--who else is going to buy it?

Now, you can back things up yet another step in your search for root cause:  How did house prices get too high?  The answer to that question (which has mostly to do with bad interest rate decisions from the Fed interacting with bad public policy in financial market regulation) will help us prevent the next financial crisis.  But for addressing this financial crisis, all we need to understand is that the correction is not the root cause.  The root cause is that house prices got so high that the average household couldn't afford an average house.  Once that happened, a correction was inevitable.

The way to address the root cause is to let house prices drop to where an average house is within the means of an average household.  (Or, alternatively, boost the income of the average household to the point that they can afford an average house.  But that's very hard.  Letting houses prices go on falling, although painful for everyone who owns a house or who has lent money to someone who owns a house, is very easy.)

Now, some sort of bailout plan may be necessary to keep the financial system from simply collapsing under the weight of all that bad debt.  But if that plan is focused on keeping house prices from falling, it's a hopeless plan.  If you successfully kept house prices up, we would remain mired in this problem until incomes rose enough to make house prices affordable.

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Guest's picture

They are taking the exact same tactic as the government did during the Great Depression. Basically they are fixing prices. During the Depression they propped up wages and prices but that just caused unemployment and people weren't able to afford anything anyway. It is a stupid thing to do to fix the prices. They need to let it naturally fall and reach a balance.

Guest's picture
Josh

I'm sorry, I just commented, but then I read some more farther up. You people who say greed was the causing factor are simply wrong, I'm sorry. It was not greed that caused them to overlend to underqualified individuals. It was an act of congress called the Neighborhood Reinvestment Act (i've seen it called the COmmunity Reinvestment Act as well). This FORCED lenders to implement subprime mortgage loans with fluctuating interest rates, in turn forcing up home values because of the demand increase. Other living costs continued to increase, i.e. gas, milk, etc. and the housing bubble burst because people can't afford houses now (for example, me. A person with an excellent credit score but not enough income to even come close to paying for an APARTMENT!)

So now I've moved back in with my parents. :S

Thanks yet again democrats.

And now they want to inundate the economy with more money to fund more irrelevant government programs that won't address the issue at all (condoms? really? That's going to help save our country from economic meltdown?) ... On a side note ... only 7 percent of obama's proposed bailout will even be SPENT THIS YEAR.

PUH LEASE, democrats. It was your action that got us into this mess, and now you're going to steep us further into it.

Thanks.

I just want to say that I didnt vote democrat, so when our nation goes to pot, it wasnt my fault :) Thank you.

Guest's picture
Eric

Really, I thought the cause was people not paying their bills.

Guest's picture
Guest

Greed.

Guest's picture
Lucille

The root of the root cause is deregulation. I have heard some people trying to blame the entire thing on Fannie & Freddie. Theirs was more of an after effect problem of falling prices that was caused by the really sketchy private banking mortgages that were defaulting. That and home prices reaching the point mentioned where they had to fall. Fannie & Freddie are a symptom, not the cause.

Ironically Ginnie Mae isn't tanking because it is still federally owned and regulated.

Probably the worst most misdirected blame (it was on Fox) for the economic meltdown.... minorities buying homes. My jaw hit the floor that anyone would have the audacity to suggest such a thing. Not to mention being utterly off base.

Guest's picture
Guest

I have also heard from my Republican friends that removing redlining and providing mortgages to minorities to increase home ownership (the implication being that the Clinton administration has caused all of the problem today)is the root cause of the financial collapse. While we know that only 3% of the mortgages are at risk of default, does anyone know how to source the percentage of the bad loans that were minority loans and whether that group of loans has brought down the whole system?

Guest's picture
Kelja

There are many root causes. Certainly, dumping any reasonable requirement for loan qualification, is a big one.

All because of Political Correctness. Can't be calling me a racist, after all.

Another major one is: Alan Greenspan. He will go down in history as a dark blot and major cause in this fiasco. And, not that it's important, but he was a Clinton appointee.

Many causes going back almost 100 years. Too many to list. But it going to be a hell of a storm. Hold on!

Guest's picture
Even Stephen

There are many working parts to the problem. 1) Fed easing rates from 2002-2004. 2)FHA loosened up requirements on down payments. 3) Strengthening of the community reinvestment act, resulting in banks being pressured into making risky loans. 4) H.U.D. setting quotas for freddie and fannie to make loans to people who were not good risks. Most importantly 5) Expansion of freddie mac, and fannie mae, based on the premise that the tax payer will cover their back.
I think we need to resolve that it is unrealistic to try to promote home ownership to people who can not afford them. It is an injustice to the people who the homes are sold to, as well as entire rest of the economy.

Guest's picture
Josh

Well, that Fox may or may not have been correct about minorities buying homes. But what you come to is that poor were enabled to buy homes through a shady Neighborhood Reinvestment Act (thank you Democrats) that gave crazy, fluctuating interest rates as a way to provide incentives and ability to pay for the poor. This was a significant contributor to the downfall of our economy. That combined with house prices inflating over the years and voila, economic breakdown.

Thanks again Democrats.

Guest's picture
Hootch

If Fox News suggested the cause of the current financial mess is home loans to minorities, they were almost right. The root cause is federal legislation and policies designed to "put the dream of homeownership within the reach of more Americans," especially low-income and non-white Americans.

Begining in 1995 right up through 2007 Clinton, Bush and Congress lowered lending standards, eliminated downpayment requirements and generally made it easier for people previously considered high-risk to get mortgage loans. Google Fannie 97 or Fannie 100 as examples. Fannie Mae and Freddie Mac were required to buy or guarantee these loans. Demand for mortgages jumped, home prices followed and the bubble began to inflate.

Too many banks and mortgage brokers took advantage, regulators failed to regulate, funky derivative investments were created, and in hind-sight we all should have known better. But before any of these other contributing factors kicked in came the actions of the federal government.

Guest's picture
Guest

This one is to bail out the investment banks. Congress has already passed legislation to allow the FHA to "fix" the subprime ARM mortgages. I guess it was not enough to calm the fears of investors ( in junk paper ). I wonder if the bailout for the mortgage holders is dead?

This CNBC article includes a link to a pdf on the senate website of the previous bailout bill.

Thoughts Phil?

Paul Michael's picture

Will the government bail me out if I make stupid financial decisions, get in over my head and can't pay my bills?

I think I know the answer. In fact, the government made bankruptcy laws even more strict. Shame that doesn't apply to large corporations.

