Friday, October 24, 2008

Acting White: I'm Shocked!

“Those of us who have looked to the self-interest of lending institutions to protect shareholders’ equity, myself included, are in a state of shocked disbelief,” he [Greenspan] told the House Committee on Oversight and Government Reform.
The NYT article goes on to say, "Many Republican lawmakers on the oversight committee tried to blame the mortgage meltdown on the unchecked growth of Fannie Mae and Freddie Mac, the giant government-sponsored mortgage-finance companies that were placed in a government conservatorship last month. Republicans have argued that Democratic lawmakers blocked measures to reform the companies.

But Mr. Greenspan, who was first appointed by President Ronald Reagan, placed far more blame on the Wall Street companies that bundled subprime mortgages into pools and sold them as mortgage-backed securities. Global demand for the securities was so high, he said, that Wall Street companies pressured lenders to lower their standards and produce more “paper.”

“The evidence strongly suggests that without the excess demand from securitizers, subprime mortgage originations (undeniably the original source of the crisis) would have been far smaller and defaults accordingly far lower,” he said."

It looks more and more, by the words of the 'maestro' himself, that the melt-down was not caused by all those minorities scamming poor bankers, but just the opposite - loose lending to feed the greedy appetites of Wall Street.

This much is for sure, there are a lot of poor folks deserving of a big fat apology and some debt relief from the likes of Greenspan, the Treasury, and the pundits who have been heaping blame on their poor wanton souls over the past weeks. But I won't hold my breath waiting.

James C. Collier


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Dennis Mangan said...

Jim: the "diversity recession" hypothesis does not blame "minorities" for the current crisis, but a grab bag of lobbyists, activists, Congressfolks, and even a few Republicans, for wanting to raise levels of home ownership and using political pressure to do so. If a few minorities and investment banks tagged along for the ride, well, you can hardly blame them. The problem is a political system that lets that kind of pressure be applied.

James C. Collier said...

Dennis: Diversity Recession??? Now that's foul! FYI, I found this defense at the CRA site.

CRA Myth and Fact
Myth: The Community Reinvestment Act (CRA) caused the foreclosure crisis.

The majority of subprime loans were originated by non-CRA covered financial institutions. In fact, only about 25 percent of sub-prime loans were made by institutions covered by CRA.¹

CRA was passed in 1977. The explosive growth in subprime lending occurred more than two decades later, nearly doubling from 2001-2006 alone. No major changes to CRA were enacted during this time.
CRA does not mandate banks to make only home loans. Banks are encouraged to examine credit needs and lend appropriately based on these needs (for small business, home, and other types of loans).
CRA penalizes banks for reckless, irresponsible and otherwise predatory lending.

Myth: Rapid growth of subprime loans was a direct response to financial institutions efforts to expand homeownership for low and moderate and minority households.
Between 1998-2006 over half of subprime mortgage originations were for refinancing.²
In that same time, less than 10% of subprime mortgage originations went to first time homebuyers.³
Significant gains in homeownership occurred in the 1990s when prime lending was offered to low and moderate income and minority borrowers.

Myth: Federal banking agencies encouraged banks to engage in risky lending practices. In particular, a 1992 Boston Federal Reserve Bank publication, Closing the Credit Gap: A Guide to Equal Opportunity Lending, provided unsound advice to banks.


BTW, I get the Greenspan bit.

Dennis Mangan said...

The fact that many or even most subprime loans went to whites was because lending standards were lowered for everyone. Which led to the bubble, which led to speculators jumping in. I'm sure you remember all the fuss a few years back about "redlining".

James C. Collier said...

Dennis: You remind me something I heard as a kid - white people go after blacks for weekend diversion, and each other during the week for the big money.

You say lending standards were lowered by policy to benefit undeserving minorities, with the inadvertent same benefit to even more undeserving whites. Greenspan and the CRA say that greedy investment banks enticed greedy mortgage lenders to aggressively pursue loans, knowing the regulators were pleasuring themselves in the corner.

In your world, the minority of first-time sub-prime buyers (minorities) are to blame for this majority profit-gouging and the resulting 'diversity recession'.

It seems that America (not just the poor), is infected with wanting more than it has worked for and being willing to do just about anything to get it, and all the better if poor minorities are made to blame.

Anonymous said...

This article begs to differ:

Anonymous said...

Hmmm, I wonder if greenspan is familiar with the concept of "economics".

It says, that as the availablity of a desired product decreases, its price, increases. Why would "Wall Street" care how many of these loans were avaiable to create derivatives of? They just jack up the price, and take a percentage of that price, so they get paid the same, regardless.

I suspect Greenspan is, once again, obfuscating reality as he managed to do so eloquently as Fed Chairman.

I would point out that neither party is blameless in this mess. Its not like when the power balance shifted, they went back and fixed the bad policies of the previous administration. They carried on business as usual, because both parties take money from the same special interest groups, and they made money with all these policies, even as it screws over the voters. Try to keep that in mind when you start pointing fingers. :(

Anonymous said...

Both parties definately.
But Barney Franks did report this summer that Fannie was "sound".

I think we know exactly what body cavity he must have had his head in.

There's a lot more to this than meets the eye. Let's hope we find the facts of the matter and let's hope that regulations will go into effect that will prevent it from ever happeneing again.