Boom Bust Boom

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Finn R Mar 25, 2018 I think complete stories are better than ones that start in the middle. This one starts with greedy bankers preying on borrowers who couldn't afford mortgages. It's strange that no one questions why greedy banks were eager to loan money to people who were unlikely to pay it back. The minute someone does the slightest bit of research they'll find that these greedy banks were being accused of discriminating against minorities and people with bad credit. The New York Times published a headline about a black man with a 700 credit score being 60% less likely to get a loan than a white man. The New York Times made sure to disclose the color of the borrowers skin, but failed to mention the debt to income levels, down payments, and annual income of those borrowers. In 1998, Bill Clinton threatens to fine banks for not loaning to minorities and sub prime borrowers because owning a home is the American dream. The greedy banks knew that loaning money to people who can't afford the loans is not only stupid for the banks, but also the borrowers. However, the all powerful government got what it wanted; increased loans to voters with low credit scores. The greedy banks, who also donate vast sums to both parties, complained about the risks of loaning money to high risk borrowers and were told the Government Sponsored Entities, Fannie and Freddie, would buy those high risks/high interest loans. This policy moved the risk from bank balance sheets to the government. This made a small bit of sense at the time since banks had to be threatened with fines from the government to make these loans in the first place. However, this policy is also what opened the flood gates. Banks could now seek out high risk borrowers they originally "discriminated" against, provide loans to them and then sell those loans to Fannie and Freddie. Given that any risky loan the banks came up with was backed by the full faith and credit of these government sponsored entities, banks were now eager to take on these risks. By 2003, a group of independent auditors finds an unprecedented amount of high risk mortgages on Fannie and Freddie's books and warns then House Financial Services committee chairman, Barney Frank, of the tremendous risk the government had taken on. He replies that he is, "comfortable rolling the dice on subsidizing the mortgage market." This is the man whose name would be on the bill put in place to stop banks from "rolling the dice" after the crisis. In between 2003 and 2007, 250 Republicans and 200 Democrats sign legislation to deregulate derivatives. Funny enough, these derivatives would be partially blamed for the crisis along with a lack of lending between banks. No one talks about why these derivatives blew up. These derivatives were best that borrowers were going to pay their mortgages. Given that the mortgage market was over 400 years old at the time and had never blown up before, everyone thought mortgages were a safe bet. Mortgages were a safe bet until the government started subsidizing them. Once the crisis began, politicians pointed their fingers at the banks. Bankers are easy targets since they are some of the few people hated more than politicians. Barney "Roll the Dice" Frank came to the rescue with the Dodd Frank Bill and the entire world believed that greedy banks were to blame. Lawsuits started being filed against banks for preying on the same people they were accused previously accused of discriminating against. Yet, no one asks what caused discriminatory banks to become hunters of borrowers with bad credit. To the government's credit, they fulfilled their promise to guarantee the loans in the form of massive bailouts for banks. Bush provided the first TARP money, Obama provide the next installment, and the federal reserve lowered rates to make money cheap. This is a another great slight of hand. Bush gets the blame for bailing out Wall Street with TARP 1. Obama gets credit for stabilizing the financial system with TARP 2 and the stock markets performance fueled by the largest deficit in the country's history. Obama did admit he inherited the mess, but never really mentioned who left it to him. FDR created FHA and the Community Reinvestment Act, Jimmy Carter ran on "Everybody Deserves a Home", Clinton used the CRA to threaten banks into lending to high risk borrowers, and Barney Frank decided to keep "rolling the dice." But if you ignore all that, this movie is right about free market principles being responsible for the crisis. Free market principles are also responsible for creating so much wealth and freedom that ignorant actors and dishonest economists can produce Socialist propaganda in the wealthiest country in the world. See more

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Boom Bust Boom

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