Amid the Bush Administration's so-far faltering response to the current financial meltdown, the cause of this catastrophe has been all but forgotten.
In case you've lost it in the clouds of smoke and the avalanche of opaque financial jargon emanating from President Bush's Treasury Department, the root cause was mortgages. Home loans marketed by deception by unregulated cowboy lenders. Loans to people who were encouraged not to understand what they were getting into. Bait-and-switch loans with low introductory interest rates set to balloon into the ionosphere a couple of years later. Loans many should never have had received and predictably were unable to repay.
But not to worry. Didn't we all know that the credit cup would always runneth over and that the housing market could never go down, only up? Well, that's the way we behaved and that underlying assumption finally resulted in what we now call the housing bubble.
The busted one!
Most of these toxic mortgage loans were not made by banks. They came from mortgage lenders and mortgage brokers. These entities were not regulated by any government oversight body. They were operating in the wild wild West of the housing industry. Many didn't even require proof of the borrower's income; in some cases, the sales pitch included lending you the down payment.
Once these guys sold a bunch of mortgages, they sold them to investors, including the big commercial and investment banks all over the world, which bundled them up and sold them again. It was the unabated greed of these big financial institutions and their advisors that ultimately made them victims as well as perpetrators of the disaster. When their investments turned out to be worthless - or of unknown value - they started worrying about the accuracy of their balance sheets, stopped lending money to anyone, and turned to the government for help.
The government obliged with the most massive bailouts in U.S. history. You still with me? The bankers were a big part of the gang that caused the housing bubble in the first place, yet were the first ones to be rescued with our tax dollars. Seven-hundred-billion of them.
All but forgotten in the Treasury Department's frenzy to save Wall Street were those millions of homeowners who couldn't make their mortgage payments and whose homes were being seized in foreclosure at a pace not seen since the Great Depression of 1929.
Treasury's rationale for pouring its billions into the nation's largest banks was to end the acute constipation in the credit markets. That bit of government largesse cost $350 billion. It came with no strings attached -- and no results either, unless you count using our tax dollars to acquire other banks and pay out dividends to shareholders. Meantime, these banks are still not lending - even to one another. Many are said to be "hoarding" money while waiting for another shoe to drop, and there is no indication that the flow of credit is likely to restart any time soon.
But there is at least one person who didn't forget where this mess started. And, for her trouble, she is being quietly dissed by the Bush Administration.
She is Sheila Bair and her job is Chair of the Federal Deposit Insurance Corporation. The FDIC, started by Franklin Roosevelt as one of his recovery weapons after massive bank failures in the Great Depression, is the agency that provides Federal guarantees to depositors of banks that fail. When Washington woke up facing a protracted recession or worse, Bair's outfit quickly increased that insurance from $100,000 to $250,000 for each bank account. That's one of the very few positive and successful moves yet made.
Ironically, Sheila Bair was appointed by George W. Bush. The term of this self-described moderate Republican runs through 2011, meaning that W. can't fire her - though it appears he would if he could. She is currently far more popular with Democrats than she is with her own party's leaders. Or with Treasury Secretary Henry Paulson.
The reason: Bair has focused like a laser not on propping up banks but on rescuing homeowners. Her objective is to help stem the tsunami of foreclosures now putting people out of their homes and decimating entire neighborhoods as house values continue to drop like stones.
Bair has put forward a proposal to use $24 billion of the government bailout funds to help 1.5 million borrowers avoid foreclosure by guaranteeing modified home loans through the end of next year. This move is being opposed by Paulson and the Bush administration. So now Bair finds herself locked in a so far mild-mannered but potentially ugly duel.
There are two key elements to the Bair proposal.
First, delinquent borrowers who are two months or more late can arrange to have their monthly payments reduced to 31 per cent of their gross monthly income. To achieve that result, mortgage rates could be set as low as 3 per cent for five years. The rate would increase annually by one percentage point until it reached the prevailing market rate. Loan terms could be extended for as long as 40 years.