So, isn't this bailout just socialism for big business? And what would happen if we instead gave all of that money to people to make up the difference between what their house is worth and what they paid for it?

Guest's picture
Rivercat

Too much of our economy is people buying things they don't need with money they don't have.

Guest's picture

I wasn't aware that an average-income-level full-time worker with a family, should not be able to afford a home in which to live.

That doesn't seem, somehow, to be a luxury that they should be denied.

This is an excellent post, by the way.

Paul Michael's picture

take our lead from the government, that seems to be the way to do business.

Guest's picture
Jen

Clinton started this mess with the idea that homeownership is the cure to societal ills, and the (wrong) idea that everyone should be able to own a home. As credit (subprime lending) became easy, everyone (rightfully or wrongfully) was buying a home. The old convention that your house should be worth up to 4x your salary was forgotten as banks approved ARMs, interest-onlys, NINJA loans, etc for every Tom, Dick, and Harry. Guess what? People couldn't maintain these homes, had no wiggle room in the budget, and were one paycheck away from disaster, depending on HELOCs and ReFinancing to keep things afloat. We were due for a correction, both in housing prices, and in stupid personal finance decisions. If you can't afford a home, then DON'T BUY ONE!!!

Guest's picture
Brian

Try and blame it on Clinton??!! That's ridiculous, the economy was stable then. There is nothing wrong with home ownership as long as it is within your means.

The loans that are defaulting were written from around 02-07 well after Clinton had left. The Republicans deregulated the banking and housing industry, allowed the 'credit default swaps' to be written as insurance on the bad mortgages, and then when the defaults came the banks who had written the swaps couldn't pay the claims (see Lehman Brothers and AIG).

Guest's picture
Jess

The root cause of all this financial mess is the unregulated exotic instruments like CDS (credit default swaps) which have mushroomed to $50+ Trillion [not billion but trillion]. If debt obligations were allowed to default, then these investment banking firms, AIG and others would be severely exposed. The problem is these investment banks don't have that kind of money so: Washington is bailing them out!

In all of this mess what about the average hard working, tax paying citizen who is having difficulty with credit card debt, who thinks of bailing them out? We got to live with the consequences.

Then why is it fair to bail out the rich and their exotic debt schemes while the people who made these bets sail off in expensive yachts?

I recommend this blog highly: http://blog.moneyaisle.com/ - its a great blog!

Philip Brewer's picture

It's not people not paying their bills.  It's perfectly ordinary for some fraction of borrowers to be unable to pay back the money they borrow--that's happened since the invention of money.  (And it would be a non-issue if the house prices hadn't been driven up too high--the lenders could just foreclose, sell the house, and get their money back.)

It's also not greed.  People are about as greedy now as they've always been.

If you want to back up to the root cause of housing prices being driven too high, there's a bunch of culprits.  Lack of regulation and bad lending practices are a big part of it, as is the Fed panicking after the dotcom bubble and lowering interest rates too low (and keeping them there too long).

The exotic derivatives aren't exactly a cause, but they are a big part of what's making the real problem so damaging and so hard to fix.  They magnify the damage, spread it around, and let it hide in corners where it can pop out at you after you think it's already been cleaned up.

Paul Michael's picture

after 8 years of Republicans in the White House, it's still the fault of the Democrats. Is there no accountability here at all? After Enron, couldn't Bush have looked into the practices of Merryl Lynch and other investment banks? I'm sure some fault lies with Dems, but to put this problem entirely at the feet of Clinton, and now the Democratic Congress (who have only been in power for the last 2 of those 8 years) seems like a blinkered way to look at the problem.

Guest's picture
Jason

If you take Bush's 8 years out of this picture, this crisis won't have happened. Bush was bent on spending money, going to war and forgot how to govern his own country. All that classic spending with runaway inflation was real ammunition for a crisis. He knew but he allowed it to happen. In the end he lost the war on both fronts. This is no way to fight a holy war. Now he just walk away for someone else to clean up his mess.

Guest's picture
Chris

Blame too much regulation in the form of Sarbanes-Oxley. The requirement that banks "mark to market" their mortgage backed securities directly precipitated the liquidity crisis. As the value of their balance sheets went down, their need for capital went up, and their ability to make new loans was cut off.

We are in the midst of a complex problem, created over years by politicians of both parties. There is no one "root cause"; rather we have reached a point of systemic failure.

Guest's picture
Sam

Your assessment of the happenings seem to start in the middle of the chain...marking to market is a process of fair valuing your assets and liabilities based on the market value, so the outcome of this process is dependent on whats happening in the market, thus your analysis of the root cause should be focused on the market which is the input for m-t-m.

Guest's picture
Guest

the greed of BANKS and RICH did this.... and now they will pay!

http://www.finance-maker.com/fanny-mae-lehman-brothers-aig-and-freddie-mac/

also had something similar to say. All i can say for the next 5 years HOLD ON!

Guest's picture
Guest

I'm not sure why everybody forgets the practice of loan originators who helped ignore, or fudge numbers to make a loan possible. Sure they were all trying to reach for the carrot without any true regulation, ethics, or licensing in most states. My family has been involved in banking and home loans for years... With all the bank consolidation over the years they've seen a lot of things they disagreed with.. Maybe that's why they all work for banks that do not sell their loans now.. There's something about accountability if a bank has to keep a certain # of their loans to ensure they do their homework.. Sadly.. the big banks seems to sell loans like hotcakes...

Guest's picture
Guest

Great article, and in short, I agree.

But... I think the people in charge (by which I mean the Fed and the gang) realize this. I think they realize that a less traumatic way of making housing affordable again (and solving this mess) is to increase people's income (nominal income that is).

If the government inherits the current accumulated debt, it can decide to make as little return (interest + principal) on it as it likes. It can then increase the money supply dramatically (creating $100B and giving it out, then creating up to $700B and giving that out too), pushing up inflation.

The result is on a nominal basis, eventually incomes will have a more acceptable ratio to the cost of housing - solving the dilemma you describe. The problem is inflation...but at this point that must seem like a better problem than a sudden collapse in the price of houses (and many other assets).

This is just food for thought... but if you're right, the government isn't necessarily crazy, they're just going about rectifying the situation another way. (I disagree with this approach as well, but from a bank's point of view, it would be more desirable).

