Bush Had Nothing To Do With Financial Crisis

Editorial: Bush Had Nothing To Do With Financial Crisis
By Noel Sheppard
February 8, 2009 - 13:54 ET

As the financial crisis hit last September, NewsBusters regularly informed readers of the truth behind the matter, and that media assertions the Bush administration was to blame were politically motivated falsehoods intentionally designed to get Barack Obama elected president.

On Saturday, the financial publication Barron's offered readers an editorial by Hoover Institution visiting fellow Scott S. Powell which presented facts that were routinely withheld from the public during the campaign assuring the Democrat candidate victory in November.

More importantly, Powell offered some compelling insights into the dangers of partisanship which sadly is negatively impacting today's stimulus package discussion.

But before we get there, this was Powell's case as to who was really to blame for this crisis (h/t Hot Air):

CONTRARY TO A VIEW POPULARIZED DURING THE 2008 presidential election season, the current economic crisis was not the result of deregulation.

The Bush administration made many mistakes, but deregulation was not one of them.

Not only was there no major deregulation passed during the past eight years, but the Bush administration and a Republican Congress approved the most sweeping financial-market regulation in decades.

The bipartisan Sarbanes-Oxley Act was enacted in 2002 to prevent corporate fraud and restore investor confidence after the collapse of Enron and WorldCom. It failed to prevent the accounting fraud and influence-peddling scandals at Fannie Mae and Freddie Mac. And even after those scandals were widely understood, regulators sent Fannie and Freddie back into the market to continue buying subprime loans, lending and borrowing with implied taxpayer backing.

Across the government, the Bush administration supported new regulations that added almost 1,000 pages a year to the Federal Register, nearly a record. If this is insufficient regulation, it's hard to imagine a scope that would be effective.

Powell of course was spot on. Sarbanes-Oxley was indeed a comprehensive and encompassing piece of legislation specifically designed to prevent a repeat of the tech bubble and Enron. Yet, as the financial crisis raged last fall, media members who wanted to blame the problem on Bush and deregulation conveniently forgot this sweeping bill.

But there's more:

Our present crisis began in the 1970s, during the Carter administration, with passage of the Community Reinvestment Act to stem bank redlining and liberalize lending in order to extend home ownership in lower-income communities. Then in the 1990s, the Department of Housing and Urban Development took a fateful step by getting the GSEs to accept subprime mortgages. With Fannie and Freddie easing credit requirements on loans they would purchase from lenders, banks could greatly increase lending to borrowers unqualified for conventional loans. In the name of extending affordable housing, this broadened the acceptability of risky loans throughout the financial system.

The risk lurking in the GSE portfolios was acknowledged in the Bush administration's first fiscal-year budget, released in April 2001. It stated that Fannie and Freddie were "a potential problem" because "financial trouble of a large GSE could cause strong repercussions in the financial markets, affecting federally insured entities and economic activity." Fed Chairman Alan Greenspan issued repeated warnings that the GSEs "placed the total financial system of the future at substantial risk." Such warnings went unheeded even after accounting scandals rocked Fannie and Freddie.

Yep. The Bush administration began warning of problems with Fannie and Freddie just three months into its first term, and continued doing so for years. But you wouldn't know that from how the press reported things last fall, would you?

However, what's done is done. The press wanted Obama to be president, and by dishonestly blaming Bush for the financial crisis, so-called journalists were able to paint John McCain as also being at fault thereby making it impossible for him to win.

Yet, Powell left us with a warning concerning this matter that is quite important given economic stimulus plans currently being discussed:

But the lesson should be clear that socializing failed businesses -- whether in housing, health care or in Detroit -- is not a long-term solution. Expanding government's intrusion into the private sector doesn't come without great risk. The renewing and self-correcting nature of the private sector is largely lost in the public sector, where accountability is impaired by obfuscation of responsibility, and where special interests benefit even when the public good is ill-served.

George Washington also warned against excessive partisanship, which distracts public councils and enfeebles public administration. Rather than blaming the party in power or the party formerly in power, the nation should stop living in denial of the mistakes of both parties.

Spreading failure across the entire economy risks turning a recession into a depression. Regulatory reform now must foster responsible behavior and financial accountability. Far better for our citizenry and businesses to have a strength and resourcefulness that comes from creativity, honesty and self-reliance than to have a growing dependence on a profligate government.

Powell touched on a lot of issues here that should be at the front of the current stimulus debate but sadly aren't.

In particular, the partisanship in the nation today prevents an honest assessment of the past thereby dooming us to repeat the same mistakes.

Take for example the Great Depression. For almost 80 years the left and their media minions have done everything within their power to blame all that era's ills on Herbert Hoover while crediting Franklin D. Roosevelt with the eventual economic recovery despite the former presiding over only two years of the Depression.

Yet, after eight years of unprecedented federal spending under Roosevelt, the unemployment rate was still a staggering 14.6 percent in 1940, and the Gross Domestic Product was still under its pre-Depression level.

Isn't this important, especially since our federal debt is already quite high?

Unfortunately, because of the partisanship, such can't be discussed. The left have so much time and money invested in Roosevelt supposedly being the greatest president of the 20th century that an honest assessment of what did and did not work back then is verboten.

But isn't that absurd? Assuming we really are on the verge of another Depression -- an assumption I don't necessarily agree with yet, mind you -- shouldn't we be examining everything we did before and during the last one in order to chart a more effective course this time?

The fact is the last Depression began in 1931 and despite all Roosevelt's good intentions didn't end until America entered World War II in 1941. Once the war ended, we went back into a very serious recession suggesting that nothing Roosevelt implemented had a lasting positive economic impact.

Isn't this relevant, especially given the Congressional Budget Office's report last week predicting current stimulus plans will actually hurt the economy in the long run?

Sadly, the answer is "No," for the left are so protective of Roosevelt's legacy that any analysis of his economic policies is totally unacceptable even as our nation grapples with solutions to our current financial problems.

Is this the way adults should behave? Is this really the best we can get from our elected officials?

Given the known failings and wastefulness of last year's TARP, wouldn't we be well-advised to halt all current stimulus discussions until a thorough and impartial analysis of previous plans -- INCLUDING those implemented by us during the '30s and by Japan during the '90s -- was accomplished thereby increasing the likelihood of success while reducing the chance of us making exactly the same mistakes?

