An amazing insight into politics and the housing crisis/recession

This post (I have figured the Sanders appeal out … and it ain’t good‼️) generated several  comments. You can read them all by going to the post. 

However, I found this comment uniquely  thorough and insightful and well worth your time reading. Consider all this in light of the political promises (and accusations) being made on the campaign trail. Pay particular attention to the paragraph I placed in italic. The CBO predicts a significant increase in the deficit after Obama leaves office. 

MAKE NO MISTAKE; shortsighted government policies, not the private sector get us into most of the problems we face and we are not going to simply tax others and resolve them. 

“Reader” commented: 

All the good you are describing, low inflation, low unemployment, low mortgage rates etc. – all under Obama policies 🙂

Benefitjack replied:

I agree with Reader that low inflation is a good thing, however, the Obama policies that created low inflation basically are the result of the stagnant economy. 

 I agree with Reader that low unemployment is a good thing, however, the Obama policies that created low unemployment have nothing to do with getting government to facilitate growth by business and employers, but have reduced unemployment by lowering the labor participation rate, triggering retirement by baby boomers prior to their intended date while also increasing the disabled rolls. 

 There is a reason why we needed a Social Security Disability Income trust bailout – the dramatic change in disability claiming rates, turned into a supplemental unemployment program. 

 I agree with Reader that low mortgage rates are a good thing, however, the Obama policies that created low mortgage rates are the result of actions by the Federal Reserve to counter troubling fiscal policy with monetary policy. 

 Just think how bad GDP of 2% – 2.5% would have sunk without the Fed priming the pump with low interest rates. Note that none of the Obama policies were in effect when the US economy emerged from recession. Much like FDR and the Great Depression, Obama’s policies have tended to dampen the vigor of the recovery. These same Obama policies (mostly unchanged back to the time when the Democrats had super majorities in both the House and Senate – before Scott Brown) have doubled the national debt from $10.626 Trillion (when Obama took office) to $18.96 Trillion (1/26/16), or ~104% of 2015 GDP. 

 An increase in interest rates back to historic levels would mean that interest on the public debt would immediately become the 2nd largest component of the federal budget – after entitlements and before national defense. Just think of it, tax increases in future years will be needed not to build roads or pay social security benefits or defend the country, but, to pay interest on borrowed money. Tell me again why the American Recovery Act was worth $1+T of long term debt.  

Home ownership by individuals who were not fiscally responsible was SOLELY the province of Democrats. How soon we forget who the sponsors were of gambling with the mortgage market, and who was actually trying to rein in Fanny Mae and Freddie Mac (note the dates):  

House Financial Services Committee hearing, Sept. 10, 2003:

– Rep. Barney Frank (D., Mass.): “I worry, frankly, that there’s a tension here. The more people, in my judgment, exaggerate a threat of safety and soundness, the more people conjure up the possibility of serious financial losses to the Treasury, which I do not see.”

– Rep. Maxine Waters (D., Calif.), speaking to Housing and Urban Development Secretary Mel Martinez: “Secretary Martinez, if it ain’t broke, why do you want to fix it? Have the GSEs [government-sponsored enterprises] ever missed their housing goals?”

House Financial Services Committee hearing, Sept. 25, 2003:

– Rep. Frank: “I do think I do not want the same kind of focus on safety and soundness that we have in OCC [Office of the Comptroller of the Currency] and OTS [Office of Thrift Supervision]. I want to roll the dice a little bit more in this situation towards subsidized housing. . . .”

– Rep. Waters: “Mr. Chairman, we do not have a crisis at Freddie Mac, and in particular at Fannie Mae, under the outstanding leadership of Mr. Frank Raines. Everything in the 1992 act has worked just fine. In fact, the GSEs have exceeded their housing goals. . . .”

– Rep. Frank: “I believe there has been more alarm raised about potential unsafety and unsoundness than, in fact, exists.”

Senate Banking Committee, Oct. 16, 2003: Sen. Charles Schumer (D., N.Y.): “And my worry is that we’re using the recent safety and soundness concerns, particularly with Freddie, and with a poor regulator, as a straw man to curtail Fannie and Freddie’s mission. And I don’t think there is any doubt that there are some in the (Bush II) administration who don’t believe in Fannie and Freddie altogether, say let the private sector do it. That would be sort of an ideological position.”