Guest's picture
Sam

Increasing the income for the people of USA would worsen the plight of the poor and unemployment, why...because labour cost would increase for the US firms and they would consider relocating to production sites/countries such as China/other parts of Asia. I think the bail out is aimed at minimising the crisis damage.

Guest's picture
wildgift

The government should take over houses once they default, but allow the occupant to stay, as a renter, paying market-rate rent. "Create some jobs." LOL. Hey, we can do it now - we're going to own a lot of these bad mortgages.

Guest's picture
Erika

I heard on NPR that only 3% of mortgages are in foreclosure which is higher than normal but still such a small part of the whole market. It seems to me that if people bought houses they could afford rather than listening to government and banks telling them they would give them money which they really couldn't afford. On top of that people used any equity as their bank. Spending money is the patriotic thing to do. The government doesn't maintain a balanced budget so why should the people. The biggest issue to me is too much attention on consumerism and not enough of debt reduction or savings. Someone said yesterday that it is easy to spend other people's money (loans and credit?) but spending your own is much harder. The average American can't just print money when they run out. When will people realize that stuff is not the name of the game? When will people realize that buying a home larger than they can afford is not the way? Not only will you have to pay that mortgage but you will have to pay all the associated costs with a larger home like higher heating/cooling costs, higher taxes, not to mention the need to fill the empty house with new furniture.

Guest's picture
Mad Mike

The events of the last week have a familiar odor. A crisis that needs immediate action, fear mongering, and a demand for new sweeping powers for the executive branch of our goverment. The result being the citizens giving up their rights to the checks and balances laid out in our constitution. Smells like Iraq. Smells like the Patriot Act.

Paul Michael's picture

...I will say that I never like the idea of massive, sweeping laws being put into effect with little or no time to analyse them. This bailout package is another case in point. "Do it by Thursday or we're screwed" is serious pressure, but not enough time to discuss the finer points of the proposal. I think Congress should forget about taking their vacation and worry about what's at stake here. This is the future of the country we're talking about.

Guest's picture
Ken

I think the root cause was people taking on loans they couldn't afford to repay. This involves greed on the part of both the lender AND the borrower. What's really sad is that the 97% or so who ARE paying their mortgages as they agreed to are getting punished for the irresponsible actions of a few.

Cheers,
Ken

Guest's picture
Lucille

"The root cause of all this financial mess is the unregulated exotic instruments like CDS (credit default swaps) "

This and deregulation that allowed these exotic loans to be sold by pretty much anyone with a pen and also the massive deregulation in the investment banks world caused this far far more than someone buying more home than they can afford.

Yes, this thing reeks to high heaven like Iraq and the Patriot Act. We have the former CEO of Goldman Sachs (Paulson) asking for the largest no questions asked blank check in history with no oversight.

If we the taxpayers are going to spend 700 billion dollars it ought to be going directly to homeowners and businesses that need that operating credit or changes to their mortgage to keep things rolling. Giving it to the investment banks seems very stupid and with little promise we might ever get it back.

Not giving Wall Street the bail out might make the markets a mess for a long while but we are also not the only game in the world. Giving the average taxpayer or business that employs people what will keep them going makes more sense.

Guest's picture

A big problem with deregulated capitalism is that it forces companies to engage in riskier and riskier behavior in order to be competitive -- ultimately, however, some of the behavior turns out to have been *too* risky. Unfortunately, its very hard to gauge how risky is too risky. The Republicans party has consistently fought for deregulation and reduced enforcement of anti-trust laws so that companies can buy each other more and more easily. This encourages companies to take greater and greater risks because if one company is making larger profits (by being increasingly leveraged, for example), then your company either has to do the same or risk getting bought by someone who *will* do it.

You see the same kind of behavior in every other sphere of human behavior, though: radium dials seemed like a great idea for watch faces until the risks to human health were discovered; DDT seemed like a great way to control mosquitoes until the risks to the environment were made clear; and the list goes on and on. We have regulatory agencies like the FDA in place in order to carefully assess the risks to reduce the likelihood that new, experimental drugs gain widespread use before unanticipated effects are discovered. It's expensive to have regulatory oversight and it dramatically limits what kinds of approaches get tried -- it's too expensive to try to get regulatory approval of anything that isn't a pretty sure bet. But we accept the limitations because of the potential for human suffering. Companies have a hard time evaluating risks to human suffering: they have an obligation to pay attention to the bottom line -- and only the bottom line. We have to have strong government regulation if we want the behavior of companies to engage in risky behavior to be limited. And, although I don't hear Republicans saying it yet, it seems clear now that they agree with that sentiment.

Guest's picture
Angelic

There are several oversight committees already in place that should have caught this banking problem. There is no accountability from anyone in the government. Many senators have spoken about their concerns about these institutions, but have been ignored because of partisan politics. To state the FDA is protecting us is another testament of FAILURE to yet another government agency not protecting us.
(example: not testing GMO Foods and not requiring them to be labeled as such.) Other countries require labeling of Genetically Modified Organisms and refuse to buy it. They are watching to see what happens to us guinnea pigs in the United States. The problem is where is the accountablility and our protection that our CONSTITUTION provides us? We are the people, but as long as there is no accountability and they can keep us seperated by dividing us through partisan politics we stay distracted. Then politics goes on as usual. Some of the regulation allowing anyone and everyone to get a loan got us into this mess. Sometimes we don't need the government involvement, especially when they think they know what is in our best interest. Buyer Beware!!!

Guest's picture

Another key question is WHY did house prices get so high? Well lets think about this, with the low interest rates and lowered financial requirements. People who couldn’t afford houses where laughing and buying happily, not reading the fine print on the fluctuation mortgage rates. Now if the supply of houses are diminished, economics tells us that the price would increase to follow suit. Now imagine this on a massive scale, prices are going to rocket. Then when the fluctuating mortgages started rising, people who couldn’t afford a cent more got picked off and claimed bankruptcy, and like a house of cards it all came tumbling down. The Fed’s correction thought inevitable was handled in a poor and amateur-ish manner. .I was just reading a couple posts on www.StockResearchPortalblog.com where they were discussing the impact of the financial crisis and how it’s led to the current bailout. I found it interesting that they made comparisons from 1929 to today. It seems as if the market is one big wheel and always repeats itself.

Guest's picture
Kelja

I'm sick of it all. I didn't load up with debt and was responsible so I'm screwed. Government will bail out the banks and the individuals who made bad decisions. The net effect will be to prop up home prices artificially and will keep me out of the market ... again.

