Authored by William Robert Barber
The polarized respondent to the query: What caused the 2008 financial crisis is intriguing. Admittedly, as a conservative, I am particularly interested in the liberal progressives’ deductions, inferences, and ultimate conclusion; however, the Republicans’ reasoning for not engaging their congressional counter-parts on the Fannie/Freddie issue more forcefully is also of quirkiest interest.
The Democrats accuse the greedy Wall Street personas, the reproachable bankers, insufficient regulation for the financial meltdown, and resolve that capitalism, the free enterprise system, and possibly even the private ownership of certain property is effectually an outdated economic methodology; one that requires an extensive European modeled upgrade.
For the Republicans, conservatives as well as Rhinos, the cause of the financial crisis is simple with most of the blame attributed to the score upon score of years the Democrats controlled Fannie and Freddie. This Democratic control of the means to finance coupled in with the idea, that home ownership (like healthcare) is a right, and the forcing of banks (by congress via legislation) to lend money to those that could not substantiate financial wherewithal was by any reasonable assessment a financial catastrophe awaiting opportunity. To add more wood to this fire, banks-broker-dealers, and mortgage lenders found an additional length of rope to hang everyone when they tied in the creative financial instruments of mortgage-interest securitization, asset-backed obligations, and mortgage derivatives pledged to underlying value. Naturally, there were warranted allies to fill in all of the blanks. Exampled by government created rating agencies who took a look at the transaction and rated them AAA or AA+. The downside was protected by the large, highly rated, multijurisdictional AIG insurance corporation; this was the ‘put’ surety to cover the outside chance of the real estate market imploding to the downside.
Well, now that the blame has been assigned, rightfully or wrongfully, along ideological lines, and the blame-game considered passé, damage complete, the supposed rescue in place; now the Securities and Exchange Commission files a complaint. The charge is against former Fannie and Freddie executives. Claiming that the rascals held a lot more subprime loans than they publicly called subprime. Suggesting that they in collusion with private sector entities Fannie and Freddie drove down underwriting standards such as co-sponsoring in 1999 of Countrywide’s “Fast and Easy” program. A lending policy that gave buyers loans without proof of their income or assets. Interestingly, the lawsuit is prompted not by justice for the public but to protect the shareholders of Fannie and Freddie?
Imagine right up to the moment of seizure the Bush administration along with representatives Frank and Dodd were touting that Fannie Mae and Freddie Mac were well-capitalize and solvent.
In every trade there needs to be a buyer and a seller. The only real requirement is that parties agree on a price. On the option market there is a ‘call’ to the upside and a ‘put’ to the downside. Real estate is a commodity. Economies of all sorts ebb and tide; rise and fall, such is the natural order of a free market. Bets were made that favored an ever appreciating real estate value; surety to the downside was paid in the form of a premium to AIG to protect the depreciative possibility.
What went wrong? No one knew the magnitude of bets made to the upside; AIG did not charge enough of a premium to offset the risk. When the real estate market crashed there was a run on liquidity AIG ran out of cash/liquidity and could not pay off on the surety to the downside.
The bugle blasted. The government to the rescue, they printed the paper and saved the day, or did they?
Politicians protect the ideological values of their constituencies. They do so at the cost of fiscal discipline, prudence, and the logic of common deductive sense. Politicians strive to attain and retain power. If we citizen want government to function we must enact term limits. Term limits eliminate the possibility of professional politicians and therefore to a large degree we eliminate the reasoning of enacting stupid for the sake of reelection.
My fear of course is that Obama will be reelected, government consumes more of the private sector, and America declines into another European like country. I am not sure we can print enough paper to get us out of that jam.