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The Real Cause of the Current Financial Crisis

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The legislation went nowhere and far from being any kind of sobering force on the institutions involved, things only got worse.  In 2004, HUD increased the exposure of FM2 to even more sub-prime loans by raising the percentage of loans written to low- and moderate-income homeowners from 50% to 56%. This increased the risk of a financial meltdown even more.  After even more scandals with FM2 accounting practices and fines from the FEC for elections violations, the Federal Housing Enterprise Regulatory Reform Act of 2005 was introduced in Congress.  The bill was sponsored by Sen. Charles Hagel [R-NE] and co-sponsored by Senators Elizabeth Dole [R-NC], John McCain [R-AZ], and John Sununu [R-NH].  The bill was bottled up in the Committee on Banking, Housing, and Urban Affairs and went nowhere.


Current Posturing


            What are the causes of this meltdown currently being broadcast about?  Mainly greedy Wall Street people and a lack of regulation and oversight.  But the greed on Wall Street is legendary and rarely leads to such financial distress.  There must be a reason it did this time.  While I agree that there was too little oversight, that is not the fault of anyone except those who were to provide the oversight, namely HUD and the Office of Federal Housing Enterprise Oversight.  But a lack of regulation?  Hardly.  Many point to the Financial Services Modernization Act of 1999 (also called the Gramm-Leach-Bliley Act) which lifted barriers and allowed banks, securities firms and insurance companies to merge and sell each other's products.  Since Phil Gramm sponsored this legislation he is held up as the architect of this current financial ruin.  But does this make sense?  While this may have exacerbated the problem by letting smaller companies merge and thus mask the problems that would have felled these smaller companies, this is simply not the main cause of current problems.  We would still have the sub-prime mortgage mess with the attendant liquidity problems so evident today.


Far from resulting from a lack of regulation, it is wrong-headed regulation that is the overarching cause of the entire mess.  But rather than recognize this fact, Congress and others wish to rush in with ever more regulation to make up for this alleged lack.  In the final hour, after all reasonable efforts to correct the problem have been ignored, the wise ones on high suddenly realize that some desperate measure is the only possible palliative.  Thus we get bailout after bailout financed by taxpayers who chose to act prudently in their financial affairs to save those who did not.  The entire system demands ruinous behavior and then bewails the behavior when it occurs.  The market would work if the government would just leave it alone.  But those who don't want the market to work will complain how the market has failed when it is really government intervention in the market that has failed.  Thus bad regulation breeds more bad regulation until disaster occurs and the cycle is thus restarted. 

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Retired military. Conservative. Politically independent. I enjoy critical thinking. Sometimes I do it well and sometimes I don't. Here's hoping we will all do it well more often than not.

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they once refused to do so actually cause this cri... by Mark Adams on Sunday, Sep 28, 2008 at 11:28:40 AM
Sorry Joe - you're wrong. The said legislation... by TomK on Sunday, Sep 28, 2008 at 2:58:03 PM
I don’t recall saying legislation “for... by Joe Reeser on Monday, Sep 29, 2008 at 5:23:30 PM
This problem has been in the works for years and c... by Gallaher on Sunday, Sep 28, 2008 at 6:15:54 PM
The media should show this video 24/7 on all chann... by Mad Jayhawk on Tuesday, Sep 30, 2008 at 12:16:13 PM
Thanks for that article, very informative.  F... by Matthew T. on Tuesday, Sep 30, 2008 at 12:17:58 PM
I appreciate your explanation of how the derivativ... by Joe Reeser on Wednesday, Oct 1, 2008 at 11:15:52 AM
This is total crap and a now well-propagated Repub... by E. Nelson on Tuesday, Sep 30, 2008 at 5:09:02 PM
My statement that, "for a bank to expand and ... by Joe Reeser on Wednesday, Oct 1, 2008 at 12:01:21 PM
Okay Joe, this is great...I have been trying to ge... by meg mackinley on Wednesday, Oct 1, 2008 at 12:46:47 AM
Federal Housing Enterprise Financial Safety and So... by Joe Reeser on Wednesday, Oct 1, 2008 at 3:54:47 AM
BusinessWeek which is a right-leaning well respect... by E. Nelson on Wednesday, Oct 1, 2008 at 9:51:31 AM
Had I actually made the argument that the CRA was ... by Joe Reeser on Wednesday, Oct 1, 2008 at 12:05:26 PM by CW Blanchett on Tuesday, Oct 7, 2008 at 3:27:02 PM