The Democrats - being so politically pc - thought everyone should be a homeowner. Standards became so lax as to be ridiculous.

The Republicans took care of the fat-cats on Wall Street and oversight disappeared.

Now the 'Masters of the Universe' want to bailout the entire system. How come you trust those who screwed it up in the first place.

The 'Greater Depression' is around the corner.

Guest's picture
Debbie M

I thought the cause was people getting very stupid loans which in turn was caused by banks suddenly offering and allowing these loans. It's about banks collecting all the closing costs for bad loans and then bundling them with other loans to look good and selling them to either naive or lied-to buyers.

This reminds me of developers who build houses poorly or on poor property (like on an earthquake fault or in a flood zone) and then sell everything to other people who then have to deal with the upcoming problems.

I really wish people would have to take more responsibility for the problems they cause. I guess that's were regulation comes in--don't allow banks to offer stupid loans.

Now it's true that if housing values kept going up, then when the borrowers defaulted, the lenders could sell their houses and get their money back. And if interest rates had gone down, a lot fewer borrowers would have defaulted (but since they started at or near historic lows, how likely was that?), so we could blame interest rates. And if salaries had gone up faster than inflation instead of salaries barely going up while we had record-breaking inflation of oil and food prices, then fewer people would have defaulted. But none of these things would have mattered if people had been allowed to take only loans they could reasonably have been expected to repay.

The guest with comment #15 says "The problem is inflation...but at this point that must seem like a better problem than a sudden collapse in the price of houses (and many other assets)." But inflation is the collapse of the value of money applied to all purchases (not just housing and many other assets). I'd rather have housing prices collapse. (Disclaimer: I admit I'm not planning to sell my house. But if I were, I could still use the money to buy another house whose value had also collapsed, right?)

To Jen I'd say that (almost) everyone can afford a home, just not a giant new house. There are tiny houses and trailer homes, and mud houses and stuff like that which actually are quite a bit cheaper than the average home.

Guest's picture
Mad Mike

I've heard no objective definition of what the gloom and doom will be if we don't get a bailout. I've heard some companies will fail, so what! companies are born and die everyday. Some people will lose their homes, like that hasn't been happening since the begining of time? Tell me how many? Unemployment will rise, give me some objective data, what percentage? And heres the one thats real hard to swallow, "Credit will be unavailable" BULL#*%+!! even in the dark ages people were lending to other people for profit, its the worlds second oldest profession. Are they trying to tell us it won't exist in the future unless we buy their plan. Please Mr Paulson, define "crisis" in some objective terms.

Philip Brewer's picture

@ Mad Mike:

The crisis scenario is this:

Banks (as a group) can't borrow money.  They hold so much bad debt that they're insolvent (or close enough).  They can collect small deposits because small deposits are insured, but they can't sell bonds, they can't sell commercial paper, and they can't issue huge money market CDs.

Without access to the money markets to borrow, the banks are unable to lend.  In theory they'd be able to sort-of maintain the status quo--making new loans as old loans get paid off--but in practice a bank in that situation would accumulate some cash just in case things got worse.

You express doubt about that part, but it's actually already happening.  As I type this, the federal government can borrow money for 3 months at just 0.5%, but top-tier credits that aren't the government are paying 8 times that.

With essentially no lending going on (because the banks don't have any money to lend), commerce begins to grind to a halt.  There are very few businesses of any size that can operate without ready access to credit.  Even businesses with no long-term debt still have short-term credit needs--to fill the gap from when they buy raw materials until they get paid for the products they sell.  Similarly, farmers borrow at planting time and then pay off the loan at harvest time.

Unable to borrow, businesses fail.  Some can just shrink--they only buy the raw materials they can pay cash for, they layoff enough employees that they can cover their payroll without a loan--but many fail almost immediately.  Worse, more fail every month--because customers are cutting orders, because customers are failing, and especially because consumers (having lost their jobs) are buying less.

This scenario has played out hundreds of times--it use to be called a panic.  (See my article from last year, Credit squeeze, formerly known as a panic.)

Until the great depression, economist believed that a panic was self-limiting:  Businesses would shrink and fail, but that would open up opportunities for other business to step in, buy the (still valuable) assets, and make a go of the business.  Prices would fall, asset values would fall, but eventually things would reach equilibrium.

In the great depression, though, that didn't seem to happen.  Business activity continued to shrink for years.  Even after it stabilized, it showed no signs of returning to growth.  There was land, there was labor, there was even capital--but there seemed to be no will to put it to productive use.  The economy seemed to have gotten stuck at some low-level equilibrium where vast swaths of the population were unemployed.

Maybe that wouldn't happen this time.  But that's the crisis that so many people are afraid of.

Guest's picture

Read a Cato article today that brought up two great points: Housing bubbles are worst in localities with high land use regulations, and federal housing policies geared towards subsidizing low-income homebuyers encourage folks who can't afford to buy to do so anyway. Tag on ridiculously low federal funds interest rates for way too long and you have a recipe for disaster.

http://www.cato-at-liberty.org/2008/09/22/blame-urban-planning/

Artifially restricting housing supply through land use regulations, including Environmental Protection Agency proposals to integrate climate and land use all drive up prices. Less regulated regions have natural supply and demand growth with moderate price fluctuations.

Low-income earners should probably not be buying property, especially during speculative periods of rising prices. Department of Housing and Urban Development (HUD) pressure on Fannie Mae and Freddie Mac drove these two institutions into signficantly increasing their subprime lending portfolios. This was done with decent intentions of increasing homeownership rates amongst lower-income folks, but the harsh reality is that these people could not sustain their housing payments after initial teaser periods and rapid periods of equity growth expired.

Guest's picture
Guest

First off, the cato institute is supposedly either a conservative or republican thinktank, so whatever views they may hold are colored.

Guest's picture
Wilson

Don't forget that the Fed lowered interest rates making mortgages cheaper and inflating house values. My parents' mortgage was 14%-- and they could afford it because they paid $30,000 for their house. But although a 1/3 lower rate may mean you can afford a larger mortgage payment, it doesn't mean that the same house actually tripled in value. In capitalism value is based on what you can pay, but intrinsic value does exist, and it should exert an opposing pressure, unless the government continues to lend money at a rate below that of inflation.

Certainly any banker offering no or less than no down payment mortgages was committing fraud. This is not a matter for regulation, but of law enforcement.

