Why the Economy Crashed


Why the Economy Crashed

If you’re looking for someone to blame for the drawn out recession (often more accurately called a Depression) that we’re experiencing, a good read is a book called, “Reckless Endangerment”. I write, “good read”, with reservations. Frankly, it’s difficult to continue reading a book when you know that it ends in financial disaster that could have been prevented.

  The book is written by Gretchen Morgenson and Joshua Rosner, the former a columnist and business writer for The New York Times. They target two government sponsored enterprises (GSE), the Federal Natrional Mortgage Association (Fannie Mae) and the Federal Home Mortgage Corporation ( Freddie Mac). Both were set up to make it easier for lower and middle income families to own their homes. Fannie Mae was established in 1938.

  It’s a tale of good intentions gone bad aided by greedy and corrupt and inept politicians, investment bankers, bankers and businessmen. It’s not a tale of incompetent and mindless bureaucrats handing out favors. In fact, the bureaucratic operatives are the ones constantly giving the warning only to be threatened and warned off by the so-called elite leaders.

  It’s a tale of the perfect storm: ideology, greed, corruption and power coming together to bring, nearly to its knees, the world’s wealthiest and most powerful nation. It is not a story of the failure OF regulations, but the failure TO regulate compounded by a deliberate lowering of lending standards.

  As the “everyone gets a home game” became more and more profitable, financially and politically, forces colluded to reduce the amount of money financial institutions, including Fannie and Freddie, had to put aside to cover bad loans, defaults and so forth. Simultaneously, they also reduced the standards for approving loans.

  Fannie Mae bought up almost all the loans that banks and mortgage brokers could scarf up. Their executives got bonuses based on volume. Everyone got a home. All the risk was dissipated so no one (except the homeowner and taxpayer) was at risk. Everyone got rich. Home prices shot up bringing more people into the market. Homeowners borrowed against their equity, buyers speculated on multiple homes. And, as we know now, it was a bubble with nothing but air in the balloon.

  The losses to individuals were (and still are) huge. The poor, put into homes they couldn’t afford, got poorer. Those just incidentally in the market got smashed. Taxpayers will, in the long run, be on the hook for as much as $1,000,000,000,000 and that’s just for Fannie Mae and Freddie. Another trillion was spent rescuing banks and investment houses and car companies.

  Everyone got poorer except those in charge. Politicians, like Barney Frank, a long time supporter of Fannie, survived. Brilliant (particularly in his own mind) Alan Greenspan, head of the federal reserve bank, who knew what was happening but stood aside, retained his reputation. Other players moved on into the Obama administration - Larry Summers, for instance. Economic gurus whom we seem to blindly follow continue in positions of power and influence. The book provides the names.

  Politically, there is plenty of blame, too. As noted, these programs to spur more home ownership go back several decades. It was a good cause corrupted gradually by excessive political zeal and then pure greed. The administration of George H. W. Bush helped it along. The Clinton administration gave the first big boost. The Republican legislature in the latter part of the 1990s saw the problem, but backed off. The G. W. Bush administration took a shot at Fannie and Freddie, but didn’t push hard enough. Politically, you don’t take away free rides from the voters.

  It was, in one perspective, the closest to a socialized ( but quasi-government driven) housing program we’ve had. It was unsustainable and it certainly hasn’t been free except for those who were responsible for it.

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By: JuanHappicampa on 6/26/11
Of course it was Freddy, Fanny and Frank that caused this and profited by it, we knew it all along. I have regular tea and green tea, would you care to have a party?

""This is an adaptation from "Reckless Endangerment", an exploration of the origins of the recent financial crisis, by Gretchen Morgenson and Joshua Rosner. The book will be published Tuesday by Times Books. This excerpt examines Wall Street's role in the crisis and the relationship between Goldman Sachs, a leading investment bank, and Fremont, a freewheeling mortgage lender. Goldman declined to respond to detailed interview requests for this book.

Of all the partners in the homeownership push, no industry contributed more to the corruption of the lending process than Wall Street. If mortgage originators like NovaStar or Countrywide Financial were the equivalent of drug pushers hanging around a schoolyard and the ratings agencies were the narcotics cops looking the other way, brokerage firms providing capital to the anything-goes lenders were the overseers of the cartel.

Just as drug lords know that their products pose hazards to their customers, the Wall Street firms packaging and selling mortgage pools to investors knew well before their customers did that the loans inside the securities had begun to go bad.

It was a colossal breakdown in the duty Wall Street owed to its investing customers.

Years after the meltdown, investors began to understand how badly they'd been burned by Bear Stearns, Merrill Lynch, Lehman Brothers, Deutsche Bank, Greenwich Capital, Morgan Stanley, Goldman Sachs, and other smaller firms. Lawsuits against these firms alleging a dereliction of duty started cropping up in 2010 as investors began to realize that Wall Street's secret loan assessments had identified severe problems in mortgages well before they stopped selling them.

Unlike many other firms, Goldman Sachs went negative on the mortgage market in the fall of 2006, well before others in its industry. Using its own money, the firm began amassing major bets against the same dubious loans it was peddling to investors at that time. Goldman, therefore, profited immensely from the losses its clients absorbed, losses its own practices helped to create.

It is unclear whether Goldman put on its hugely profitable and negative mortgage trades because of proprietary information turned up in its due-diligence reports. If that was indeed what happened, its failure to tell clients of the problems in the loans it was selling is even more disturbing.""