Senate Banking Committee, Feb. 24-25, 2004: Sen. Christopher Dodd (D., Conn.): “I, just briefly will say, Mr. Chairman, obviously, like most of us here, this is one of the great success stories of all time. And we don’t want to lose sight of that and [what] has been pointed out by all of our witnesses here, obviously, the 70% of Americans who own their own homes today, in no small measure, due because of the work that’s been done here. And that shouldn’t be lost in this debate and discussion. . . .”

Senate Banking Committee, April 6, 2005: Sen. Schumer (D. NY) : “I’ll lay my marker down right now, Mr. Chairman (Greenspan). I think Fannie and Freddie need some changes, but I don’t think they need dramatic restructuring in terms of their mission, in terms of their role in the secondary mortgage market, et cetera. Change some of the accounting and regulatory issues, yes, but don’t undo Fannie and Freddie.”

Senate Banking Committee, June 15, 2006: Sen. Chuck Hagel (R., Neb.): “Mr. Chairman, what we’re dealing with is an astounding failure of management and board responsibility, driven clearly by self interest and greed. And when we reference this issue in the context of — the best we can say is, “It’s no Enron.” Now, that’s a hell of a high standard.”

The Bush II weenies attempted to rein in the stupidity in the home mortgage market. 

 Here is a New York Times article from 9/11/03 (five years before the collapse)

 It is important to remember that $1+T of the debt at the time of the collapse was so-called “liars loans” issued between 2005-2007. In fact, Fannie Mae and Freddie Mac “accelerated their imprudent behavior AFTER the Bush weenies proposed legislation in 2003 – buying almost as much mortgage debt from 2005 through 2008 as the GSE’s bought in their first 30 years of their existence.


3 replies »

  1. Someone sent me this – read and enjoy:

    Heidi’s Bar

    Heidi is the proprietor of a bar in Detroit.

    She realizes that virtually all of her customers are unemployed alcoholics and, as such, can no longer afford to patronize her bar.

    To solve this problem, she comes up with a new marketing plan that allows her customers to drink now, but pay later.

    Heidi keeps track of the drinks consumed on a ledger (thereby granting the customers’ loans).

    Word gets around about Heidi’s “drink now, pay later” marketing strategy and, as a result, increasing numbers of customers flood into Heidi’s bar. Soon she has the largest sales volume for any bar in Detroit.

    By providing her customers freedom from immediate payment demands, Heidi gets no resistance when, at regular intervals, she substantially increases her prices for wine and beer, the most consumed beverages.

    Consequently, Heidi’s gross sales volume increases massively.

    A young and dynamic vice-president at the local bank recognizes that these customer debts constitute valuable future assets and increases Heidi’s borrowing limit.

    He sees no reason for any undue concern, since he has the debts of the unemployed alcoholics as collateral!!!

    At the bank’s corporate headquarters, expert traders figure a way to make huge commissions, and transform these customer loans into DRINK BONDS.

    These “securities” then are bundled and traded on international securities markets.

    Naive investors don’t really understand that the securities being sold to them as “AAA Secured Bonds” really are debts of unemployed alcoholics. Nevertheless, the bond prices continuously climb!!!, and the securities soon become the hottest-selling items for some of the nation’s leading brokerage houses.

    One day, even though the bond prices still are climbing, a risk manager at the original local bank decides that the time has come to demand payment on the debts incurred by the drinkers at Heidi’s bar. He so informs Heidi.

    Heidi then demands payment from her alcoholic patrons, but being unemployed alcoholics they cannot pay back their drinking debts.

    Since Heidi cannot fulfill her loan obligations she is forced into bankruptcy. The bar closes and Heidi’s 11 employees lose their jobs.

    Overnight, DRINK BOND prices drop by 90%.

    The collapsed bond asset value destroys the bank’s liquidity and prevents it from issuing new loans, thus freezing credit and economic activity in the community.