If the answer is "No," the only conclusion is that Party, at this critical juncture in our nation's history, is indeed more important than policy, and partisanship is asphyxiating our capital.

George Washington must be rolling over in his grave.

Link

Grim17 wrote:Editorial: Bush Had Nothing To Do With Financial Crisis
By Noel Sheppard
February 8, 2009 - 13:54 ET

As the financial crisis hit last September, NewsBusters regularly informed readers of the truth behind the matter, and that media assertions the Bush administration was to blame were politically motivated falsehoods intentionally designed to get Barack Obama elected president.

On Saturday, the financial publication Barron's offered readers an editorial by Hoover Institution visiting fellow Scott S. Powell which presented facts that were routinely withheld from the public during the campaign assuring the Democrat candidate victory in November.

More importantly, Powell offered some compelling insights into the dangers of partisanship which sadly is negatively impacting today's stimulus package discussion.

But before we get there, this was Powell's case as to who was really to blame for this crisis (h/t Hot Air):

CONTRARY TO A VIEW POPULARIZED DURING THE 2008 presidential election season, the current economic crisis was not the result of deregulation.

The Bush administration made many mistakes, but deregulation was not one of them.

Not only was there no major deregulation passed during the past eight years, but the Bush administration and a Republican Congress approved the most sweeping financial-market regulation in decades.

The bipartisan Sarbanes-Oxley Act was enacted in 2002 to prevent corporate fraud and restore investor confidence after the collapse of Enron and WorldCom. It failed to prevent the accounting fraud and influence-peddling scandals at Fannie Mae and Freddie Mac. And even after those scandals were widely understood, regulators sent Fannie and Freddie back into the market to continue buying subprime loans, lending and borrowing with implied taxpayer backing.

Across the government, the Bush administration supported new regulations that added almost 1,000 pages a year to the Federal Register, nearly a record. If this is insufficient regulation, it's hard to imagine a scope that would be effective.

Powell of course was spot on. Sarbanes-Oxley was indeed a comprehensive and encompassing piece of legislation specifically designed to prevent a repeat of the tech bubble and Enron. Yet, as the financial crisis raged last fall, media members who wanted to blame the problem on Bush and deregulation conveniently forgot this sweeping bill.

But there's more:

Our present crisis began in the 1970s, during the Carter administration, with passage of the Community Reinvestment Act to stem bank redlining and liberalize lending in order to extend home ownership in lower-income communities. Then in the 1990s, the Department of Housing and Urban Development took a fateful step by getting the GSEs to accept subprime mortgages. With Fannie and Freddie easing credit requirements on loans they would purchase from lenders, banks could greatly increase lending to borrowers unqualified for conventional loans. In the name of extending affordable housing, this broadened the acceptability of risky loans throughout the financial system.

The risk lurking in the GSE portfolios was acknowledged in the Bush administration's first fiscal-year budget, released in April 2001. It stated that Fannie and Freddie were "a potential problem" because "financial trouble of a large GSE could cause strong repercussions in the financial markets, affecting federally insured entities and economic activity." Fed Chairman Alan Greenspan issued repeated warnings that the GSEs "placed the total financial system of the future at substantial risk." Such warnings went unheeded even after accounting scandals rocked Fannie and Freddie.

Yep. The Bush administration began warning of problems with Fannie and Freddie just three months into its first term, and continued doing so for years. But you wouldn't know that from how the press reported things last fall, would you?

However, what's done is done. The press wanted Obama to be president, and by dishonestly blaming Bush for the financial crisis, so-called journalists were able to paint John McCain as also being at fault thereby making it impossible for him to win.

Yet, Powell left us with a warning concerning this matter that is quite important given economic stimulus plans currently being discussed:

But the lesson should be clear that socializing failed businesses -- whether in housing, health care or in Detroit -- is not a long-term solution. Expanding government's intrusion into the private sector doesn't come without great risk. The renewing and self-correcting nature of the private sector is largely lost in the public sector, where accountability is impaired by obfuscation of responsibility, and where special interests benefit even when the public good is ill-served.

George Washington also warned against excessive partisanship, which distracts public councils and enfeebles public administration. Rather than blaming the party in power or the party formerly in power, the nation should stop living in denial of the mistakes of both parties.

Spreading failure across the entire economy risks turning a recession into a depression. Regulatory reform now must foster responsible behavior and financial accountability. Far better for our citizenry and businesses to have a strength and resourcefulness that comes from creativity, honesty and self-reliance than to have a growing dependence on a profligate government.

Powell touched on a lot of issues here that should be at the front of the current stimulus debate but sadly aren't.

In particular, the partisanship in the nation today prevents an honest assessment of the past thereby dooming us to repeat the same mistakes.

Take for example the Great Depression. For almost 80 years the left and their media minions have done everything within their power to blame all that era's ills on Herbert Hoover while crediting Franklin D. Roosevelt with the eventual economic recovery despite the former presiding over only two years of the Depression.

Yet, after eight years of unprecedented federal spending under Roosevelt, the unemployment rate was still a staggering 14.6 percent in 1940, and the Gross Domestic Product was still under its pre-Depression level.

Isn't this important, especially since our federal debt is already quite high?

Unfortunately, because of the partisanship, such can't be discussed. The left have so much time and money invested in Roosevelt supposedly being the greatest president of the 20th century that an honest assessment of what did and did not work back then is verboten.

But isn't that absurd? Assuming we really are on the verge of another Depression -- an assumption I don't necessarily agree with yet, mind you -- shouldn't we be examining everything we did before and during the last one in order to chart a more effective course this time?

The fact is the last Depression began in 1931 and despite all Roosevelt's good intentions didn't end until America entered World War II in 1941. Once the war ended, we went back into a very serious recession suggesting that nothing Roosevelt implemented had a lasting positive economic impact.

Isn't this relevant, especially given the Congressional Budget Office's report last week predicting current stimulus plans will actually hurt the economy in the long run?

Sadly, the answer is "No," for the left are so protective of Roosevelt's legacy that any analysis of his economic policies is totally unacceptable even as our nation grapples with solutions to our current financial problems.

