Five Weeks To Go
A little more than a month till the election. Obama has opened up a solid lead. The polls show him at 5% or more ahead. There are a number of reasons for this, but the main one is that the public has been concentrating for the last couple weeks on an economic crisis. For better or worse, the party in the White House gets blamed for the economy. (Even when the White House fought for more oversight of Fannie Mae and the Democrats blocked it.)
If the bailout situation had happened a few months ago, McCain would have had plenty of time to recover, but since now is the time when views of the candidates start hardening--and since about one in five voters actually vote before Election Day--it'll be extra hard for McCain to come back. He's got a shot, but I'd put Obama's odds of winning at better than 80%.
posted by LAGuy @ 12:17 AM
12 Comments:
fivethirtyeight.com is with you -- they've got Obama at 83% likelihood. Intrade has him at 63, which is a huge bump from 52/48 last week.
I think "fought" is a mighty strong verb to use to describe the White House's efforts re Fannie Mae oversight. More importantly, blaming Fannie for this economy is like blaming a particularly flammable form of gasoline for your rear-ended Pinto bursting into flames.
In 2001, the Bush administration requested greater oversight for Fannie Mae, and in 2003 proposed sweeping new regulations. Soon after they started loudly warning of an economic meltdown. Every proposal they made was voted on strictly by party lines, with full-throated defenses of Fannie Mae and Freddie Mac by the Democrats, some of whom claimed even criticizing them was a bad idea. Their bills never got out of committee because the Democrats were able to block consideration.(As a side note, McCain introduced legislation for more oversight, Obama was one of the top senatorial recipients of Fannie Mae's largesse.)
As for the basic problem, the original sin, without which no meltdown would have occurred, comes from earlier government decisions, supported by both parties, though mostly done during Democratic administrations.
The two biggest problems were 1) Fannie and Freddie themselves, as government sponsored enterprises, were not subject to the same oversight and taxes of other private companies, and with the implicit backing of the government, were able to do all sorts of things the free market would have slowed down or wiped out. As they say, privatized reward and socialized risk don't mix. 2) The Community Reinvestment Act, created in the 70s and modified in the 90s not only allowed for high-risk loans, it mandated them. Once that was in place, disaster was just about inevitable.
So you're telling me a Republican majority congress -- both houses -- considered this a major priority, as did the Republican president, but where completely stifled by the minority party for six straight years on "party line votes"? Color me skeptical.
But even if it were true, and Fannie and Freddie provided the "original sin," it was the huge multiplier effect of heavily leveraged mortgage backed paper and swaps that has caused a crisis. Fannie and Freddie could have invested every dime they had in the worst mortgages humanly imaginable, and you still get no crisis without Wall Street's subsequent actions. Note that all this was publicly available information -- e.g. somehow the boys at Goldman Sachs were able to figure out that these bonds were shit and avoid them. Indeed, a friend who works at GS warned me two years ago that these mortgage backed securities were a huge problem.
You need 60 votes in the Senate to get anything done.
If you have a bad financial system, you can expect people to take advantage of it, especially since they don't think it's a bad financial system.
Don't forget that Republicans who didn't go along with the Democrats on Fannie Mae were called racists.
Imagine if there's a change machine that gives you two dollars for every dollar you put in. if there's a run on the machine and the purveyor loses his shirt, wasn't it the failure of the machine that caused the problem in the first place.
The difference here is that Wall Street had no reason to think it was doing anything wrong.
Nuh uh, you don't get to have it both ways. Either the poor Wall Street saps were ignorant of the horrors of Freddie and Fannie, and were duped (duped!) into leveraging those mortgages by a factor of 40 or so, OR the Republican politicians were struggling vainly and volubly to correct the horrors going on over there. They're mutually inconsistent positions, n'est pas? "We were trying to fix it while we had no idea anything was wrong" ain't much of a narrative.
Oh, and the 60 only applies when you're facing a filibuster. There was no filibuster.
Again, I'm not suggesting the Republicans didn't have better ideas about what to do with Freddie and Fannie, and deserve a golf clap for having suggested it. But you don't get more than a golf clap when you caved so easily. Show me the bill that passed the (simple majority) house and was filibustered in the senate -- THEN you get to claim you "fought."
All it takes is the threat of a filibuster in a lot of cases. Furthermore, there were always some Republicans willing to vote with the vast majority of Democrats on oversight of Fannie Mae. But when you look at these bills in committee, the votes were almost strictly along party lines. There are lots of quotes back then from Fannie Mae people explaining how the Democrats protect them while the Republicans want unneeded reform. Bills were suggested by the Bush administration and introduced by McCain and others, but never had the power to make it out of committee. The pushback when you tried to reform Fannie Mae was a thing to see.
As for Wall Street, that's how the free market works in general. There are thousands and thousands of different approaches, and some hit, most don't. Observers see what hits and swarm toward that. If your system is broken because of GREs (which create great leverage) and government mandates for high-risk loans, among other deformities, that's where the money will naturally go. It's no more about greed, or even foolishness, than trying to get the best deal when you shop.
Fresh off the false and politicized attack on Fannie Mae and Freddie Mac, today we’re hearing the know-nothings blame the subprime crisis on the Community Reinvestment Act — a 30-year-old law that was actually weakened by the Bush administration just as the worst lending wave began. This is even more ridiculous than blaming Freddie and Fannie.
