Weblog Commenting and Trackback by HaloScan.com The Barnyard: What Caused The Financial Meltdown?

Saturday, September 20, 2008

What Caused The Financial Meltdown?

Many many things actually but the seed was planted thirty years ago during the Carter administration with something called the Community Redevelopment Act which was a well intentioned plan to increase home ownership in poorer neighborhoods. This was given more teeth in '92 under Bill Clinton which forced banks to make risky loans and threatened them that if they didn't their ability to lend or expand would be limited. Bear in mind that Democrats controlled all branches of government at those times and George Bush was nowhere on the scene though Joe Biden was.

Investors Business Daily has an excellent piece that explains all this better than I can since I am not an economist or financial analyst, their is too much good stuff to pull a quote so go read it. Noel Sheppard also as an interesting take on this after managing some banks during that time.

I admit that some of these laxed lending practices helped me purchase my first home a few years back and also came damn close to getting me in trouble financially, but unlike many of those borrowers I have an excellent credit rating. I also didn't bite off more than I could chew. It seems to me that when housing prices started rising steadily as demand increased a lot of people whose mortgages were nearly paid off refinanced their homes in order to capitalize on the increased value of their homes for many various reasons, some good, some bad over extending themselves in the process. There were also the flipper speculators that bought with the intention of selling within a year or two at a profit. The mortgage brokers also sought to make a few bucks and created all sorts of creative plans to facilitate this, like interest only, ARMS, and back loaded payments that actually added to the amount owed. Then the bill came do and a whole bunch of folks said OH Shit! and the housing bubble burst, leading to where we are today.

This is not President Bush's fault or John McCain's who both sought to reign this idiocy in and were blocked by Democrats as the IBD article spells out in plain language. The Democrats are actually pushing to allow these insane lending practices to continue in the name of fairness and be backed up by the taxpayer. I do not like the bailouts of Fannie, Freddie and AIG but unfortunately it was needed to prevent an even bigger meltdown. I am also not a fan of regulations but some rules and oversight are needed for markets or society to function in an orderly manner, they just need to be of the proper kind, unlike those forcing banks to lend to those that aren't credit worthy.

The blame for this meltdown can be spread far and wide but most of it falls squarely in the lap of the Democrats with their well intentioned as usual but incredibly shortsighted policies. The question now is who is best suited to fix it, the Party that got us into this mess or the one that warned about it as early as '93. John McCain has come out with some solid ideas while Barack Obama has blamed George Bush and by extension McCain but has offered no solutions beyond tax the rich. If I were McCain I would put Mitt Romney in charge of getting this mess in order but that is why I was backing Mitt from the start anyway. Who would Obama put in charge of it? I would guess some of the folks that got us here in the first place since his financial team seems to be filled with Clinton era derelicts.

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