Is this the way adults should behave? Is this really the best we can get from our elected officials?

Given the known failings and wastefulness of last year's TARP, wouldn't we be well-advised to halt all current stimulus discussions until a thorough and impartial analysis of previous plans -- INCLUDING those implemented by us during the '30s and by Japan during the '90s -- was accomplished thereby increasing the likelihood of success while reducing the chance of us making exactly the same mistakes?

If the answer is "No," the only conclusion is that Party, at this critical juncture in our nation's history, is indeed more important than policy, and partisanship is asphyxiating our capital.

George Washington must be rolling over in his grave.

Link

Excellent post Sir. I would also be willing to bet that this will never make thee 6 oclock news either.

I agree that the majority of this problem did not come from deregulation, and it's not entirely Bush's fault. I place most of my blame on Dick Cheney and the ludicrous civilian contracts given to Halliburton and KBR costing the government (and taxpayers) millions of dollars (possibly more, who really knows) for jobs that our military could've done. Our nation is in trillions of dollars of debt, and we've spent over a trillion on the war in Iraq. It's that right there that makes me think that even if the housing market was more stable, even if we had more jobs, we would STILL be in bad condition.

Dick Cheney??? Halliburton??? They have absolutely nothing to do with the recession we're in.

The main reason we are hurting so badly right now, was laid out in that article:

"Our present crisis began in the 1970s, during the Carter administration, with passage of the Community Reinvestment Act to stem bank redlining and liberalize lending in order to extend home ownership in lower-income communities. Then in the 1990s, the Department of Housing and Urban Development took a fateful step by getting the GSEs to accept subprime mortgages. With Fannie and Freddie easing credit requirements on loans they would purchase from lenders, banks could greatly increase lending to borrowers unqualified for conventional loans. In the name of extending affordable housing, this broadened the acceptability of risky loans throughout the financial system."

Excellent post Sir. I would also be willing to bet that this will never make thee 6 oclock news either.

I think you're right and there's a number of reasons it won't. Of course Bush isn't solely responsible and deregulation isn't the only cause. But how the newsbusted writer gets to Bush had nothing to do with the Financial Crisis from a Barrons editorial titled The Culprit is All of Us and starts out with

The Bush administration made many mistakes, but deregulation was not one of them.

is an interesting study in partisan hackery.

from the Barrons article, which is largely an anti-business and financial regulation piece by a libertarian who places blame on both parties states:

Across the government, the Bush administration supported new regulations that added almost
1,000 pages a year to the Federal Register, nearly a record. If this is insufficient regulation, it's hard to imagine a scope that would be effective.

This is a true but misleading statement. Any new regulation or alteration of existing regulations is
recorded in the Federal Register.A regulation that weakens or eliminates existing regulations is a
new regulation.And most aren't related to the financial sector. An example of some of the last
regulations implemented or proposed under the Bush administration:

-Permit health care professionals at federally funded institutions to opt out of providing
abortion and sterilization if such processes create "a problem of conscience for the provider.

-Require drug testing for miners. Critics have questioned why this would be a priority given the
high safety concerns associated with mining facilities.

-Change how occupational safety agencies calculate job-risk for miners, despite opposition from
health and safety groups, which said it would "undermine" health rules.

- Allow Interior Department officials to approve development projects without full consulting
federal wildlife and habitat scientists on the impact on endangered species.

-Ease rules for police on allowing them to launch criminal intelligence investigation if the
target is suspected of links to terrorism. Proponents say it brings policy in line with current process but critics say it infringes on first amendment rights.

http://abcnews.go.com/Blotter/Story?id=6146929&page=1

Whether one agrees with any or all of these regulations is irrelevant.The point is that using the
number of overall regulations doesn't support the authors thesis.

the newsbuster writer quotes the following from Barrons:

Our present crisis began in the 1970s, during the Carter administration, with passage of the Community Reinvestment Act to stem bank redlining and liberalize lending in order to extend home ownership in lower-income communities. Then in the 1990s, the Department of Housing and Urban Development took a fateful step by getting the GSEs to accept subprime mortgages. With Fannie and Freddie easing credit requirements on loans they would purchase from lenders, banks could greatly increase lending to borrowers unqualified for conventional loans. In the name of extending affordable housing, this broadened the acceptability of risky loans throughout the financial system.

The risk lurking in the GSE portfolios was acknowledged in the Bush administration's first fiscal-year budget, released in April 2001. It stated that Fannie and Freddie were "a potential problem" because "financial trouble of a large GSE could cause strong repercussions in the financial markets, affecting federally insured entities and economic activity." Fed Chairman Alan Greenspan issued repeated warnings that the GSEs "placed the total financial system of the future at substantial risk." Such warnings went unheeded even after accounting scandals rocked Fannie and Freddie.

Yet he omits:

The poor and middle class were encouraged to live beyond their means and buy houses they couldn't afford; speculators were lured into excessive risk-taking; banks were rewarded for lowering their loan standards; and Wall Street found new windfall profits from securitizing and reselling bad loans in bulk. With the support of regulators, credit-rating agencies provided cover for the whole charade.

That would be George W Bush's "Ownership Society" he's referring to.

By the newsbuster writer:

Take for example the Great Depression. For almost 80 years the left and their media minions have done everything within their power to blame all that era's ills on Herbert Hoover while crediting Franklin D. Roosevelt with the eventual economic recovery despite the former presiding over only two years of the Depression.
Yet, after eight years of unprecedented federal spending under Roosevelt, the unemployment rate was still a staggering 14.6 percent in 1940, and the Gross Domestic Product was still under its pre-Depression level.

Isn't this important, especially since our federal debt is already quite high?


The fact is the last Depression began in 1931 and despite all Roosevelt's good intentions didn't end until America entered World War II in 1941. Once the war ended, we went back into a very serious recession suggesting that nothing Roosevelt implemented had a lasting positive economic impact.

This whole argument is based on a single book by an Austrian school economist. His theories and analysis of the hard data has not gained any consensus among economists or historians, and from the little I've read about it is being largely dismissed. Not being an economist I'll tend to trust the majority of experts. I do know that the unemployment when Roosevelt took office was +/- 25%. went down to 10% by '35-36 and then started going back up in '37. The uptick has generally been attributed to concessions to the financial and businesses sectors and a reduction in government programs. In any event, a reduction of unemployment from 25% to 14.6% was hardly a failure.