Guest's picture
Guest

Perhaps it's because people weren't happy with the house they could afford.

People aren't defaulting on $100,000 mortgages here. They're defaulting on the $200+ mortgages in areas where they could easily find something liveable for less.

That's a bit of a simplification, but by and large- people overbought and banks over-lent.

A mortgage is a privilege, not a Constitutional right.

Philip Brewer's picture

@Guest:

People buying houses they cannot afford should be a problem only for that person and whoever lent him the money.  When it starts causing problems for everyone else, I think that's a sign that there's something more going on. 

After all, people have wanted bigger and better houses since we moved out of caves.  Why is it that this time it's threatening the whole economy?  Obviously a lot of things play into this, but we're not going to solve the problem by propping up house prices.

Guest's picture
Guest

A bubble burst when there aren't any more who can come in at the bottom to prop it up. At one point there was no one willing to pay an exorbitant rate for a tulip in Holland so that bubble burst. "Unaffordable housing" is an oxymoron. If the average family can't afford a house, the price has to drop.

In order to keep the prices artificially high, there was fudging of qualification for mortgage loans, which were sold off as financial instruments. Many were really "junk" since the
only way the buyer could continue payments was if the adjustable rate decreased, the buyer spent over 30% of take-home income on the payment, and the buyer's income increased.

Wages have not increased enough to cover the inflated price of housing. Meanwhile, banks and mortgage brokers, and real estate agents have their taken their profit out of the house.

When the average house is too costly for the average income, something has to burst.

Guest's picture
Guest

I think #15 hits it.

There is no political will to allow housing prices to continue to fall.

No one wants to be the one to tell the California homeowner that their home which sold for $200,000 in 1999, is still only worth that (at best), not the $450,000 they see on zillow.com

The government will do their best to pump as much money as they can into the economy to prevent real estate price deflation.

Since no new taxes are politically possible, well, a trillion dollars worth of monetization will have a significant impact on domestic price levels.

Guest's picture
Troy

If you have scrolled this far, you will now be rewarded.

Many people here are close,some closer than others.

Many of your reasons are not the causes they only seem like causes when in fact they are effects.

The root cause? From the very beginning. Read on...

C.R.A

Stands for "Community Reinvestment Act"

Act passed by congress in 1995. Clinton time.

General purpose is to "provide credit to underserved populations"

Trust me...look it up. Wiki or google. They have a much better definition, but the above is the general idea.

Essentially laws were passed REQUIRING banks to lend money to underserved populations. IF not,penalties and charter revocation.

Now why were these people underserved. Because they were not qualified, but no one wants to talk about that.

This 1995 law changes the rules. Forces banks everywhere in the country, every town city, community to lend apercentage of money to "underserved" communities. So,banks have to loosen their standards so these underserved communities qualify for loans. This creates what is commonly known as SUBPRIME. Prior to this, subprime was virtually nonexistent.

Subprime is lending money to people who likely will not pay it back. Guess what happens when you lend money to people who have a history of not paying it back.

So, why would banks do that. It is not because they were stupid or greedy. People running banks knew immediately the likelyhood of not getting paid back was extremely high. Trust me, I used to loan out money under CRA. It was because banks were REQUIRED BY LAW to lend it. So they did. They had no other choice.

Now, most anyone who breathed had some type of financing available, so demand went up.

This financing was incredible. No verification of hardly anything. Assets, income, down payment. Who cares.

Once again ask yourself WHY. What prudent bank would stop caring about underwriting. All of them,because they HAD to. These loose lending standards were the only way many people could qualify for a loan,and they had to be loaned to.

Anyway supply stayed low, so prices went up. Simple economics. Demand continued for years until about 2006 when prices got so high even subprime couldn't help many people. Then it popped and we are here. You know the rest.

The root cause. CRA. The governments belief that everyone deserves a shot at the "American Dream"

No they don't.

Guest's picture
William Garland

Your comments on the CRA are right on point. I was reading through the comments waiting to see if anyone discussed it and intending to comment on it if no one had already done so.

Guest's picture

It is simply a big fat lie that CRA caused the financial crisis.  I'll refute this silly nonsense.You say you did banking, but you must not have been much of a banker.  CRA regs apply to specific areas, not every where in the country, every town, neighborhood and there are tons of lenders who are NOT BANKS and are not covered by these regs.

1. the crisis was caused by the poor performance of mortgage loans made between 2005 and 2007. If CRA did actually spurred the expansion of the subprime mortgage market and subsequent turmoil, some change in the enforcement regime in 2004 or 2005 would have triggered a relaxation of underwriting standards by CRA-covered lenders for loans originated in the past few years. However, the CRA rules and enforcement process have not changed substantively since 1995.

2. independent nonbank lenders, such as mortgage and finance companies and credit unions, originated nearly half of subprime mortgages, but they are not subject to CRA regulation and, hence, are not directly influenced by CRA obligations. And the financial entities that bought these mortgages as mortgage backed securities were not covered by CRA either.

Its a ridicoulous lie and worse, its a lie that perpetuates a steretype of minorities on top of it. 

Guest's picture

There are actually two things happening here, both of which are contributing to a financial crisis;

1. The meltdown of Wall Street - caused by deregulation during the Clinton Administration, and these massive trillions of dollars in derivatives. Wall Street got greedy, started gambling and placing bets with each other with money they didn't have, and they ensnared themselves in their own greedy trap.

2. The meltdown of the American Dollar. The Federal Reserve is responsible for devaluing the dollar, and that's what happens when you create money out of thin air. Historically fiat currencies are doomed to fail and the American dollar will eventually be worthless too.

Guest's picture
Mia

fiiiiive pound blocks of cheeeeese... baaaags of grocerieeeees.

when the **** hits the fan.

Guest's picture

Letting housing prices naturally balance and fall would have been a great idea several years ago. And that's not hindsight, we suspecting things weren't right all along as we saw local governments artificially increasing property values to increase tax base and lenders using creating new ways of lending. But here we are. And the bailout looks like a bandaid--give these companies more money so they can right size and thus extend more credit. Will it be more bad credit? Our society/economy has been riding like a spoiled "I want it now" child and getting it's way extending credit to those who can't afford it. Will the bailout do the same? What is the natural correction now? I'm afraid none of us will like it.

Guest's picture
Mad Mike

Thank you Phillip for your explanation.
These folks at the Treasury and the Fed have some pretty high power models of the economy I'm sure. I wish they would share the data that these models spit out. So I could decide which of the 2 senarios (bail or no bail) would hurt me the least.

