Friday, September 26, 2008

The Truth About the Current Financial Crisis

This blog is supposed to be about my experiences in law school, but every once in awhile, I have to take on current events. Earlier this week, our school had a professor that used the email list serve to send out a email which blamed the current crisis on the Bush Administration. In addition, it stated that George W. was going to hand out a 700 Billion dollar blank check to his pals on wall street. This set me off. Law professors should be more educated about the powers of the president than the average person. When I go to the nail salon, I expected to hear a comment like this. I do not expect to hear this at my school.

Here is the truth: In 1977, a Democratic controlled Congress passed The Community Reinvestment Act in which President Carter signed into law. This instructed lending institutions to expand the percentage of loans issued to minorities and the poor for homes. In 1995, under a Democratic controlled Congress, this act was expanded tremendously and signed by President Clinton. This directed that 42% of all of Fannie Mae and Freddie Mac's loans must be issued to low income and minorities. Thus truly began the sub-prime mortgage nightmare. There were no regulations built in that allowed for executive power oversight, and indeed no independent agency was given the authority to oversee what was happening within the mortgage practices. Delegating this oversight is the responsibility of THE CONGRESS, not the President. Fannie Mae and Freddie Mac began issueing loans to people, where it took 40-50% of thier incomes to make the monthly payments. With the price of oil and food increasing dramatically in the past 2-3 years, this caused substantial strain on the ability of people to pay their mortgage notes.

Now, this is an ABC Sesame Street account of the story because it is much more complex than this. This recount does not account for hedgefunds and the lack of oversight on the wall street fat cats.

In 2003, the Bush Administration recommended what the NY Times called "the most significant regulatory overhaul in the housing finance industry since the savings and loan crisis a decade ago." This change was to move governmental supervision of two of the primary agents guaranteeing subprime loans, Fannie Mae and Freddie Mae under a new agency created within the Department of the Treasury. However, it did not alter the implicit guarantee that Washington will bail the companies out if they run into financial difficulty; that perception enabled them to issue debt at significantly lower rates than their competitors. The changes were generally opposed along Party lines and eventually failed to happen. Representative Barney Frank(D-MA) claimed of the thrifts "These two entities -- Fannie Mae and Freddie Mac -- are not facing any kind of financial crisis, the more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing." Representative Mel Watt (D-NC) added "I don't see much other than a shell game going on here, moving something from one agency to another and in the process weakening the bargaining power of poorer families and their ability to get affordable housing."

This is worriesome to say the least that we have placed, as a country, the power in the hands of the democrats who refused to see the writing on the wall. I point this out to say that Bush's Administration attempted to address this issue 5 YEARS AGO. AND CONGRESS FAILED TO ACT. I think this was willful blindless on behalf of the branch of government that is supposed to make the laws and to arrange for oversight of the laws.

If the Bush Administration is guilty of anything, it is in not being aggressive enough in bringing the problem to light. Perhaps the administration was distracted by other issues, but that does not excuse the Administration for remaining silent for so long. They should have been calling the Congress out on the carpet and alerting the American people of the fact that their elected officials were unwilling to regulate this are of law. Too much rides on financial markets for these institutions not to be regulated by the government. I do not mean controlled, I mean under scrutiny for abuse.

Congress makes the laws. The President enforces the laws. Period. But right now, it does not matter who got this country into the situation, what matters now is how do we get out? It is time for all of us to let our officials know that enough is enough, and if you can't fix this responsibly, then we the people, will boot your butts out of office November 4th. Stop bickering and start working---Oh, and make the fat cats pay, not we the people. We did not get us there, you did Congress men and women. Suck it up and stick it to those that abused the system and those that fell asleep at the wheel when they should have been watching.

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