But isn't that absurd? Assuming we really are on the verge of another Depression -- an assumption I don't necessarily agree with yet, mind you -- shouldn't we be examining everything we did before and during the last one in order to chart a more effective course this time?

That's what economists and economic historians do.
And they seem to have come to a pretty wide, non-partisan concensus on one aspect anyway:

Economists Agree Time Is of the Essence for Stimulus

The newsbusted author also makes mention about the national debt and defict. There's an interesting chart tracking the history of that, but I couldn't find a copy on the net without blatantly partisan comments scrawled all over it so I won't post it. But the objective raw data is all available from the Treasury Dept. if you want to match the years with the administrations and parties in control:
Historical Debt Outstanding – Annual

Good job thomasjay. That was a well thought out response.

I think you're right and there's a number of reasons it won't. Of course Bush isn't solely responsible and deregulation isn't the only cause. But how the newsbusted writer gets to Bush had nothing to do with the Financial Crisis from a Barrons editorial titled The Culprit is All of Us and starts out with "The Bush administration made many mistakes, but deregulation was not one of them.", is an interesting study in partisan hackery.

I'm sorry, but deregulation isn't even a factor from everything I've read. It was government regulations that led to this mess, and the Barrons article was addressing those people on the political left who have tried to pin it on deregulation by the Bush administration, rather than telling the truth of the cause.

This is a true but misleading statement. Any new regulation or alteration of existing regulations is
recorded in the Federal Register.A regulation that weakens or eliminates existing regulations is a
new regulation.And most aren't related to the financial sector. An example of some of the last
regulations implemented or proposed under the Bush administration...

...Whether one agrees with any or all of these regulations is irrelevant.The point is that using the
number of overall regulations doesn't support the authors thesis.

I agree with you here. Listing the things Bush "regulated" as an argument against those who blame him for "deregulating" things, doesn't prove a damn thing. But the reason I believe he used that argument is because those who blamed "deregulation" by Bush, have never pointed out anything specific. In fact, I believe it isn't a matter of what he deregulated at all... It's really about how he didn't impose more regulations, which I believe he left up to congress to hammer out, but unfortunately the democrats didn't see any need in doing.

Yet he omits:

"The poor and middle class were encouraged to live beyond their means and buy houses they couldn't afford; speculators were lured into excessive risk-taking; banks were rewarded for lowering their loan standards; and Wall Street found new windfall profits from securitizing and reselling bad loans in bulk. With the support of regulators, credit-rating agencies provided cover for the whole charade."

That would be George W Bush's "Ownership Society" he's referring to.

I think you are wrong. Including that paragraph wouldn't have changed a thing. I think it points out the snowball effect that took place as a direct result of HUD policy implemented during the Clinton administration, which in essence provided a government safety net for financial institutions. It allowed them to lower their credit standards without any substantial risk. That's was the birth of the sub-prime loan crisis, that led us to where we are today.

"But isn't that absurd? Assuming we really are on the verge of another Depression -- an assumption I don't necessarily agree with yet, mind you -- shouldn't we be examining everything we did before and during the last one in order to chart a more effective course this time?"


That's what economists and economic historians do.
And they seem to have come to a pretty wide, non-partisan concensus on one aspect anyway:

Economists Agree Time Is of the Essence for Stimulus

The newsbusted author also makes mention about the national debt and defict. There's an interesting chart tracking the history of that, but I couldn't find a copy on the net without blatantly partisan comments scrawled all over it so I won't post it. But the objective raw data is all available from the Treasury Dept. if you want to match the years with the administrations and parties in control:
Historical Debt Outstanding – Annual

I acknowledge that if the sub-prime crisis did not exist, we would likely still be in a recession today anyway. The difference is, it would have been a normal recession like the one we had in the late 80's and at the end of the Clinton years. One that wouldn't require a trillion dollar bailout. In fact, the deficit that we incurred under the Bush administration had been cut in half at the end of 2006, 2 years ahead of schedule, but unfortunately that's when the housing market took a downward turn and things began to unravel.

So who cares who's fault it is how about just fixing the problem instead?

Doesn't it seem that politicians are more interested in telling you who to blame for it, and who to be afraid of, than telling you the actual way to get it taken care of and making sure that it don't happen again.

lisan23 wrote:I agree that the majority of this problem did not come from deregulation....

What? Um, the whole problem is that the line between banks and Wall Street was disintegrated and they took on debt they possibly could not cover....

Grim17 wrote:Dick Cheney??? Halliburton??? They have absolutely nothing to do with the recession we're in.

The main reason we are hurting so badly right now, was laid out in that article:

"Our present crisis began in the 1970s, during the Carter administration, with passage of the Community Reinvestment Act to stem bank redlining and liberalize lending in order to extend home ownership in lower-income communities. Then in the 1990s, the Department of Housing and Urban Development took a fateful step by getting the GSEs to accept subprime mortgages. With Fannie and Freddie easing credit requirements on loans they would purchase from lenders, banks could greatly increase lending to borrowers unqualified for conventional loans. In the name of extending affordable housing, this broadened the acceptability of risky loans throughout the financial system."

LMFAO!! And there in lies the Republican talking points buck passing fantasy!

Did Carter have some play in this? Yes he did, but not because of an inconsequential act often cited, but never with any actual evidence it had ANY impact on the Housing Bubble other than in the fantasy life of dopes who enjoy letting Wall Street brokers and bankers get away with murder!


Foreclosure Phil

NEWS: Years before Phil Gramm was a McCain campaign adviser and a lobbyist for a Swiss bank at the center of the housing credit crisis, he pulled a sly maneuver in the Senate that helped create today's subprime meltdown.