Guest's picture
Guest

Troy,

The CRA was passed in 1977, and strengthened in 1995.

Guest's picture
francis

Crisis explained the current situation perfectly. But as to the cause it is a shame people attribute it to such things as CRA, that holds little water.

Also attributing it buying unaffordable homes doesnt cut it, no body is that stupid to buy a home he/she can't afford if there is no underlying propellant.

One factor that I haven't heard is that of "flipping", trumped by Donald trump and the like as the easiest way to riches. I suspect more than anything this contributed to the current mess. People bought homes at very high values with the believe they could flip the homes for very high sums, and those buying at those sums believed they could flip them for more and the maddness continued.

Why the foreclosure rate is jumping so high is that investors in the flipping scheme dump houses faster than actual home owners, since it makes less sense to continue paying the mortgage if there would be capital loss. Almost everybody became a real estate professional, carrying out expensive renovations on houses with the hope of selling at a huge profit. All this expectation came tumbling down when the growth in house prices outpaced rental income, wages and salaries.

Guest's picture
Sharon Apple

I'm fairly young, but whatever happened to living within your means and using what you physically earn?

I say let the 'Recession' come. Maybe that would slow down our consumerism society. I'm not desperate for a house or any shiny bauble if it keeps me in debt and makes some detached overlord rich.

I'm not for this bailout either. It's simply a rushed sham that the paranoid are going to buy into and panic.

I think everyone, young peon and old corporate jockey, has forgotten hard times; so we spend too much, make too many sub-par products and believe in deals too good to be true.

Let hard times come. It will balance itself out if the people let it.

Guest's picture
Guest

"Another major one is: Alan Greenspan. He will go down in history as a dark blot and major cause in this fiasco. And, not that it's important, but he was a Clinton appointee."

He was appointed by Ronald Reagan. He was then re-appointed by George HW Bush, Bill Clinton and George W Bush.

Guest's picture
James K

Like ken said, the root cause was people taking out loan which they could not afford, BUT also it’s the banks for allowing them to get the loans!

Guest's picture
Tyson

The article asks: How did house prices get too high?

The prices got too high for the same reason most prices go up: the demand increased.

Why did the demand increase? The demand increased because more people qualified for loans to buy a home.

Why did more people qualify for loans? The Clinton Administration felt everyone had the "right" to own a home. They made it easier for these people to qualify for loans. This is the real root cause of the problem.

Philip Brewer's picture

I don't actually think you can peg much of the blame on the Clinton administration. The community reinvestment act didn't tell banks that they needed to lend money to people who couldn't pay it back; it just said that banks needed to serve their local community--which if more banks had done, they wouldn't be in nearly the trouble they're in now.

A big chunk of the blame needs to rest with the Fed, for taking interest rates too low and keeping them there too long--that made lending so profitable that it was possible to imagine that even if some loans weren't paid back, the rest could make up the difference.

Another big chunk belongs with the whole system of securitized lending, and all the people involved--loan originators, loan packagers, and the buyers of the packaged securities.  They all behaved like idiots.

It's just sad that so much of the cost is going to end up landing on the rest of us.

Guest's picture
Prof Aaron

An astrological prediction says: AMERICA WILL OVERCOME THE FINANCIAL CRISIS IN ANOTHER 7 MONTHS. Read: "Act now…Tomorrow will be too late" by John Walker published by JTS Books
www.jtsbooks.com

Guest's picture
LB

“Expansion becomes impossible without abundant cheap energy. So I think that the debt of the world is going bad. That speaks of a financial crisis, unseen, probably equalling the Great Depression of 1930; it’s probable we face the Second Great Depression. It would be a chain reaction, one bank would fail, and another one would fail, industries will close…” Dr. Colin Campbell, geologist, founder of the nowadays respected Association for the Study of Peak Oil (2006 interview).

Michael Meacher, a British Labour MP and former Environment Minister identifies the Peak Oil crisis as “an apocalyptic scenario” . A Deutsche Bank paper on oil depletion goes in the same direction:

“The end-of-the-fossil-hydrocarbons scenario is not a doom-and-gloom picture painted by pessimistic end-of-the-world prophets, but a view of scarcity in the coming years and decades that must be taken seriously.”

To read more on Peak Oil and the Financial Crisis please consult the following article:

http://www.ireport.com/docs/DOC-112467

Guest's picture
Guest

...wanted a house but couldn't afford the monthly payments. What changed was that someone gave them loans anyway.

Guest's picture
Sam

I agree with you 100%, overspending backed by poor banking credit policies pushed the houses beyond the sustainable equilibrium, leading to a collapse (correction) in the poorly priced loans of the financial services sector. This correction is semi-permanent, thus I warn investors to be cautiously optimistic of the US property market.

Guest's picture
Naz

Stop the war in Iraq. Stop encouraging war everywhere else. Stop spending money for destruction. Don't spend money creating more advanced weapons. Ppl die and the world hate US goverment. Use the money for good cause. Feed the hungry. Americans can have better life from that money.

Guest's picture
Brian C

What we are witnessing is nothing unusual, it has happened before and will happen again. Every great democracy has a rise and fall. This is just how democracies close down, and all the technology and historic lessons will not help us at this point.

``The country is facing a crisis in capitalism"

or better yet, "The World"

Guest's picture
Guest

Someone recently asked about our track record with respect to the market crisis. Here, from 2003 and 2006, are a few of our comments:

SEC Comments. Page 6: "Envy, hatred, and greed have flourished in certain capital market institutions, propelling ethical standards of behavior downward. Without meaningful reform, there is a small (but significant and growing) risk that our economic system will simply cease functioning."

http://www.sec.gov/rules/proposed/s71903/wmccir122203.pdf December 22, 2003.

and:

SEC Comments. Page 2: "Together these practices threaten the integrity of securities markets. Individuals and market institutions with the power to safeguard the system, including investment analysts and rating agencies, have been compromised. Few efficient, effective and just safeguards are in place. Statistical models created by the firm show the probability of system-wide market failure has increased over the past eight years.

Investors and the public are at risk."

http://www.sec.gov/rules/proposed/s71005/wcunningham5867.pdf February 6, 2006.

Guest's picture
Guest

The economic crisis had occurred as a result of the things that have been spoken of but there is still a significant root cause that has not been mentioned. A market works with supply and demand, sellers and consumers. The problem is that the supply of goods namely housing and big ticket items has now substantially outpaced demand.

