If I Were Dictator (Part 21)

Posted on Thu 07/14/2011 by


By Marlin6

On 02/05/2008, I authored a post “Benevolent Dictators Make Good Government”. Examples are King David – Israel – (1010 BC –970 B.C.) in ancient times and General Douglas McArthur – Japan – (1945 –1947) in modern times. I started musing about what I would do if I were absolute dictator of the United States to fast track our country back to a position of greatness and prosperity. Therefore I am submitting a series of posts to PA Pundits (many controversial) about how I would provide solutions to the major issues facing our nation.


I would issue an order that the United States Government will stay out of anything to do with housing and let banks and other financial institutions in the free market determine prices, interest rates, and terms of payment. The government has spent $1.5 Trillion on housing programs and the problem is getting worse. Housing is the largest single purchase most persons make, and government interference has ruined many lives.

Liberal Democrats are constantly manipulating public sentiment in a steady effort to disestablish the free market as they push the nation down the road to disaster. They have built an enormous maze of government agencies and programs that grow from year to year and intervene in and interfere with the free market. Then the central planners create economic perversions that are seriously detrimental to the public, blame the free market and insist on seizing additional authority to correct the failures created by their own direction In 1977 Congress passed the Community Reinvestment Act (CRA) to address alleged discrimination by banks in making loans to poor people and minorities in inner-cities. They called it ‘red-lining’. The act provided that banks have ‘an affirmative obligation’ to meet the credit needs of the communities in which they are chartered. In 1989 Congress amended the Home Mortgage Disclosure Act requiring banks to collect racial data on mortgage applications. University of Texas economics professor Stan Libowitz has written that: ’In 1995 the Clinton administration’s Treasury Department issued regulations tracking loans by neighborhoods, income groups and races to rate the performance of banks. The ratings were used by regulators to determine whether the government would approve bank mergers, acquisitions, and new branches.

There are all kinds of finger pointing going around as to why our economy is the way it is. With four million homes in foreclosure it’s no wonder our economy is where it is with so many people dependent on the real estate market and home building. They say Wall Street, banks, and speculators brought about the real estate home collapse and this is true. However, the real culprits are in Congress and the Executive branch. In 1992, Andrew Cuomo was Secretary of the Department of Housing and Urban Development (HUD). HUD pressured two government-chartered corporations known as Freddie Mac and Fannie Mae to purchase large bundles of loans for conflicting purposes of diversifying the risk and making even more money available to banks for risky loans. Congress also passed the Federal Housing Enterprises Financial Safety and Soundness Act eventually mandating that these companies, Freddie Mac and Fannie Mae. Assume 45% of all loans from people of low and moderate incomes. Consequently, a second market was created for these loans by Fannie Mae and Freddie Mac.

In 1995 the Treasury Department established the Community Development Financial Institutions Fund that provided banks with tax dollars to encourage even more risky loans. This was still not enough. Top congressional Democrats including Representative Barney Frank, Senator Chris Dodd and Senator Charles Schumer, among others, repeatedly ignored warnings of pending disaster, insisting that they were overstated and opposed efforts to force Freddie Mac and Fannie Mae to comply with the usual business and oversight practices, like SEC reporting. Top executives of these corporations, most of whom had worked in Democrat administrations, resisted reform while they were actively ‘cooking the books’ in order to reward themselves with tens of millions of dollars in bonuses. Barney Frank, who was head of the Banking and Finance Committee in the House, and Sen. Chris Dodd, who headed the Banking and Finance Committee in the Senate, are the ones who got us into this mess. Both of them decided that just about anyone who walks through the doors should own a home. They told the banks and mortgage companies to lower their standards on qualifying for a mortgage. That brought about interest only and adjustable rate mortgages with little or no money down, putting people in homes that they could not afford, along with speculators with buy today and sell tomorrow thinking. Dodd and Frank did this for one reason, and one reason only, to get votes.

Top headlines a couple years ago were about the failures and buyouts of some of the largest financial institutions in the United States, like Lehman Brothers, Bear Stearns, Merrill Lynch, AIG and Washington Mutual. Freddie and Fannie have become wards of the state and have put the taxpayers on the hook for up to $1.5 Trillion dollars. Somehow you understand that all these problems go back to bad mortgages and that a combination of falling home prices and mortgage defaults have put these investment banks into deep trouble. So who is to blame? The Democrat politicians (and some Republicans) would like us to believe that the problem rests squarely on “greedy” mortgage brokers and lenders. Nothing could be further from the truth. The responsibility for this whole debacle can be laid at the feet of Congress and HUD for political meddling in the credit decisions of the mortgage lenders. A byproduct of this government intervention and social engineering was a financial instrument called the derivative which turned the sub-prime mortgage market into a ticking time-bomb that would magnify the housing bust by orders of magnitude. A derivative is, in essence, a contract where one party sells the risk associated with the mortgage to another party in exchange for payments to that company based on the value of the mortgage. In other words, it’s a bet. It’s a bet that the mortgage will last or will go under; you bet on one side or the other. In some cases investors who did not even make the loans would bet on whether the loans would subject to default. Although imprecise, perhaps derivatives in this context can best be understood as a form of insurance. Now, derivatives allowed commercial and investment banks, individual companies and private investors to further
spread and ultimately multiply the risk.