By David Corn

July/August 2008 Issue


Who's to blame for the biggest financial catastrophe of our time? There are plenty of culprits, but one candidate for lead perp is former Sen. Phil Gramm. Eight years ago, as part of a decades-long anti-regulatory crusade, Gramm pulled a sly legislative maneuver that greased the way to the multibillion-dollar subprime meltdown. Yet has Gramm been banished from the corridors of power? Reviled as the villain who bankrupted Middle America? Hardly. Now a well-paid executive at a Swiss bank, Gramm cochairs Sen. John McCain's presidential campaign and advises the Republican candidate on economic matters. He's been mentioned as a possible Treasury secretary should McCain win. That's right: A guy who helped screw up the global financial system could end up in charge of US economic policy. Talk about a market failure.

Gramm's long been a handmaiden to Big Finance. In the 1990s, as chairman of the Senate banking committee, he routinely turned down Securities and Exchange Commission chairman Arthur Levitt's requests for more money to police Wall Street; during this period, the sec's workload shot up 80 percent, but its staff grew only 20 percent. Gramm also opposed an sec rule that would have prohibited accounting firms from getting too close to the companies they audited—at one point, according to Levitt's memoir, he warned the sec chairman that if the commission adopted the rule, its funding would be cut. And in 1999, Gramm pushed through a historic banking deregulation bill that decimated Depression-era firewalls between commercial banks, investment banks, insurance companies, and securities firms—setting off a wave of merger mania.

But Gramm's most cunning coup on behalf of his friends in the financial services industry—friends who gave him millions over his 24-year congressional career—came on December 15, 2000. It was an especially tense time in Washington. Only two days earlier, the Supreme Court had issued its decision on Bush v. Gore. President Bill Clinton and the Republican-controlled Congress were locked in a budget showdown. It was the perfect moment for a wily senator to game the system. As Congress and the White House were hurriedly hammering out a $384-billion omnibus spending bill, Gramm slipped in a 262-page measure called the Commodity Futures Modernization Act. Written with the help of financial industry lobbyists and cosponsored by Senator Richard Lugar (R-Ind.), the chairman of the agriculture committee, the measure had been considered dead—even by Gramm. Few lawmakers had either the opportunity or inclination to read the version of the bill Gramm inserted. "Nobody in either chamber had any knowledge of what was going on or what was in it," says a congressional aide familiar with the bill's history.

It's not exactly like Gramm hid his handiwork—far from it. The balding and bespectacled Texan strode onto the Senate floor to hail the act's inclusion into the must-pass budget package. But only an expert, or a lobbyist, could have followed what Gramm was saying. The act, he declared, would ensure that neither the sec nor the Commodity Futures Trading Commission (cftc) got into the business of regulating newfangled financial products called swaps—and would thus "protect financial institutions from overregulation" and "position our financial services industries to be world leaders into the new century."

Subprime 1-2-3
Don't understand credit default swaps? Don't worry—neither does Congress. Herewith, a step-by-step outline of the subprime risk betting game. —Casey Miner

Subprime borrower: Has a few overdue credit card bills; goes to a storefront lender owned by major bank; takes out a $100,000 home-equity loan at 11 percent interest

Lending bank: Assuming housing prices will only go up, and that investors will want to buy mortgage loan packages, makes as many subprime loans as it can

Investment bank: Packages subprime mortgages into bundles called collateralized debt obligations, or cdos, then sells those cdos to eager investors. Goes to insurer to get protection for those investors, thus passing the default risk to the insurer through a "credit default swap."

Insurer: Thinking that default risk is low, agrees to cover more money than it can pay out, in exchange for a premium

Rating agency: On basis of original quality of loans and insurance policy they are "wrapped" in, issues a rating signaling certain slices of the cdo are low risk (aaa), medium risk (bbb), or high risk (ccc)

Investor: Borrows more money from investment bank to load up on cdo slices; makes money from interest payments made to the "pool" of loans. No one loses—as long as no one tries to cash in on the insurance.
It didn't quite work out that way. For starters, the legislation contained a provision—lobbied for by Enron, a generous contributor to Gramm—that exempted energy trading from regulatory oversight, allowing Enron to run rampant, wreck the California electricity market, and cost consumers billions before it collapsed. (For Gramm, Enron was a family affair. Eight years earlier, his wife, Wendy Gramm, as cftc chairwoman, had pushed through a rule excluding Enron's energy futures contracts from government oversight. Wendy later joined the Houston-based company's board, and in the following years her Enron salary and stock income brought between $915,000 and $1.8 million into the Gramm household.)

But the Enron loophole was small potatoes compared to the devastation that unregulated swaps would unleash. Credit default swaps are essentially insurance policies covering the losses on securities in the event of a default. Financial institutions buy them to protect themselves if an investment they hold goes south. It's like bookies trading bets, with banks and hedge funds gambling on whether an investment (say, a pile of subprime mortgages bundled into a security) will succeed or fail. Because of the swap-related provisions of Gramm's bill—which were supported by Fed chairman Alan Greenspan and Treasury secretary Larry Summers—a $62 trillion market (nearly four times the size of the entire US stock market) remained utterly unregulated, meaning no one made sure the banks and hedge funds had the assets to cover the losses they guaranteed.

In essence, Wall Street's biggest players (which, thanks to Gramm's earlier banking deregulation efforts, now incorporated everything from your checking account to your pension fund) ran a secret casino. "Tens of trillions of dollars of transactions were done in the dark," says University of San Diego law professor Frank Partnoy, an expert on financial markets and derivatives. "No one had a picture of where the risks were flowing." Betting on the risk of any given transaction became more important—and more lucrative—than the transactions themselves, Partnoy notes: "So there was more betting on the riskiest subprime mortgages than there were actual mortgages." Banks and hedge funds, notes Michael Greenberger, who directed the cftc's division of trading and markets in the late 1990s, "were betting the subprimes would pay off and they would not need the capital to support their bets."

These unregulated swaps have been at "the heart of the subprime meltdown," says Greenberger. "I happen to think Gramm did not know what he was doing. I don't think a member in Congress had read the 262-page bill or had thought of the cataclysm it would cause." In 1998, Greenberger's division at the cftc proposed applying regulations to the burgeoning derivatives market. But, he says, "all hell broke loose. The lobbyists for major commercial banks and investment banks and hedge funds went wild. They all wanted to be trading without the government looking over their shoulder."