Why is there no demand you may ask? The demand has waned because the number of consumers has dropped significantly over the past decade as the baby boomers move out of their life period of conspicuous consumption. They are selling their houses now and doing it all at once. The problem is that there is no where near the same number of buyers coming behind them to pick up the slack.

This crisis has been coming and likely the financial missteps have delayed and exasperated the crisis but there is little that can be done to get out of it other than creating a new economy that is not built upon the U.S. baby boomer. Where is the next consumer and what are they wanting? That is where our long term focus should be.

Try this information for an insight into what the core root is.
http://www.thegreatbustahead.com/

k

Philip Brewer's picture

I don't think there's been any fall in the demand for houses for people to live in.  The number of households in the US is still growing, and they all have to live somewhere.

There has definitely been a drop in the demand for McMansions in the exurbs, for a lot of different reasons.  But I think the biggest drop in demand is that people have quit buying three, four, or five extra houses, hoping to flip them for a quick profit.

That is a fall in demand, but I don't think it's the sort of demographic change you seem to be talking about.

Guest's picture
Guest

Philip

The raw population trends have been largely ignored in this discussion. While the population has stayed relatively level like you said, underlying that is an age distribution with a large bubble flowing through it. I have a pdf graph of this census data that might help. I would be happy to forward it but I do not have a means to upload it.

k

Guest's picture
Jay Kay

I just stumbled onto this site and find the comments largely in sync with my understanding of this crisis. The answer in #66 by Guest makes the most sense to me. I think he/she has it exactly right. The original article actually mentions briefly the problem with low interest rates. Who is responsible for the excessively low interest rates? Why, the Fed, of course.

One statement I hear a lot lately is that the "root" cause is the greed of the private banking industry resulting in the creation of derivatives and default swaps. They are complicit in the cause, but not THE cause. The root cause is actually the Fed's own policies, which resulted in the tech bubble, followed by the housing bubble. Some say that this crisis "proves" that the superiority of the "market economy" is false. Not so. We haven't had a real "market economy" because of the government's policies. Interest rates were not allowed to seek their own level due to goverment intervention (Fed). The mortgage industry has not applied good lending standards because of too much money avaiable at too low rates and pressure from the government (Fannie and Freddie) to loan to high risk people. The banking industry created dubious products because of excessively low rates and too much money available.

So, now what are we doing? Paulson is now saying we need to push down mortgage rates to get the housing market "going again". Oh great. We got into this mess because of too much interference by the government (Fed, Fannie, Freddie, etc.). Now we don't want to let the market correct the excesses. We want to print more money to "fix" the situation. What would be the best course? At this stage, only considerable pain will fix things as excesses are wrung out of the economy. We need to start producing again, not just comsuming. We need to stop borrowing for all our wants, but saving for them instead so there's some capital to invest.

I could go on, but I've vented enough for today. I just heard a guest on the Diane Rhem show put all the blame on the private banking system and it really got my goat.

Guest's picture
Guest

Here's my take on the question. Factory automation and outsourcing, by reducing the wage share in overall income, seriously compromised consumption expenditure in the 1980's. Ronald Reagan responded by outsourcing traditional fiscal policy to the banking sector, specifically with the passage of the Secondary Mortgage Market Act in 1984, making securitization possible. The banking sector took the bait and multiplied questionable sub-prime loans. All in all, the policy was more successful than Reagan could have ever imagined as it touched off a housing bubble that further increased indebtedness as home equity balloned. Everything was honky-dory until the housing bubble burst, which is why the bankking sector is now stuck with $7 Trillion of bad debt.
The true culprit was factory automation and outsourcing. Reagan's outsourcing of fiscal policy and the fallout were but consequences. The banking sector is not to blame, nor is Reagan, although traditional fiscal policy would have been, in my view, a better choice. As it turns out, the current bailout of the banking sector can be seen as a form of delayed fiscal policy, the only problem being that it fails to address the current problem!

Guest's picture
dotty

#22 (steven brewer) makes a valid point. additionally, i believe as long as capitalism existed, it couldn't really be guided via a single government or institution, or anyone for that matter. It's kind of a "rich man's game", and you can rest assured they don't have YOUR wellbeing at priority #1.
Elected governments however, should. So a solution could be to let the state own a county's vital functions: housing, gas, electricity, health care, hospitals, trains, railways, roads, schools, perhaps even supermarkets and other things that lie at the basis of life and make a country a country. That way a crisis in the liberal world won't hurt so much. It also gives people a choice to work for their fellow man as a socialist or work for themselves/a company as a capitalist. Within the current system, i believe this is attainable and it should solve a problem or two. So i hope Obama will be the next "red man in the white house".

I'd like to note that in my country (netherlands) the state did own health care and railways and stuff about 20 years ago but now the negative effect of the more recent neo-liberal privatization is getting noticeable due to rising prices "cos of the crisis". And since i never felt any advantage of privatization, it seems to me a kind of de-evolution of inter human relations.

A more extreme but very inspiring text can be found here: http://socialism.com/whatsocialism.html

Guest's picture
Alaa radaideh

It's all about the credit policy which was prevailing at that time, easy credit in the financial market lead to high production (construction) in real state industry where is the supply become much higher than the real demand,it's also because the construction takes time to provide units into the market where more suppliers were not aware of the real demand ,once all the under construction projects completed. these projects was out of the supply demand equation. people bought on the plan for the purpose of trade rather than to use these units, and because of the high liquidity and earning expectations ,they bought more than they can afford ,now what will happen? once these projects completed and ready to be filled, who's gonna rent with this frantic prices,so owners need to lower the rent price in order to let people think of more space to live then filling out their units . and once the return on investments get lower ,definitely units price must go down,left lenders with loses,and lower the market confidence.thing lead to thing,and financial crises present

Guest's picture
Guest

Hey I’m no Ivy League scholar but my take on the cause:

1. Bad Fed Legislation - CRA which led to ridiculously high risk credit decisions by lending institutions. The intent was noble but not practical or good business. Not just underserved sub prime borrowers but because of fair lending laws prime borrowers are also in on this. So now not only can a sub prime borrower get a $200k mortgage (no money down, interest only or ARM) that they won’t be able to afford when rates adjust but now a prime borrower who can afford the $200k mortgage all of a sudden thinks they can afford the $500K+ mortgage (no money down, interest only or ARM) that they won’t be able to afford when rates adjust. Legislation drove poor credit risk management.

