Why the Economy Crashed

Bill Northrop


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.