Last year, I posted a lengthy piece on the origins of the mortgage industry collapse and the role Congress played. I have since closed the post to comments to reduce spam. A reader found it and sent me an e-mail about a Frontline piece that is apparently full of lies. UPDATE: I should change this to say that it is not lying that is the problem but the inability of the writers to see the merits of a free market and a determination that only regulation, and by extension a command economy, can safely run the financial markets. Derivatives were not the problem. The problem was the inability to estimate risk because the GSEs, Fannie Mae and Freddie Mac, were pushing the envelope with government guarantees to their risky loans. Every step which should have warned of the risk was failing because the parties saw huge profits and, at the end of the day, a guarantee by the Treasury that nobody could lose. Moral hazard was rampant.
Typically, it blames the Bush people (actually Greenspan and shows Bush giving him a medal) even though the problems were begun under Clinton and Congress was the chief villain. Here is an example of Congress on the job. Note the tactic of hiding incriminating videos by claiming copyright violation. At least one is still visible.
Rush Limbaugh discussed it on his show and there is a link to the PBS show.
Ladies and gentlemen, they had to do what they were told. The federal government created policies that made them make these loans to people who couldn’t pay them. That’s what the subprime mortgage crisis is all about. The architects of that are Bill Clinton, Barney Frank, Chris Dodd, and a whole bunch of other minor bit players. ACORN’s involved, ACORN’s running around hassling banks if they don’t make loans to people. So now, after following mandated policy, federal law, the Community Redevelopment Act under Carter, it was put on steroids in the late nineties with Clinton and the bunch and that thing forced the banks to make these loans. And so these banks, after following orders, are now being blamed for the problem.
My point in my post was that both parties contributed and those who tried to warn or to rein in the out-of-control Fannie and Freddie were punished or warned of punishment. Ms Born was warning but she did not see that the real risk was government intervention in markets (Fannie/Freddie) not deregulation.
Or consider the experience of Wisconsin Rep. Paul Ryan, one of the GOP’s bright young lights who decided in the 1990s that Fan and Fred needed more supervision. As he held town hall meetings in his district, he soon noticed a man in a well-tailored suit hanging out amid the John Deere caps and street clothes. Mr. Ryan was being stalked by a Fannie lobbyist monitoring his every word.
On another occasion, he was invited to a meeting with the Democratic mayor of Racine, which is in his district, though he wasn’t sure why. When he arrived, Mr. Ryan discovered that both he and the mayor had been invited separately — not by each other, but by a Fannie lobbyist who proceeded to tell them about the great things Fannie did for home ownership in Racine.
When none of that deterred Mr. Ryan, Fannie played rougher. It called every mortgage holder in his district, claiming (falsely) that Mr. Ryan wanted to raise the cost of their mortgage and asking if Fannie could tell the congressman to stop on their behalf. He received some 6,000 telegrams. When Mr. Ryan finally left Financial Services for a seat on Ways and Means, which doesn’t oversee Fannie, he received a personal note from Mr. Raines congratulating him. “He meant good riddance,” says Mr. Ryan.
Yes, this was a bipartisan scandal and PBS (government funded, of course) tries to avoid the truth and blame Bush and Greenspan. Why not ? Everyone else that is government funded does. Greenspan missed the impending crisis but the PBS program missed it too.
Tags: Democrats, economy, Fannie Mae, financial, politics, Republicans
Have you actually watched the piece?
Yes. It is anti-market and pro-regulation. LTCM should have been allowed to implode and Merriweather was well known as a loose cannon. “When Genius Failed” is an excellent book. You should read it.
A similar event occurred with the Orange County bankruptcy. The PBS piece has nothing to do with the mortgage bubble that took down the world economic system. Derivatives are not the problem. The GSE subsidies and the failure of Moody and other rating agencies were the cause. Did you watch the video I embedded or read the post ?
I am no fan of Rubin, who bailed out his buddies in the Mexican bond meltdown and added to moral hazard. I also think Greenspan was too eager to see a housing bubble after the internet bubble popped.
It was amusing to see the fellow say “Communism was gone and capitalism was triumphant.” You could see how much it hurt for him to say that.
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Oh, you finally watched it AFTER you wrote your post on it based on a reader’s email and what Rush told you about it. Got it.
No, I watched it to the dreary end after writing the post. I had skimmed it. You can do that, you know, by dragging the slider.
Your point ?
They blamed the financial meltdown on derivatives and not on the politicians who created the housing bubble with incentives and punishment for banks that didn’t play ball with ACORN. That’s like blaming guns for crime.
