September 30, 2008

Bumper Sticker: DEREGULATION IS NUANCED

Phil Gramm did two things in 1999 that seem particularly relevant now.

1) He introduced and strongly supported the Gramm-Leach-Blily Act.

This act repealed part of the Glass-Steagal Act and officially allowed commercial and investment banks to consolidate for the first time since the New Deal.

Robert Kuttner wrote an article almost exactly a year ago explaining the effect that deregulation had on our current economic crises. Here's a snip:

quote:
The Glass-Steagall wall was devised to prevent a repeat of the 1920s' scams, in which banks made speculative investments, turned the debts into securities, and sold them off to unsuspecting investors with the blessing of the bank. With Glass-Steagall, commercial banks were tightly supervised and given access to federal deposit insurance, to keep savings secure and prevent runs on banks. Investment banks, meanwhile, were not government-guaranteed and were free to do more speculative transactions for consenting adult customers. But Roosevelt's newly created SEC subjected securities markets to much tighter structures against self-dealing and insider conflicts of interest.
2) As chairman of the U.S. Senate Committee on Banking, Housing, and Urban Affairs, he helped to usher in the wave of subprime mortgage lending.

In this article from the NY Times back in 1999,

quote:
In July [of 1999], the Department of Housing and Urban Development proposed that by the year 2001, 50 percent of Fannie Mae's and Freddie Mac's portfolio be made up of loans to low and moderate-income borrowers. Last year, 44 percent of the loans Fannie Mae purchased were from these groups.
The other relevant fact about Phil Gramm: until very recently, he was John McCain’s presidential campaign co-chair [source] and his most senior economic adviser [source], and continues to be an unofficial adviser on economic and financial matters [source].

Obama campaign: could you please make and run this ad immediately?

2 comments:

D.R.Schepers said...

well no sorry... Glass-Steagall rejected the argument that a bank and its holding company should be treated as a single entity. It is relative only to deposits i dont see the relevance to sub-prime morgatges..

That is the dems mess with the failed Community Reinvestment Act.

http://en.wikipedia.org/wiki/Community_Reinvestment_Act

"Economist Stan Liebowitz notes that the Fannie Mae Foundation singled out Countrywide Financial as a "paragon" of a nondiscriminatory lender who works with community activists, following "the most flexible underwriting criteria permitted." The chief executive of Countrywide is said to have "bragged" that in order to approve minority applications, "lenders have had to stretch the rules a bit." Countrywide's commitment to low-income loans had grown to $600 billion by early 2003"

Clinton increased the power of the CRA in 1995.

Subprime mortgage loan originations surged by a whopping 25 percent per year between 1994 and 2003, resulting in a nearly ten-fold increase in the volume of these loans in just nine years

A September 30, 1999 New York Times article stated, "... the Fannie Mae Corporation is easing the credit requirements on loans... The action... will encourage those banks to extend home mortgages to individuals whose credit is generally not good enough... Fannie Mae... has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people... borrowers whose incomes, credit ratings and savings are not good enough... Fannie Mae is taking on significantly more risk... the government-subsidized corporation may run into trouble... prompting a government rescue... the move is intended in part to increase the number of... home owners who tend to have worse credit ratings..."

Fannie Mae Eases Credit To Aid Mortgage Lending, The New York Times, September 30, 1999 .....


Why didn’t someone try to stop it?

Someone did: “The Bush administration today recommended the most significant regulatory overhaul in the housing finance industry since the savings and loan crisis a decade ago,” The New York Times, September 11, 2003.

But someone intervened to stymie the Bush administration. Who? The New York Times reports:

Supporters of the companies said efforts to regulate the lenders tightly under those agencies might diminish their ability to finance loans for lower-income families. . . . “These two entities — Fannie Mae and Freddie Mac — are not facing any kind of financial crisis,” said Representative Barney Frank of Massachusetts, the ranking Democrat on the Financial Services Committee. “The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing.”

In 2005, John McCain co-sponsored the “Federal Housing Enterprise Regulatory Reform Act,” which among other things provided for more oversight of Freddie & Fannie. The bill didn’t pass. Guess who blocked it?


The junior senator from Illinois, i.e., Barack Obama, who turned to Jim Johnson, former head (1991-1998) of Fannie Mae, to help advise him on whom to pick for the vice-presidential slot on his ticket. From 1985 to 1990, incidentally, Johnson was managing director of Lehman Brothers. Remember them?

You might also want to check out one of Barack Obama’s other advisors: Franklin Raines, former CEO of Freddie Mac.

And for people who ask why wasn’t Bush and McCain more forceful: What politician is going to put his career on the line to deny minorities housing opportunities?


Who is leading the charge in blaming Glass-Steagel? Of course Robert Kuttner, economist for the Carter admin. who started the CRA.

Jason said...

Hi Dan. Thanks for your comments.

The G-S Act affects loans, securities, and deposits and their relationship with each other.

The CRA started as an act to discourage discrimination in loans, and was written with this provision: "The law also does not require institutions to make high-risk loans that may bring losses to the institution, instead the law emphasizes that an institution's CRA activities should be undertaken in a safe and sound manner."

To blame the CRA from its start would be foolish.

I agree that some of President Clinton's involvement is directly related to our current economic crisis. But mass deregulation and the total abolition of the CRA at the expense of discriminatory lending isn't much preferable, and I've yet to see someone explain how deregulation didn't contribute to the perfect storm we now find ourselves in.

Also, Dan, if you pull large chunks of text from someone else's blog and put them on this blog, please include appropriate attribution, which I've included for you below.

(The above comment by D.R. Schepers is in part from http://pajamasmedia.com/rogerkimball/2008/09/29/who-caused-the-biggest-financial-crisis-since-the-great-depression/ , by Roger Kimball.)