Now, belatedly, the feds are swooping in—but not to regulate the industry, only to bail it out, as they did in engineering the March takeover of investment banking giant Bear Stearns by JPMorgan Chase, fearing the firm's collapse could trigger a dominoes-like crash of the entire credit derivatives market.

No one in Washington apologizes for anything, so it's no surprise that Gramm has failed to issue any mea culpa. Post-Enron, says Greenberger, the senator even called him to say, "You're going around saying this was my fault—and it's not my fault. I didn't intend this."

Whether or not Gramm had bothered to ponder the potential downsides of his commodities legislation, having helped set off an industry free-for-all, he reaped the rewards. In 2003, he left the Senate to take a highly lucrative job at ubs, Switzerland's largest bank, which had been able to acquire investment house PaineWebber due to his banking deregulation bill. He would soon be lobbying Congress, the Fed, and the Treasury Department for ubs on banking and mortgage matters. There was a moment of poetic justice when ubs became one of the subprime crisis' top losers, writing down $37 billion as of this spring—an amount equal to its previous four years of profits combined. In a report explaining how it had managed to mess up so grandly, ubs noted that two-thirds of its losses were the fault of collateralized debt obligations—securities backed largely by subprime instruments—and that credit default swaps had been "key to the growth" of its out-of-control cdo business. (Gramm declined to comment for this article.)

Gramm's record as a reckless deregulator has not affected his rating as a Republican economic expert. Sen. John McCain has relied on him for policy advice, especially, according to the campaign, on housing matters. The two have been buddies ever since they served together in the House in the 1980s; in 1996, McCain chaired Gramm's flop of a presidential campaign. (Gramm spent $21 million and earned only 10 delegates during the gop primaries.) In 2005, McCain told a Wall Street Journal columnist that Gramm was his economic guru. Two years later, Gramm wrote a piece for the Journal extolling McCain as a modern-day Abraham Lincoln, and he's hailed McCain's love of tax cuts and free trade. Media accounts have identified Gramm as a contender for the top slot at the Treasury Department if McCain reaches the White House. "If McCain gets in," frets Lynn Turner, a former chief sec accountant, "we'll have more of the same deregulatory mess. I like John McCain, but given what I know about Phil Gramm, I wouldn't vote for McCain."

As a thriving bank exec and presidential adviser, Gramm has defied a prime economic principle: Bad products are driven out of the market. In John McCain, he has gained an important customer, so his stock has gone up in value. And there's no telling when the Gramm bubble will burst.


David Corn is Mother Jones' Washington, D.C. bureau chief
http://www.motherjones.com/news/feature/2008/07/foreclosure-phil.html

Grim wrote:I'm sorry, but deregulation isn't even a factor from everything I've read. It was government regulations that led to this mess, and the Barrons article was addressing those people on the political left who have tried to pin it on deregulation by the Bush administration, rather than telling the truth of the cause.

The Barrons opinion piece was addressing the issue from the perspective of an economic libertarian who believes any regulation of the free market is bad. I agree, it's far too complicated an issue to pin on any one person or party. And it may not be so much a matter of deregulation, although I believe it did play a role, as failure to amend existing regulations to meet a changing environment.

Grim wrote:It's really about how he didn't impose more regulations, which I believe he left up to congress to hammer out, but unfortunately the democrats didn't see any need in doing.

Apparently the Republicans who controlled both houses of Congress and were appointed to all pertinent agencies through most of the Bush presidency didn't see any need for doing anything either. And as stated above, I agree it's more about not imposing new regulations.

Grim wrote:I think you are wrong. Including that paragraph wouldn't have changed a thing.

We'll have to disagree on this one. That section of the Barrons piece is clearly a chronology beginning with Carter and ending with George W Bush's 'Ownership Society'.

Grim wrote:I acknowledge that if the sub-prime crisis did not exist, we would likely still be in a recession today anyway. The difference is, it would have been a normal recession like the one we had in the late 80's and at the end of the Clinton years. One that wouldn't require a trillion dollar bailout. In fact, the deficit that we incurred under the Bush administration had been cut in half at the end of 2006, 2 years ahead of schedule, but unfortunately that's when the housing market took a downward turn and things began to unravel.

We're in full agreement on that.

Grim17 wrote:Editorial: Bush Had Nothing To Do With Financial Crisis
By Noel Sheppard
February 8, 2009 - 13:54 ET

As the financial crisis hit last September, NewsBusters regularly informed readers of the truth behind the matter, and that media assertions the Bush administration was to blame were politically motivated falsehoods intentionally designed to get Barack Obama elected president.

On Saturday, the financial publication Barron's offered readers an editorial by Hoover Institution visiting fellow Scott S. Powell which presented facts that were routinely withheld from the public during the campaign assuring the Democrat candidate victory in November.

More importantly, Powell offered some compelling insights into the dangers of partisanship which sadly is negatively impacting today's stimulus package discussion.

But before we get there, this was Powell's case as to who was really to blame for this crisis (h/t Hot Air):

CONTRARY TO A VIEW POPULARIZED DURING THE 2008 presidential election season, the current economic crisis was not the result of deregulation.

The Bush administration made many mistakes, but deregulation was not one of them.

Not only was there no major deregulation passed during the past eight years, but the Bush administration and a Republican Congress approved the most sweeping financial-market regulation in decades.

The bipartisan Sarbanes-Oxley Act was enacted in 2002 to prevent corporate fraud and restore investor confidence after the collapse of Enron and WorldCom. It failed to prevent the accounting fraud and influence-peddling scandals at Fannie Mae and Freddie Mac. And even after those scandals were widely understood, regulators sent Fannie and Freddie back into the market to continue buying subprime loans, lending and borrowing with implied taxpayer backing.

Across the government, the Bush administration supported new regulations that added almost 1,000 pages a year to the Federal Register, nearly a record. If this is insufficient regulation, it's hard to imagine a scope that would be effective.

Powell of course was spot on. Sarbanes-Oxley was indeed a comprehensive and encompassing piece of legislation specifically designed to prevent a repeat of the tech bubble and Enron. Yet, as the financial crisis raged last fall, media members who wanted to blame the problem on Bush and deregulation conveniently forgot this sweeping bill.

