Freddie and Fannie, AIG, Merrill Lynch…
Who’s fault is this? Where does the blame lie? Was it a lack of regulation? Or something else?
I’m almost entirely ignorant on this subject, and while we’ve had some discussions about what to do now, and HOW this happened, I don’t think we’ve had a blame game thread
So, Clinton? Bush? Reagan? Lincoln? Congress? Who’s fault is this?[/quote]
Perhaps 30 years ago or more the collective “government” made a decision to try and increase home ownership. Freddie and Fannie were spawned to buy the mortgages that banks and mortgage companies underwrote.
The real estate boom hit in the 70’s and people went to real estate as a hedge against inflation. Rates rose to the point that construction stopped in the late 70’s. Eventually the fed learned to balance things out and the economy generally enjoyed sustained growth from about 1984 thru 1999 with a few bumps and corrections along the road.
The real estate market got hot about the year 2000. It got so hot it drew in amatuers and speculators not just homeowners and investors. This is where the problem really manifested itself. Fannie and Freddie were quasi-government institutions. The underwriters and mortgage sellers were not. The real estate mortgage underwriters were able to get mortgages for anyone who could sign an application and pay a fee…and freddie and fannie bought the mortgages. It all depended on constantly rising real estate prices and easy credit for boorowers. The rising market assured liquidity.
Unlimited capital, easy liquidity and an endless supply of new buyers. The perfect storm really for a bubble.
The big investment banks got fat and happy bundling the “safe mortgages” and peddling them as secure investments. Investors put money into these “safe” investments with the expectation they were secured by real mortgages and had the US Govenment behind them to some degree. After all they were quasi government agencies.
Then prices started falling. Foreclosures rose and borrowers defaulted. This caused lenders to tighten up credit which slows construction which is a major driver of the economy. Then it got worse. Banks and brokers who held FNMA and GNMA bonds saw the value of their investments drop and they needed to “mark them to market”. They did and suddenly their capital bases dried up and they became insolvent overnight…not over time. Bad guess on their part and too quick to do anything about it. These were pro’s by the way. Greedy pro’s, but professionals none the less.
The market will correct itself and the fed and the administration are actually doing a decent job managing the risk and heading off some of the really bad outcomes that could happen. Right now it’s all about liquidity and stabilization of the markets and prices for real estate. In reality 98% of mortgages are NOT in default. 94% of those who want to work are working and GDP is expanding. The US is still the engine driving the world economy and will continue to do so for a long time. McCain was right when he said the fundamentals are strong. Most of the listeners, including Obama’s staff, are not literate enough in economics to understand the statement.
This is bad but the late 70’s were worse. The S&L crisis in the 80’s was also worse in my opinion. This one however is not over so who knows where it will lead.
Not to interject politics but a tax increase at this point would slide this economy off the ledge. Business needs an incentive to invest and Sarbanes-Oxley is prohibitive cost for most companies stifling growth.