I suspect you agree with them.
Mike,
I heard about this Frontline piece from a caller to Rush the other day. The spin was positive. I’m actually watching the documentary now. I’ve just gotten through Part 1. Here are my notes:
Review of Frontline’s “The Warning”:
Is that SPOCK narrating…?!?!
Hmm… I wonder if they’re going to remind watchers who Greenspan’s wife is…
(*SHRUG*)
O.K. Fair enough. They’re starting the story at the Clinton administration. (Though it really goes back to the Carter administration…)
Utt, oh… what happened to the Clinton administration… why have they gone straight to 2005…??? Oh… ahh… I see… the initial soundbites were just just a faint – a cover if you will – so that critics can’t say Clinton was mentioned up front. Yet after identifying Greenspan as a key villain Greenspan is then tied to BUSH. Got it!
OH… MY… GOD…! They just used a filmbite to try and portray MAURICE HINCHEY as a “congressional watchdog.” (For those who don’t know, Hinchey is Left of Left and was – and is – a main backer of “credit absent credit worthiness.”)
Ahh… FIVE presidents linked to Greenspan – starting with Ford. (Still, it’s repeated via film clip that BUSH is the main supporter of Greenspan, the man who awarded him the Presidential Medal of Freedom.)
Ahh… let’s connect “star pupil” Greenspan with “mentor” Ayn Rand and… umm… libertarianism. (Hey… fair enough to an extent – the link to Rand is dead on – but the Greenspan of the ’70’s, ’80’s, ’90’s, and particulary the 21st century was NOT the Greenspan of the ’60’s and ’70’s “Rand period.”)
Ahh… straight to Reagon… Greenspan, Rand, Reagan…
Hey – what about CARTER…??? (If memory serves it was Ford… CARTER… Reagain… et al.)
Ahh… on to Clinton. Clinton who was “forced” to sign on to “Reagan rhetoric.”
Ahh… Rubin. Goldman Sachs. Wall Street. Summers. Geithner.
OK. It’s at this point where the (false) premise is being laid: “Pro-business, anti-regulatory” BAD. (So therefore pro-regulatory would be GOOD… right…???)
BILL
Review of Frontline’s “The Warning”:
Is that SPOCK narrating…?!?!
Hmm… I wonder if they’re going to remind watchers who Greenspan’s wife is…
(*SHRUG*)
O.K. Fair enough. They’re starting the story at the Clinton administration. (Though it really goes back to the Carter administration…)
Utt, oh… what happened to the Clinton administration… why have they gone straight to 2005…??? Oh… ahh… I see… the initial sound bites were just a faint – a cover if you will – so that critics can’t say Clinton was mentioned up front. Yet after identifying Greenspan as a key villain Greenspan is then tied to BUSH. Got it!
OH… MY… GOD…! They just used a film bite to try and portray MAURICE HINCHEY as a “congressional watchdog.” (For those who don’t know, Hinchey is Left of Left and was – and is – a main backer of “credit absent credit worthiness.”)
Ahh… FIVE presidents linked to Greenspan – starting with Ford. (Still, it’s repeated via film clip that BUSH is the main supporter of Greenspan, the man who awarded him the Presidential Medal of Freedom.)
Ahh… let’s connect “star pupil” Greenspan with “mentor” Ayn Rand and… umm… libertarianism. (Hey… fair enough to an extent – the link to Rand is dead on – but the Greenspan of the ’70’s, ’80’s, ’90’s, and particularly the 21st century was NOT the Greenspan of the ’60’s and ’70’s “Rand period.”)
Ahh… straight to Reagan… Greenspan, Rand, Reagan…
Hey – what about CARTER…??? (If memory serves it was Ford… CARTER… Reagan… et al.)
Ahh… on to Clinton. Clinton who was “forced” to sign on to “Reagan rhetoric.”
Ahh… Rubin. Goldman Sachs. Wall Street. Summers. Geithner.
OK. It’s at this point where the (false) premise is being laid: “Pro-business, anti-regulatory” BAD. (So therefore pro-regulatory would be GOOD… right…???)
Ahh… we’re now up to CFTC and Brooksley Born!
Born is definitely “the hero” of this documentary, and as if you couldn’t guess… yep… she’s a big supporter of government financial regulation. (And, hey… financial regulation GOOD; lack of financial regulation BAD.)
Oh… OH…! Now I’m not a big fan of Greenspan, but the documentary maker just identified him as a FAN of FRAUD. (Hey… I’m at 38.30 if you wanna check for yourself!)
Bottom line, derivatives flourished during the Clinton administration.
