Who’s to Blame for the Financial Meltdown?
If you are not somehow preoccupied with the financial crisis, you are probably homeless, out of work and out of your mind. Virtually everyone has been effected by the worldwide meltdown of the banking system. It is only human that when faced by crisis, we look to see who to blame. Given the magnitude of the problem we are fortunate that the government is going to do the work for us. Nancy Pelosi has instructed Barney Frank to get to the bottom of this sordid mess.
While disasters such as this always have a host of people to blame, some of the best minds in the world have already seen the forest through the trees and simplified the problem for us. The Europeans have determined it’s all our fault. Evidently, the world’s policeman went bad and held a gun to their heads and forced them to buy the mortgage backed securities. Their problems had nothing to do with their own lack of due diligence or an over levered European banking system that makes ours look puritanical. With the burden of singular guilt for the largest financial disaster in most lifetimes, I doubt that old Barn is going to have to look too hard for a singular scapegoat.
A large part of the blame is most certainly deserved by the financial community. With excessive pay packages only matched by professional sports and Hollywood and a once stellar reputation envied by Congress whose own reputation makes George Bush look like a national hero, what better group to place all the blame on. What’s more, these bad actors have also been the beneficiaries of decades of deregulation emasculating the powerful bureaucracies in Washington.
This is obviously a preordained conclusion of the coming inquisition. The American people are irate and need a place to lay the blame. This is a slam dunk if I’ve ever seen one. Unfortunately, without a complete assessment of the events leading up to this, history is bound to repeat itself.
In the third quarter of 1999 Fannie Mae announced a pilot program to ease credit requirements on mortgages it would acquire from banks and other lenders. The objective was to encourage banks to extend mortgages to individuals that would not otherwise qualify for conventional mortgages. The pilot program was hoped to go nationwide by spring of 2000.
In a September 30, 1999 article in the New York Times, Fannie Mae Eases Credit to Aid Mortgage Financing by Steven Holmes, the action was described to be as a result of “pressure from the Clinton Administration to expand mortgage loans among low and moderate income people” and “pressure from stock holders to maintain its phenomenal growth in profits.” In a particularly prophetic way, the article states:
“In moving, even tentatively, into this new area of lending, Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980’s.”
The banking system makes a great bad guy at this point, but without addressing the manipulation of that system for public policy and political purposes, we will have lost an opportunity to learn from our mistakes. This program survived administrations of both parties and “we”, after all, are the shareholders that demanded ever increasing growth at what can now only be considered, any cost. Let’s hope for a miracle and see if Congress takes an introspective look at the problem while deciding what new regulations they can apply to increase their control over a segment of our economy they have significant responsibility for destroying.
Richard Gabel
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