But there's more:

Our present crisis began in the 1970s, during the Carter administration, with passage of the Community Reinvestment Act to stem bank redlining and liberalize lending in order to extend home ownership in lower-income communities. Then in the 1990s, the Department of Housing and Urban Development took a fateful step by getting the GSEs to accept subprime mortgages. With Fannie and Freddie easing credit requirements on loans they would purchase from lenders, banks could greatly increase lending to borrowers unqualified for conventional loans. In the name of extending affordable housing, this broadened the acceptability of risky loans throughout the financial system.

The risk lurking in the GSE portfolios was acknowledged in the Bush administration's first fiscal-year budget, released in April 2001. It stated that Fannie and Freddie were "a potential problem" because "financial trouble of a large GSE could cause strong repercussions in the financial markets, affecting federally insured entities and economic activity." Fed Chairman Alan Greenspan issued repeated warnings that the GSEs "placed the total financial system of the future at substantial risk." Such warnings went unheeded even after accounting scandals rocked Fannie and Freddie.

Yep. The Bush administration began warning of problems with Fannie and Freddie just three months into its first term, and continued doing so for years. But you wouldn't know that from how the press reported things last fall, would you?

However, what's done is done. The press wanted Obama to be president, and by dishonestly blaming Bush for the financial crisis, so-called journalists were able to paint John McCain as also being at fault thereby making it impossible for him to win.

Yet, Powell left us with a warning concerning this matter that is quite important given economic stimulus plans currently being discussed:

But the lesson should be clear that socializing failed businesses -- whether in housing, health care or in Detroit -- is not a long-term solution. Expanding government's intrusion into the private sector doesn't come without great risk. The renewing and self-correcting nature of the private sector is largely lost in the public sector, where accountability is impaired by obfuscation of responsibility, and where special interests benefit even when the public good is ill-served.

George Washington also warned against excessive partisanship, which distracts public councils and enfeebles public administration. Rather than blaming the party in power or the party formerly in power, the nation should stop living in denial of the mistakes of both parties.

Spreading failure across the entire economy risks turning a recession into a depression. Regulatory reform now must foster responsible behavior and financial accountability. Far better for our citizenry and businesses to have a strength and resourcefulness that comes from creativity, honesty and self-reliance than to have a growing dependence on a profligate government.

Powell touched on a lot of issues here that should be at the front of the current stimulus debate but sadly aren't.

In particular, the partisanship in the nation today prevents an honest assessment of the past thereby dooming us to repeat the same mistakes.

Take for example the Great Depression. For almost 80 years the left and their media minions have done everything within their power to blame all that era's ills on Herbert Hoover while crediting Franklin D. Roosevelt with the eventual economic recovery despite the former presiding over only two years of the Depression.

Yet, after eight years of unprecedented federal spending under Roosevelt, the unemployment rate was still a staggering 14.6 percent in 1940, and the Gross Domestic Product was still under its pre-Depression level.

Isn't this important, especially since our federal debt is already quite high?

Unfortunately, because of the partisanship, such can't be discussed. The left have so much time and money invested in Roosevelt supposedly being the greatest president of the 20th century that an honest assessment of what did and did not work back then is verboten.

But isn't that absurd? Assuming we really are on the verge of another Depression -- an assumption I don't necessarily agree with yet, mind you -- shouldn't we be examining everything we did before and during the last one in order to chart a more effective course this time?

The fact is the last Depression began in 1931 and despite all Roosevelt's good intentions didn't end until America entered World War II in 1941. Once the war ended, we went back into a very serious recession suggesting that nothing Roosevelt implemented had a lasting positive economic impact.

Isn't this relevant, especially given the Congressional Budget Office's report last week predicting current stimulus plans will actually hurt the economy in the long run?

Sadly, the answer is "No," for the left are so protective of Roosevelt's legacy that any analysis of his economic policies is totally unacceptable even as our nation grapples with solutions to our current financial problems.

Is this the way adults should behave? Is this really the best we can get from our elected officials?

Given the known failings and wastefulness of last year's TARP, wouldn't we be well-advised to halt all current stimulus discussions until a thorough and impartial analysis of previous plans -- INCLUDING those implemented by us during the '30s and by Japan during the '90s -- was accomplished thereby increasing the likelihood of success while reducing the chance of us making exactly the same mistakes?

If the answer is "No," the only conclusion is that Party, at this critical juncture in our nation's history, is indeed more important than policy, and partisanship is asphyxiating our capital.

George Washington must be rolling over in his grave.

Link

Wow grim you really are a sheep...I mean seriuosly. One of the biggest reason for the financial crisis was the Bush admin stopped requiring the OCC to audit these financial packages. Which led to the abuse of them by banks...The system was working quite well until that happene...

Bullshit Harry.

Stop trying to make excuses for failed liberal policy.

Grim17 wrote:Editorial: Bush Had Nothing To Do With Financial Crisis
By Noel Sheppard
February 8, 2009 - 13:54 ET

As the financial crisis hit last September, NewsBusters regularly informed readers of the truth behind the matter, and that media assertions the Bush administration was to blame were politically motivated falsehoods intentionally designed to get Barack Obama elected president.

On Saturday, the financial publication Barron's offered readers an editorial by Hoover Institution visiting fellow Scott S. Powell which presented facts that were routinely withheld from the public during the campaign assuring the Democrat candidate victory in November.

More importantly, Powell offered some compelling insights into the dangers of partisanship which sadly is negatively impacting today's stimulus package discussion.

But before we get there, this was Powell's case as to who was really to blame for this crisis (h/t Hot Air):

CONTRARY TO A VIEW POPULARIZED DURING THE 2008 presidential election season, the current economic crisis was not the result of deregulation.

The Bush administration made many mistakes, but deregulation was not one of them.

Not only was there no major deregulation passed during the past eight years, but the Bush administration and a Republican Congress approved the most sweeping financial-market regulation in decades.

The bipartisan Sarbanes-Oxley Act was enacted in 2002 to prevent corporate fraud and restore investor confidence after the collapse of Enron and WorldCom. It failed to prevent the accounting fraud and influence-peddling scandals at Fannie Mae and Freddie Mac. And even after those scandals were widely understood, regulators sent Fannie and Freddie back into the market to continue buying subprime loans, lending and borrowing with implied taxpayer backing.