The Community Reinvestment Act, passed in 1977, requires banks to lend in the low-income neighborhoods where they take deposits. Just the idea that a lending crisis created from 2004 to 2007 was caused by a 1977 law is silly. But it’s even more ridiculous when you consider that most subprime loans were made by firms that aren’t subject to the CRA. University of Michigan law professor Michael Barr testified back in February before the House Committee on Financial Services that 50% of subprime loans were made by mortgage service companies not subject comprehensive federal supervision and another 30% were made by affiliates of banks or thrifts which are not subject to routine supervision or examinations. As former Fed Governor Ned Gramlich said in an August, 2007, speech shortly before he passed away: “In the subprime market where we badly need supervision, a majority of loans are made with very little supervision. It is like a city with a murder law, but no cops on the beat.”
Not surprisingly given the higher degree of supervision, loans made under the CRA program were made in a more responsible way than other subprime loans. CRA loans carried lower rates than other subprime loans and were less likely to end up securitized into the mortgage-backed securities that have caused so many losses, according to a recent study by the law firm Traiger & Hinckley (PDF file here).
Finally, keep in mind that the Bush administration has been weakening CRA enforcement and the law’s reach since the day it took office. The CRA was at its strongest in the 1990s, under the Clinton administration, a period when subprime loans performed quite well. It was only after the Bush administration cut back on CRA enforcement that problems arose, a timing issue which should stop those blaming the law dead in their tracks. The Federal Reserve, too, did nothing but encourage the wild west of lending in recent years. It wasn’t until the middle of 2007 that the Fed decided it was time to crack down on abusive pratices in the subprime lending market. Oops.
We've all read the counterclaimns about the CRA, and they're not particularly impressive. Already in the early 90s, it was being abused, and the big change was the modifications that strengthened it in 1995. Since then, with other changes in the economy, along with the problems attached to Fannie Mae and Freddie Mac as GRE, we had a meltdown in the mortgage sector of the economy. There would have been trouble elsewhere if the markets had been as deformed, but since there weren't, the changes in the economy that came in the late 90s up till now were able to opportunistically exploit the dangers of a system that didn't have the proper oversight and was lacking the economic discipline through protection of the government.
Here are some of the responses made to the fraudulent Business Week article posted above:
Nobody made loans "under the CRA program" CRA is not a loan program. It sets numerical targets for lending by location, race, and ethnicity. CRA often required lending to uncreditworthy persons to get a satisfactory CRA rating, and it did indeed cause Freddie and Fannie to take on huge amounts of dreck. "The chief executive of Countrywide Financial, the nation's largest mortgage lender, is said to have 'bragged' that in order to approve minority applications, 'lenders have had to stretch the rules a bit.'" See http://en.wikipedia.org/wiki/Community_Reinvestment_Act#Criticism and references thereto.
There never were laws that would prevent lenders from making bad loans. Nothing was deregulated by the Bush Administration in that regard. Lenders did their best to not make bad loans.
Then the Clinton Administration rewrote the CRA to REQUIRE loans be made to low credit quality borrowers. And engaged FNMA and FRE to buy these loans.
In order to make loans and homes more affordable for lower income borrowers the unusual loan products were developed. Interest only, Option ARM, and the low teaser rate products were answers to helping people who did not otherwise qualify get a home, as REQUIRED by CRA. These low standards for qualification were applied to everyone who wanted a mortgage.
Credit Default swaps are insurance for bonds. I buy insurance on most of my assets. Insurance is available for equity investments through the options market. The end result is that it can make the investment much more sound.
The problem developed when CDS written on the pools of home loans were found to be badly mispriced. Why? The borrowers did not meet the historic standards of the homeowner of the past. It was not the CDS market that caused the problem, it was the terrible result of the low underwriting standards and the high default rates that brought on.
This article is incorrect in its premise.
In early 1993 President Bill Clinton ordered new regulations for the CRA which would increase access to mortgage credit for inner city and distressed rural communities. The new rules went into effect on January 31, 1995 and featured: requiring strictly numerical assessments to get a satisfactory CRA rating; using federal home-loan data broken down by neighborhood, income group, and race; encouraging community groups to complain when banks were not loaning enough to specified neighborhood, income group, and race; allowing community groups that marketed loans to targeted groups to collect a fee from the banks.
The new rules, during a time when many banks were merging and needed to pass the CRA review process to do so, substantially increased the number and aggregate amount of loans to low- and moderate-income borrowers for home loans, some of which were "risky mortgages. Banks set up CRA departments, a CRA consultant industry was created and new financial-services firms helped banks invest in packaged portfolios of CRA loans to ensure compliance. Established and new community groups began marketing such mortgages. The Senate Banking Committee estimated that as of 2000, as a result of CRA, such groups had received $9.5 billion in services and salaries. As of that time such groups also had received tens of billions of dollars in multi-year commitments from banks, including ACORN Housing $760 million; Boston-based Neighborhood Assistance Corporation of America $3 billion; a New Jersey Citizen Action-led coalition $13 billion; the Massachusetts Affordable Housing Alliance $220 million. The number of CRA mortgage loans increased by 39 percent between 1993 and 1998, while other loans increased by only 17 percent.
The CRA was public policy that DROVE the market. To cast a blind eye that obvious econic fact and simply blame "the profit motive" is ludicrous.
It is equally ludicrious to blame Wall Street and investment banks when what they did was buy up the risky mortgages that became so prevelant in the market place.
Granted, no one intened to lose money, but, to lay blame on capitalism when the real source of the problem was government in the first place indicates to me a fundamental lack of economic understanding.
It is equally ludicrious to blame Wall Street and investment banks when what they did was buy up the risky mortgages that became so prevelant in the market place.
Assuming everything you wrote is true, anon., I'd be interested to hear which parts of that narrative were not publicly disclosed at the time. I.e. which of the facts you cite could not (should not?) have been taken into account when banks were buying up the risky mortgages or pricing the insurance on the resulting risky bonds.
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