    The suppliers of Heidi’s bar had granted her generous payment extensions and had invested their firms’ pension funds in the BOND securities.

    They find they are now faced with having to write off her bad debt and with losing over 90% of the presumed value of the bonds.

    Her wine supplier also claims bankruptcy, closing the doors on a family business that had endured for three generations, her beer supplier is taken over by a competitor, who immediately closes the local plant and lays off 150 workers.

    Fortunately though, the bank, the brokerage houses and their respective executives are saved and bailed out by a multibillion dollar no-strings attached cash infusion from the government.

    The funds required for this bailout are obtained by new taxes levied on employed, middle-class, nondrinkers who have never been in Heidi’s bar.

    Now do you understand?


    • That’s Congress just swinging away:

      The banks have exited government-insured home mortgages. In 2017, Jamie Dimon stated, in part (page 27):

      “… However, aggressive use of the False Claims Act (FCA) (a Civil War act passed to protect the government from intentional fraud) and overly complex regulations have made FHA lending
      risky and cost prohibitive for many banks. … This has led us to scale back our participation in the FHA lending program in favor of less burdensome lending programs that serve the same consumer base – and we are not alone. The chart above shows that nonbanks have gone from 20% to 80% of FHA originations. …”


      So, we’ve gone from a wild wild west market encouraging many to buy a home they can’t afford, to a litigation driven market, where only those who are not subject to the liquidity requirements and litigation exposures that banks face are willing to issue these loans secured by TAXPAYERS!!!!!

      See also:

      The “… boom in nonbank mortgage lending  means the mortgage market is still exposed to liquidity risk … liquidity risk associated with the nonbank mortgage sector was also a key driver of the crisis—and those same vulnerabilities are not only still present, but pose an even greater risk to the system  today  because the nonbank sector is an even larger part of the market. Nonbank mortgage originators and servicers—i.e.  independent  mortgage companies that are not subsidiaries of a bank or a bank holding company—are  subject to far greater liquidity risks  but  are  less  regulated than bank-lenders and servicers.  … (however) nonbanks that concentrate on servicing these loans have less ability to withstand liquidity strains. … mortgages originated by nonbanks are of lower credit quality than those originated by banks, making nonbank lenders more vulnerable to  delinquencies triggered by a fall in house prices through  the  higher costs of servicing delinquent loans.  A  larger fraction  of  nonbank originations are insured by the Federal Housing Administration (FHA) or Department of Veterans Affairs (VA), which tend to be more likely to default than other types. … the data  indicate that mortgages originated  by nonbanks are twice as likely as bank-originated mortgages to be two  or  more  months  delinquent. … in the event of a crisis, nonbanks have limited resources to draw upon and the government (THAT’s US TAXPAYERS!!!!!!) would  probably  bear the majority of increased credit and operational losses. ”

      FHA will actually allow borrowing on a home valued up to $727,000 with as little as 3.5% down, for borrowers with credit scores of 620 and a debt-to-income ratio of 43% – with limited underwriting. A quarter of FHA borrowers have payments that exceed 50% of their income. The average borrower’s credit score has declined to 670.

      Trump Administration stupidity? Yes, in that they continue to allow guidance issued by the Obama administration to remain in force.

      Should there be another housing market collapse, taxpayers will need to again get their wallets out to bail out Ginnie Mae and Freddie-Mac.


  2. I have been watching politics in this country since my High School History teacher Mr. Williams taught me objective logic when looking at history from months ago to hundreds of years.
    It was 1971 Southern California, Watergate. He was a personal friend of the Nixon family and I learned plenty the 3 years I attended his classes. Both political parties are to blame for the problems we are going through today.

    After numerous attempts to repeal Glass-Steagall spanning the Bush and Clinton administrations, President Clinton signed the Gramm-Leach-Bliley Act that repealed the provisions preventing banks from affiliating with security firms.

    Since it took less than 10 years, after repeal, before we had a financial crisis, maybe some government regulation is a good thing. I am not sure Hillary or any of the Rs will hold their friends on Wall Street or across the isle accountable for anything.


What's your opinion on this post? Readers would like your point of view.

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s