Hey… if Born was concerned about fraud and the SEC wouldn’t touch it… what about the FBI… what about the Justice Department – the Clinton Justice Department?
And why didn’t poor “sleepless with worry” Born go straight to her GOOD FRIEND Hillary Rodham Clinton…??? Hmm…???
Notice how they – the Frontline folks – keep on juxtaposing what amounted to fraud, insider trading, and the activities of Greenspan, Summers, and Rubin with “capitalism” and “markets?”
Bill Clinton *is* the President during all this… right…??? Hmm… ya think our buddies at Frontline tried to interview either Bill or Hillary…???
(So… Phil Graham was “one of them;” what else is new?!)
Hmm… funny… Born gets fired and no talk of her ultimate boss – Bill Clinton – being responsible. Oh, well…
Anyway… all in all… this documentary gave us a single mantra: REGULATE. This is a mantra without context, without meat, without specificity. Hell, when you look for the “there” there, it’s not even clear whether the film makers believe derivatives should exist! (I personally believe they shouldn’t.)
BILL
Deriatives equaled more than the global economy at one point and Lehman and Bear Strearns had leveraged ratios of 30 to 1, but you want me to believe that Fannie and Freddie at a fraction of those values caused the collapse, rather than the personal testimony of Brooksley Born, Alan Greenspan (in front of Waxman’s committee), and the former head of the SEC?
eerie, how a myth spreads in partisan circles. Anyway, I have two articles for you: one from noted communist Business Week
http://www.businessweek.com/investing/insights/blog/archives/2008/09/fannie_mae_and.html
And one from a financial blog http://bigpicture.typepad.com/comments/2008/10/fannie-mae-and.html#more
Both contain links to actual documents, unlike say the Rush Limaugh show, and both feature people who actually graduated college! Not that Rush isn’t an expert on macroeconomics and the sort…I mean, he isn’t, but he is damn good at blaming poor people or government agencies for stuff.
Did he tell any cabinet secretaries to screw him yesterday. I was busy and missed most of the show
One…it was the domino collapse of the derivatives, not the derivatives per se, that triggered the mortgage tsunami which is nowhere the end. If ever mark to market comes to pass, it will be revealed to what extent the banks and other financial institutions (eg. insurance holding cos) are carrying worthless mortgage backed assets at *full* value. That is one reason the bailout money has been hoarded to increase their book values and will never see the light of day.
Two…the mortgage backed derivatives were piggy-backed one on top of another by nothing other than paper created by Wall Street for enormous fees, and sold across the globe to institutions suckered into complacency by the early successes of the carry trade profits and the supposed virtual risk free opportunity afforded by purchases of third party portfolio insurance. Which we now know was as worthless as the signatures on the documents. Liar loans at the top of the pyramid, if you will. Unfortunately, these arrangements have much further to go before they are unwound, if ever. I suspect there will be a calamitous resolution of these derivatives. Most likely by currency and bond devaluations as seen time after time historically. Typically associated with the demise of a nation.
Tim, calm down. I don’t listen to Rush Limbaugh unless I am on a trip and can’t find the usual shows (Dennis Prager) i listen to. Derivatives made incompetence more dangerous and the people using them had far too much confidence in them. The bond rating services are also at fault but the housing bubble started with Fannie and Freddie. Greenspan was largely to blame in the Bush years but he didn’t push the envelop on mortgages and liar loans like Carter and Clinton and Barney Frank and the others in Congress did.
If you want to blame derivatives, at least get your facts straight. I linked that in an earlier post but you are so sure I’m a “dittohead” that you didn’t look.
This would be good reading, too
And this .
I like this addition:
THERE’S ANOTHER BIG difference between trading CDS and casino gambling. When you put $10 on black 22, you’re pretty sure the casino will pay off if you win. The CDS market offers no such assurance. One reason the market grew so quickly was that hedge funds poured in, sensing easy money. And not just big, well-established hedge funds but a lot of upstarts. So in some cases, giant financial institutions were counting on collecting money from institutions only slightly more solvent than your average minimart. The danger, of course, is that if a hedge fund suddenly has to pay off on a lot of CDS, it will simply go out of business. “People have been insuring risks that they can’t insure,” says Peter Schiff, the president of Euro Pacific Capital and author of Crash Proof, which predicted doom for Fannie and Freddie, among other things. “Let’s say you’re writing fire insurance policies, and every time you get the [premium], you spend it. You just assume that no houses are going to burn down. And all of a sudden there’s a huge fire and they all burn down. What do you do? You just close up shop.”