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Thread: Did The Housing Bubble begin during Clinton Administation

  1. #1
    Conservative Pragmatist Jets's Avatar
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    Did The Housing Bubble begin during Clinton Administation

    In 1995, the regulators created new rules that sought to establish objective criteria for determining whether a bank was meeting CRA standards. Examiners no longer had the discretion they once had. For banks, simply proving that they were looking for qualified buyers wasn’t enough. Banks now had to show that they had actually made a requisite number of loans to low- and moderate-income (LMI) borrowers. The new regulations also required the use of “innovative or flexible” lending practices to address credit needs of LMI borrowers and neighborhoods. Thus, a law that was originally intended to encourage banks to use safe and sound practices in lending now required them to be “innovative” and “flexible.” In other words, it called for the relaxation of lending standards, and it was the bank regulators who were expected to enforce these relaxed standards.

    The effort to reduce mortgage lending standards was led by the Department of Housing and Urban Development through the 1994 National Homeownership Strategy, published at the request of President Clinton. Among other things, it called for “financing strategies, fueled by the creativity and resources of the private and public sectors, to help homeowners that lack cash to buy a home or to make the payments.” Once the standards were relaxed for low-income borrowers, it would seem impossible to deny these benefits to the prime market. Indeed, bank regulators, who were in charge of enforcing CRA standards, could hardly disapprove of similar loans made to better-qualified borrowers.



    The American Spectator : The True Origins of This Financial Crisis




    I found this article an interesting read. It seems that the seeds for the housing problem were planted in 1994. I'm not saying President Clinton caused the housing disaster, but was this the beginning of it?

    Thoughts?

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    King Obama is a traitor! michaelr's Avatar
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    The causation did, yes. Clinton's advisers push to kill Glass Steagall. After that the inevitable bubble and crash occurred.

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    Senior Member Raoul_Duke's Avatar
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    Well it actually started even before that. When Nixon took us off the gold standard and gave the Fed control over a fiat dollar, these kinds of bubbles were almost pre-ordained. The CRA certainly helped it along though.

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    Senior Member Raoul_Duke's Avatar
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    Quote Originally Posted by michaelr View Post
    The causation did, yes. Clinton's advisers push to kill Glass Steagall. After that the inevitable bubble and crash occurred.
    You're going to have to show your work here. I don't see how that had any (major) effect on the housing bubble. There were non-holding company banks on both sides (investment only and commercial only) that melted down over this. The key factor was the implied government backing on mortgage backed bonds which had nothing to do with Glass Steagall.

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    Actually it went back to Carter.

    The Carter-era Community Reinvestment Act forced banks to lend to uncreditworthy borrowers, mostly in minority areas.

    Age-old standards of banking prudence got thrown out the window. In their place came harsh new regulations requiring banks not only to lend to uncreditworthy borrowers, but to do so on the basis of race.

    These well-intended rules were supercharged in the early 1990s by President Clinton. Despite warnings from GOP members of Congress in 1992, Clinton pushed extensive changes to the rules requiring lenders to make questionable loans.

    Lenders who refused would find themselves castigated publicly as racists. As noted this week in an IBD editorial, no fewer than four federal bank regulators scrutinized financial firms' books to make sure they were in compliance.

    Failure to comply meant your bank might not be allowed to expand lending, add new branches or merge with other companies. Banks were given a so-called "CRA rating" that graded how diverse their lending portfolio was.

    It was economic hardball.

    "We have to use every means at our disposal to end discrimination and to end it as quickly as possible," Clinton's comptroller of the currency, Eugene Ludwig, told the Senate Banking Committee in 1993.

    And they meant it.

    In the name of diversity, banks began making huge numbers of loans that they previously would not have. They opened branches in poor areas to lift their CRA ratings.

    Meanwhile, Congress gave Fannie and Freddie the go-ahead to finance it all by buying loans from banks, then repackaging and securitizing them for resale on the open market.

    That's how the contagion began.

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    King Obama is a traitor! michaelr's Avatar
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    Quote Originally Posted by Raoul_Duke View Post
    You're going to have to show your work here. I don't see how that had any (major) effect on the housing bubble. There were non-holding company banks on both sides (investment only and commercial only) that melted down over this. The key factor was the implied government backing on mortgage backed bonds which had nothing to do with Glass Steagall.
    The housing bubble was created in order to allow the massive leveraging of mortgages. Before the end of Glass Steagall the banks used primarily rates and of course fractional reserve as their money maker. After Glass Steagall you have the birth of the MBS. Now the MBS was a toxic ponzi. You had to continue to create these things and sell them in order to pay the MBS already on the market. That also spurred the fixed low interest rate, that was done to allow easier ownership, but it came with a price.

    Your 401's are tied into this mess, as they were used to prove the MBS would sell.

    The creation of the MBS is the reason behind the bubble.

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    Senior Member Raoul_Duke's Avatar
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    Quote Originally Posted by Nemo View Post
    No, it was a two-step process. First, there was the repeal of the provisions of Glass-Steagall that barred banking entities from trading in mortgage-backed securities and other derivative contracts; and second, the exemption from bankruptcy. This set the stage for the subprime mortgage debacle. See article at:
    http://dealbook.nytimes.com/2009/11/...steagall/?_r=0
    AIG, Bear Sterns and Lehman Brothers were never subject to Glass Steagall. A couple of other investment banks that got into trouble over mortgage backed bonds were not bailed out because they were bought by commercial banks (which would not have been possible if Glass Steagall was in effect). This is just pro-big government revisionist history.

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    King Obama is a traitor! michaelr's Avatar
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    Quote Originally Posted by Raoul_Duke View Post
    AIG, Bear Sterns and Lehman Brothers were never subject to Glass Steagall. A couple of other investment banks that got into trouble over mortgage backed bonds were not bailed out because they were bought by commercial banks (which would not have been possible if Glass Steagall was in effect). This is just pro-big government revisionist history.
    They insured securities.

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    Senior Member Raoul_Duke's Avatar
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    Quote Originally Posted by michaelr View Post
    The housing bubble was created in order to allow the massive leveraging of mortgages. Before the end of Glass Steagall the banks used primarily rates and of course fractional reserve as their money maker. After Glass Steagall you have the birth of the MBS. Now the MBS was a toxic ponzi. You had to continue to create these things and sell them in order to pay the MBS already on the market. That also spurred the fixed low interest rate, that was done to allow easier ownership, but it came with a price.

    Your 401's are tied into this mess, as they were used to prove the MBS would sell.

    The creation of the MBS is the reason behind the bubble.
    I think it was primarily the bursting of the tech bubble that put the housing bubble into motion. Baby boomers who were burnt by the stock market started putting their money into housing instead (as a retirement "investment"). The banks created MBS's to facilitate that activity.

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    Senior Member Raoul_Duke's Avatar
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    Quote Originally Posted by michaelr View Post
    They insured securities.
    They got caught with too much bad paper when the housing market crashed. And Glass Steagall would not have prevented that.

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