Across the government, the Bush administration supported new regulations that added almost 1,000 pages a year to the Federal Register, nearly a record. If this is insufficient regulation, it's hard to imagine a scope that would be effective.

Powell of course was spot on. Sarbanes-Oxley was indeed a comprehensive and encompassing piece of legislation specifically designed to prevent a repeat of the tech bubble and Enron. Yet, as the financial crisis raged last fall, media members who wanted to blame the problem on Bush and deregulation conveniently forgot this sweeping bill.

But there's more:

Our present crisis began in the 1970s, during the Carter administration, with passage of the Community Reinvestment Act to stem bank redlining and liberalize lending in order to extend home ownership in lower-income communities. Then in the 1990s, the Department of Housing and Urban Development took a fateful step by getting the GSEs to accept subprime mortgages. With Fannie and Freddie easing credit requirements on loans they would purchase from lenders, banks could greatly increase lending to borrowers unqualified for conventional loans. In the name of extending affordable housing, this broadened the acceptability of risky loans throughout the financial system.

The risk lurking in the GSE portfolios was acknowledged in the Bush administration's first fiscal-year budget, released in April 2001. It stated that Fannie and Freddie were "a potential problem" because "financial trouble of a large GSE could cause strong repercussions in the financial markets, affecting federally insured entities and economic activity." Fed Chairman Alan Greenspan issued repeated warnings that the GSEs "placed the total financial system of the future at substantial risk." Such warnings went unheeded even after accounting scandals rocked Fannie and Freddie.

Yep. The Bush administration began warning of problems with Fannie and Freddie just three months into its first term, and continued doing so for years. But you wouldn't know that from how the press reported things last fall, would you?

However, what's done is done. The press wanted Obama to be president, and by dishonestly blaming Bush for the financial crisis, so-called journalists were able to paint John McCain as also being at fault thereby making it impossible for him to win.

Yet, Powell left us with a warning concerning this matter that is quite important given economic stimulus plans currently being discussed:

But the lesson should be clear that socializing failed businesses -- whether in housing, health care or in Detroit -- is not a long-term solution. Expanding government's intrusion into the private sector doesn't come without great risk. The renewing and self-correcting nature of the private sector is largely lost in the public sector, where accountability is impaired by obfuscation of responsibility, and where special interests benefit even when the public good is ill-served.

George Washington also warned against excessive partisanship, which distracts public councils and enfeebles public administration. Rather than blaming the party in power or the party formerly in power, the nation should stop living in denial of the mistakes of both parties.

Spreading failure across the entire economy risks turning a recession into a depression. Regulatory reform now must foster responsible behavior and financial accountability. Far better for our citizenry and businesses to have a strength and resourcefulness that comes from creativity, honesty and self-reliance than to have a growing dependence on a profligate government.

Powell touched on a lot of issues here that should be at the front of the current stimulus debate but sadly aren't.

In particular, the partisanship in the nation today prevents an honest assessment of the past thereby dooming us to repeat the same mistakes.

Take for example the Great Depression. For almost 80 years the left and their media minions have done everything within their power to blame all that era's ills on Herbert Hoover while crediting Franklin D. Roosevelt with the eventual economic recovery despite the former presiding over only two years of the Depression.

Yet, after eight years of unprecedented federal spending under Roosevelt, the unemployment rate was still a staggering 14.6 percent in 1940, and the Gross Domestic Product was still under its pre-Depression level.

Isn't this important, especially since our federal debt is already quite high?

Unfortunately, because of the partisanship, such can't be discussed. The left have so much time and money invested in Roosevelt supposedly being the greatest president of the 20th century that an honest assessment of what did and did not work back then is verboten.

But isn't that absurd? Assuming we really are on the verge of another Depression -- an assumption I don't necessarily agree with yet, mind you -- shouldn't we be examining everything we did before and during the last one in order to chart a more effective course this time?

The fact is the last Depression began in 1931 and despite all Roosevelt's good intentions didn't end until America entered World War II in 1941. Once the war ended, we went back into a very serious recession suggesting that nothing Roosevelt implemented had a lasting positive economic impact.

Isn't this relevant, especially given the Congressional Budget Office's report last week predicting current stimulus plans will actually hurt the economy in the long run?

Sadly, the answer is "No," for the left are so protective of Roosevelt's legacy that any analysis of his economic policies is totally unacceptable even as our nation grapples with solutions to our current financial problems.

Is this the way adults should behave? Is this really the best we can get from our elected officials?

Given the known failings and wastefulness of last year's TARP, wouldn't we be well-advised to halt all current stimulus discussions until a thorough and impartial analysis of previous plans -- INCLUDING those implemented by us during the '30s and by Japan during the '90s -- was accomplished thereby increasing the likelihood of success while reducing the chance of us making exactly the same mistakes?

If the answer is "No," the only conclusion is that Party, at this critical juncture in our nation's history, is indeed more important than policy, and partisanship is asphyxiating our capital.

George Washington must be rolling over in his grave.

Link

Geat find Jim , I was having an argument about this with a fellow worker and his argument was " It's Bush's fault because he was president"

pretty sad

Grim17 wrote:Bullshit Harry.

Stop trying to make excuses for failed liberal policy.

Explain to me why the system was fine, until early 2000's when the government stopped auditing these financial packages and banks stopped having to disclose what the securities contained...please I dare you. You can't, this program was not the problem, is not the problem and never will bea problem. I did loans under the CRA act. All it is, is a program that stops banks from discriminatory lending. It requires that if they want to lend in a state, they have to lend in the ENTIRE state, not just in the zip codes they like...

Regardless, and I meant to add. Even if the it was terrible lending practices that led to the downfall of the subprime mortgage industry. It was the insurance fraud that has brought our nation and the rest of the world to its financial knees. AIG in particular. If there were no securities (yes created in the Clinton era, but it didn't become a problem until the Bush admin stopped auditing the financial packages) then it woudl simply be a blip in our overall financial makeup. And no one woudl be having this conversation. But it was the creation of securities and then the insurance of these securities, and then insuring other people's securities in hopes they fail. That's what created the real mess.

Here's a bump for Grim...