The Clinton administration deserves a lot of blame for the crisis, but a) it had nothing to do with government efforts to make home-buying more accessible to low-income buyers, and b) Clinton is blamed in the opening montage about the orgy of de-regulation that started with Reagan, accelerated under Clinton, and continued under Bush.
In no sane world does a bank ever make a loan to someone who is a poor credit risk. Period. No government program to encourage home-buying can get around that. Banks are in business to make money. They are not in business to make bad loans.
The crisis happened because smart bankers figured out a way to make money no matter how risky the mortgage. Bundle the risky mortgages up and sell them as investments, in a way that disguised the risk (the infamous "credit default swaps"). Furthermore, buy insurance against the securities becoming worthless. It was "foolproof."
These new securities were invented during the Clinton administration, and there were people in the administration who saw how toxic they might be and asked to regulate them, because they had the authority to ask to regulate any new type of security. That request was refused. The seeds of the whole crisis happened there.
There would have been an economic downturn no matter what, because there was a housing bubble, and there were people who were investing based on the assumption that housing prices would never come down. But the $700 billion in bad mortgages, which turned the downturn into a crisis, happened almost entirely because credit default swaps had allowed banks to profit by selling mortgages regardless of their risk. (They were able to sell them to naive investors who thought the bubble would never burst.)
The documentary Inside Job makes the Clinton administration's role in the crisis very clear.
In the meantime, studies have shown that mortgages made under the auspices of the government programs to encourage home-buying were not a contributing factor to the crisis, as they had default rates that were reasonable and in line with expectations. I believe that's because those programs had oversight to insure that borrowers were actually likely to pay their mortgages. IOW, this was not a government program to get buyers into mortgages they couldn't afford -- that would be insane. It was a government program to get mortgages to buyers who had a very good chance of paying them off but who would have fallen short of traditional standards (which allowed for almost no risk).
The crisis happened because banks made predatory and misleading mortgages (the initial payments were always affordable, and then they'd escalate dramatically), because they had figured out a way to profit even if they got stiffed. Pure greed.
Prepare your minds for a new scale of physical, scientific values, gentlemen.
reply
share
pouncemo
11 years ago
Yes, nice reply. And I do remember that Time magazine put Clinton right alongside George Bush when they made a list of persons/entities to blame.
After a year or so of perspective, and ever after, blame has been squarely placed on the shoulders of Reagan and Greenspan for the massive deregulation and rabid ideology that 'government isn't the solution...government is the problem'.
More recently, I heard an economist on Bill Moyers who says that regulation isn't the answer either. He says that any system that must be so heavily regulated will eventually fail. People (crooks) always find a way around the regulations. The system must be re-made so that it just isn't possible to game it and collapse an entire global economy.
Makes a lot of sense.
reply
share
emvan
11 years ago
That's actually an insight that both liberals and conservatives could get behind. But I think it's easier said than done.
Regulations imply fine print, and excessive paperwork, and, as you say, gaming the system. And anything that needs to be so heavily regulated should probably be just flat-out illegal, like insider trading is.
The difficulty comes from trying to outlaw various types of potentially profitable but overly risky transactions. Those who might profit are going to fight that tooth and nail. And they will argue that the risk isn't real, in the spirit of denying global warming.
Prepare your minds for a new scale of physical, scientific values, gentlemen.
reply
share