My friends,
I am acutely interested in both presidential politics and the financial crisis. Given my interest in these topics, I thought I would share the following video, which offers an interesting perspective on the origins of the banking crisis and how it relates to the presidential election.
OK, so the video is a bit over the top. I acknowledge that. To some extent, I feel that the legitimate points raised in this video are undermined by the partisan nature of the last three minutes or so. While I don't agree with everything in the video, I think it is worthy of analysis because it discusses one of the causes of the financial crisis that is rarely considered in the public debate: The Community Reinvestment Act (CRA).
The CRA, as expanded by the Clinton Administration, had a worthy goal of making credit available to underserved and less affluent segments of the population. No one likes discrimination, right? Everyone should have an opportunity to buy a home, right? The problem was that banks, against their desires, were forced to provide credit and home loans to low income segments of the population.
The CRA, with help from an extended low interest rate environment, seemed to be accomplishing its objective: it was easier for everyone, particularly lower income families, to purchase a home and get approved for a mortgage. Great news, right? It certainly felt great for several years while home prices kept climbing and lenders didn’t experience materially increased defaults and foreclosures.
But then, like any other bubble, the housing market burst. Home prices declined sharply, defaults and foreclosures increased dramatically, and the mortgage-backed securities (MBS) business was turned upside down. Since the largest financial institutions holding MBS are highly and irresponsibly leveraged (some as much as 30:1), our entire financial system is experiencing a meltdown due to inadequate capital reserves. Bear Stearns. Fannie Mae. Freddie Mac. Lehman Brothers. Merrill Lynch. AIG. Washington Mutual. Wachovia. Who’s next?
I am not a huge fan of putting $700 billion of taxpayer money at risk to buy toxic MBS. While this government intervention may be necessary to prevent a financial catastrophe, it is important to remember that this government intervention is needed in part to fix problems caused by the CRA, a prior government intervention into the free markets.
And, importantly, the financial crisis was also caused by irresponsible lending practices and greed amongst financial institutions that were eager to profit as the housing market bubble inflated.
Let me know what you thought of the video and post by leaving a comment. I'm trying to generate a discussion.
10 comments:
Video is a little over the top, no? "Eye of the Tiger"?
I don't like the video very much... but I do like the point it is trying to get across. It's not Bush's or McCain's fault that we are in a finanical melt down.
I've been pretty upset about this recently... Bailing out the people on Main Street isn't any better than bailing out the people on wall street so why are the Dems so willing to help all these people who bought houses that they can't afford?
Why should I pay to bail them out people who made bad decisions, or even lied, when I'm in a rental trying to save up for a house that I can afford??
Interesting video. A little fast for me. I had to pause a bunch of times because I kept missing stuff but it definitely was interesting. Thanks for posting it. I too am a little irked with the whole bale out thing thinking that in some respect, natural consequences might be a deterrent from this sort of history repeating itself again. However I'm pretty sure that without the bailout, we'll all be hurting anyway so it looks like its the sort of a pick your poison kind of situation. Now lets talk about all the "severence" packages these CEOs of the busted companies are getting the CEO of WAMU who worked for 18 days after the last guy got forced out got 18 million for those 18 days. What the heck. Must be nice. The greed it would seem, never ends.
I have been discussing with anyone who will listen that a lot of the problem is all about greed. This has diffently more to think about and educated other with.
Jon,
I agree with Emma the video was a little over the top."eye of the Tiger" and all but it was very informative thank so you so much for sharing it.
you guys are contiually in my thoughts and in my Prayers!
Wacovia is going down to? AHHH who is next seriously?
The video was a little extreme but I think isn't too far off!
dude, i love ya but what's the deal with all the propaganda? seriously.
http://en.wikipedia.org/wiki/Propoganda
my favorite line from wikipedia (because that's where all the 'good' info is. lol.) "Propaganda is generally an appeal to emotion, contrasted to an appeal to intellect." (not trying to be offensive, mind you...i know you have an extremely keen intellect. so give me some real stuff to chew on, none of this obama-hating mccain-lovin bizness).
i'm curious to hear christina's feelings about this. we'll have to have you all over again and this time have a rowdy debate! no peacocks! lol. :P
I can't imagine why the "facts" aren't getting more attention. I have to admit that I don't quite follow the "economic crisis". Too many people bought things they couldn't afford and now the rest of us have to bail them out? When are people going to ever take responsibility for their own actions.
Shouldn't they have to bail themselves out, and then maybe the Carter/Clinton/Obama types who also made it possible can step up and clean up their own mess.
Very interesting; I am going to munch on that for a couple of days. :) Personally I started laughing at the "Rocky" theme just before "Eye of the Tiger." Refering back to Palsgraf, I'd say that even though separated by a few years and peppered with a few other poor decisions, it sure seems like the CRA may be the proximate cause! :)
Everyone will agree the video is over the top but over the top is what it will take to get people to think about things.
In my opinion, if we are going to fund and support or "bail" someone out, I would prefer it be people that know what to do with money. I do not support flooding cash to those that were irresponsible in the fist place and got themselves into trouble either buying a bigger house than needed, upgrading their cars unnecessarily and taking out that second mortgage for the new kitchen they have always wanted.
I know this will be another extreme example but look what happened when charge cards were given to all Hurricane Katrina victims. It is a fact that handouts DONT WORK and anyone that disagrees with me has not done enough work with the poor. Not only our countries fiscal policy is a mess but so is most of the American households today.
Greed and politics got us into this mess.
John, thanks for bringing up the CRA- Why is this not on the front page of every newspaper and the first segment of every news channel. I don’t care what political party you are with but one must see the direct correlation between our situation today and the CRA!
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