2. Securitization of Mortgages – Greed on Wall Street

I don’t think going after banks with additional regulation without correcting the bad legislation will create anything more than higher costs to tax payers and burden on financial institutions. Simple rule – Cooks should go to jail, ethical businesses should be able to run their business.

Well here we are. I put 60% down on the house I bought a year and a half ago. I just refinanced a few months ago to take advantage of lower interest rates. I save and pay cash for my vehicles (I buy older used cars) and am focused on saving enough to send my three kids to college. I hope my job survives the situation we’re in but will be able to make my mortgage payment making less than half what I make now. I thought it was funny to hear Obama say “we all need to learn to live within our means”…. The last time I checked there’s a huge Federal deficit and the government just borrowed billions to finance the spending bill…..

Philip Brewer's picture

I don't think you can put much blame on the Community Reinvestment Act.  All it required was that banks make a good-faith effort to make loans in the same areas where they took deposits.  It certainly didn't require them to lend money to people who couldn't pay it back.

I think you're much closer to the mark on securitization--and, in particular, on the banks being stupid and crooked.  Securitization should have made the banks much safer, by moving the risk of default off their balance sheet and onto some other entitity that was in a better position to take the risk (like a hedge fund) or that could manage the risk by taking a particularly long view (like a pension fund).  In practice, though, the hedge funds weren't interested in the return on a mortgage unless they could leverage that return up with lots of borrowed money.  And, when it turned out that they got that borrowed money from the banks--well, you can see that the banks hadn't really unloaded any risk at all.  But, due to poor decisions that were at least stupid (and, as I say, possibly criminal) they acted like they had unloaded the risk.

Guest's picture
Guest

The federal reserve system is the root cause of the financial crisis. Listen to Ron Paul....The most proven American patriot we have.

The fed is not federal and there are no reserves. There's just a printing press and a bunch of banker/government yes men. Helicopter Ben is the current leader. Guess what.....the helicopters have arrived with plenty of cash.
Does anyone with half a brain think you can create money by printing it on a printing press.

Do you know why the wizards and witches in the Harry Potter movies use gold and silver as money? It's because even they can't create(conjure) money out of thin air. If they could....then there can be no rules even in the world of magic! Only bankers can create money out of thin air and get muggles to believe the money is good.

God calls unredeemable paper debt money "treasures of wickedness". All our debt based assets are really liabilities.

Everyone should own some silver coins.....because real money is not made of paper.

Vote to end the fed. It has failed in it's mission to stabilize the banking system and stop inflation. It has caused the problems.
Thank God for Ron Paul.

Guest's picture
C. anderson

The root cause was this....banks and mortgage lendors were lending to less than qualified buyers. In the past (and I know as I have bought 2 houses and have family members/friends who have done the same PRIOR to this free for all in mortgage lending. The income/asset/debt requirements were strict and there wasn't as much risk being taken by the banks and lendors. Second, Fannie and Freddie and the lendors were required I believe to have more capital in case of a crisis. And the reason the banks and lendors could afford the risk is because they were selling it off to Fannie and Freddie so as not to bear the risk themselves so they could go out and lend some more of these risky mortgage loans. People saw it as a way to make money since based on the nature of supply and demand, when demand goes up prices go up and people were easily buying up these houses, turning them over for profit in record time in some cases like in Florida and California since they could buy them so easily, driving the prices up. I talked to one guy who told me he had friends who had become millionaires in Florida in only a few years by turning over high price houses in Florida every 6 month making thousands and thousands of dollars profit. What is troublesome is why didn't Congress heed the warnings of the regulatory agencies that the bottom was going to fall out? And I am a C span viewer and there were many warnings from the Treasury Secretary as far back as 2002. The Senate quashed HR 1461 back in 2005 in committee which could have prevented this.

Guest's picture
C. anderson

The root cause was this....banks and mortgage lendors were lending to less than qualified buyers. In the past (and I know as I have bought 2 houses and have family members/friends who have done the same PRIOR to this free for all in mortgage lending. The income/asset/debt requirements were strict and there wasn't as much risk being taken by the banks and lendors.) Second, Fannie and Freddie and the lendors were required I believe to have more capital in the past in case of a crisis. And the reason the banks and lendors could afford the risk is because they were selling it off to Fannie and Freddie so as not to bear the risk themselves so they could go out and lend some more of these risky mortgage loans. People saw real estate as a way to make money since based on the nature of supply and demand, when demand goes up prices go up and people were easily buying up these houses, turning them over for profit in record time in some cases like in Florida and California since they could buy them so easily, driving the prices up. I talked to one guy who told me he had friends who had become millionaires in Florida in only a few years by turning over high price houses in Florida every 6 month making thousands and thousands of dollars profit. What is troublesome is why didn't Congress heed the warnings of the regulatory agencies that the bottom was going to fall out? And I am a C span viewer and there were many warnings from many sources, even the Treasury Secretary as far back as 2002. The Senate quashed HR 1461 passed in the House back in 2005 in committee because it had no real teeth and was not a good bill, but the Republicans who believed the reform was needed did nothing to replace it, allowing the meltdown to occur. So I guess you could say they had a hand in it, but not for the reasons many claim. If anything, it was because they would not stand up to the liberal Democrats in Congress when they had majorities.

Guest's picture
Guest

it has already been said that a time like this will come,but the question is:who said it?
when the days sun is turn to blood by our sins i.e.disobedience to the only creator!.what do we expect? we are in the last days,believe it or leave it.

Guest's picture
Guest

"Regulation, regulation, regulation." Every boom has a bust. The central bank kept interest rates low (making money cheap) and caused this bubble. This is regulation. Fannie and Freddie secured loans allowing for more to be originated and for the balloon to begin to heat up.

When all else falls don't blame the market. Blame the heroin government and the federal reserve gave to us.

Guest's picture
Guest

Listen to Peter Schiff the guy who predicted the .com bust and this recent housing downturn. Yes 2 for 2.

To sum it up it was the Federal Reserve coupled with government. Listen to it before you jump to conclusions.

http://www.youtube.com/watch?v=EgMclXX5msc&feature=youtube_gdata

Guest's picture
Lori

Love it! I was just getting into the spring cleaning mode yesterday, but was at a loss for frugal organization tools. This is a perfect solution! Thanks Lindsey!