Twenty years ago the buzz-word in the media was “redlining”, or mapping out districts in a city where loans from applicants would not be accepted. Newspapers across the country were filled with hard hitting investigative reports about evil and racist mortgage lenders refusing to make real estate loans to minority applicants living in lower income neighborhoods. These claims were absurd, because when credit histories, job stability, loan-to-value ratios and income levels were considered, there was no evidence of racial discrimination. However, political correctness won out. Washington made it clear that if the banks and other lending institutions didn’t do something to bring more minorities into the world of home ownership there would be a heavy price to pay. The Community Reinvestment Act permitted community activist groups like ACORN (Association of Community Organizations for Reform Now) and NACA (Neighborhood Assistance Corporation of America) to browbeat the banks and force them to make $20 billion dollars in loans to unqualified borrowers. Bruce Marks, the CEO of NACA, said that they always
took the junk-yard dog approach, “once we grab on we never let go.” They drove Fleet Financial, The Associates, and First Union into virtual bankruptcy. Instead of the old rule of 20% down and a good credit history for a borrower, the rules were changed to no money down, no closing costs, no fees, no requirement for good credit, and a below-market interest rate. NACA said, “Everyone gets the same incredible terms, including the below-market interest rate, regardless of their credit score or other factors. ‘Minority mortgage applications were rejected more frequently than other applications but the overwhelming reason wasn’t racial discrimination but simply that minorities tend to have weaker finances.

So what happened to these garbage loans? The hot potatoes were bundled up and sold to Freddie and Fannie. These agencies had the best of both worlds, because they were semi-private institutions with the tacit backing of the Federal Government. They also had their protectors in Congress, and contributed heavily to election campaigns of these Representatives and Senators (mostly Democrats). A review of Federal Election Commission records back to 1989 shows Barack Obama in his three complete years in the Senate is the second largest recipient of Freddie and Fannie campaign contributions- receiving $126,349 since being elected to the Senate in 2004. In his three years, he got more dollars/year than any other Senator in history. Since the government takeover, attention has focused on three Fannie Mae executives who have close ties to Obama: Franklin Raines, former Clinton administration budget director; James Johnson, former aide to Democratic Vice President Walter Mondale; and Jamie Gorelick, former Clinton administration deputy attorney general. Johnson earned $21 million in his last year as Fannie Mae CEO. Raines earned $90 million in his five years as Fannie Mae CEO. Gorelick earned an estimated $26 million as vice chair of Fannie Mae from 1998 to 2003. Raines and several top Fannie Mae executives were ordered to pay $31.4 million for manipulating Fannie Mae earnings to trigger their massive bonuses. Last year, the SEC imposed a $50 million fine on Freddie Mac and four executives for accounting fraud.

How do NACA and ACORN fit into this? The Community Reinvestment Act pumped up the volume of lending and bank deregulation set off a wave of mega-mergers. Regulatory approval of such mergers depended, in part, on positive CRA ratings. To avoid the possibility of denied or delayed applications, the lending institutions had an incentive to make formal agreements with community organizations (NACA and ACORN). One of the lawyers for ACORN was Barrack Obama. So these left-wing nonprofit urban terrorists were able to gain control over billions of dollars by threatening to intervene in the CRA review process of the banks. These billions were parceled out to individual low-income mortgage seekers. These applicants had to attend “workshops” that promote a left-wing activist political agenda and to participate they had to register to vote. So Obama and his fellow Democrats in control of Congress recognized that they had a symbiotic relationship with these groups, and needed each other as they washed money around in circles. Congressional Democrats forced banks to provide money for “CRA” purposes. The banks ‘lend’ the money through NACA and ACORN, who get fee-income that finance voter registration These voters happen to vote Democrat. The loans are bundled neatly and sent to Fannie and Freddie so that Raines, Johnson, and Gorelick can show that they are lending to the disadvantaged, thereby inflating their salaries, bonuses, and stock-options rights. Fannie and Freddie executives then make significant donations to Obama, Frank, Dodd, and other Democrats to make sure they get re-elected. When Fannie and Freddie go belly up, no big deal. The taxpayers will pick up the tab.

The Federal Reserve Board’s role in the housing boom and bust cannot be understated. The Pacific Research Institute’s Robert Murphy explains that the Federal Reserve slashed interest rates while this was going on; slashed them repeatedly starting in January 2001 from 6.5% percent until they reached a low of 1% in June 2003. When the easy money policy became too inflationary for comfort, the Fed under Alan Greenspan and then new chairman Ben Bernanke, at the end, began a steady process of raising interest rates back up from 1% in June 2004 to 5.25% in June 2006. Therefore, when the Federal Reserve ended its role as steward of the monetary system and instead used interest rates to artificially and inappropriately manipulate
the housing market, it interfered with the normal market conditions.

Credits – Mark Levin