Update March 13, 2013 – if you like this post, I also recommend reading my post, How to Destroy America in Ten Easy Steps.
The fact is, the entire housing bubble and the economic collapse were caused entirely by our own Federal Government. People are blaming capitalism but we no longer have capitalism, we have CRONY-capitalism, where the government bails out the banks and corporations while the banks and corporations do the bidding of the government for favors, protection from domestic and foreign competition and bailout money.
I’m not excusing Wall Street and the Banks from blame. I’m saying that our own Government sent out the invites, provided the drugs and booze, and everyone else just showed up for the party. If the government had stayed out of the private sector, and not created the incentive and the opportunity for businesses to run wild, it would not have happened.
Have you ever heard the Government admit that it made a mistake? Think about that for a second. I never have. Is it possible it’s never made a mistake? No, that’s not possible, which means either their decisions that created this economic collapse were intentional or they have no idea what they are doing and won’t admit it. Both of those possibilities are frightening.
The following timeline of events is the truth that caused the economic collapse. While I begin this with the Community Reinvestment Act, there is a long list of government failures and bad government incentives that led to the destruction of the economy through government distorting and manipulating free-market capitalism.
And the genius of this plan? The Government and their media pundits and Hollywood allies turn around and blame capitalism for creating the entire mess, when in fact we have not been practicing capitalism for decades. And what does demonizing capitalism produce? Movements like Occupy Wall Street that want to bring down capitalism and raise the flag of socialism, turning to the Government for the answer to all their problems while never realizing that capitalism is dead, and Government is what killed it, and created this nightmare we live in.
I apologize that the list is long, but this is the smallest nutshell I could make it and still give you enough details to see what happened. Items in red are highlighting major government distortions and destruction of true free market Capitalism.
- First, our Government passes the Community Reinvestment Act of 1977 in an effort to assist low-income individuals to buy homes.
- The CRA of 1977 simply “encourages” banks to make a certain amount of loans to low-income individuals. No enforcement or penalty for not being “encouraged”…yet.
- In the mid 1990′s the HUD department of the Government begins requiring banks to prove they are making the right number of low-income loans.
- Banks not making the government imposed, and now enforced “quota,” are penalized.
- The Clinton and Bush administrations with Barney Frank and Chris Dodd use the Community Reinvestment Act of 1977 to force banks to make loans to unqualified people in the name of making homes affordable to everyone. This guarantees votes for the politicians. They ignore the likely economic outcome of giving loans to people who can’t pay them back.
- If the banks don’t make the loans to unqualified borrowers, our Government prevents banks from opening new branches, new ATM’s or expanding. Every bank knows if they don’t accept the invite to the Government party and start giving out loans to people who can’t pay them back, some bank will….which will force other banks out of business as the bank willing to play this game gets to expand and take market share from the other banks, who are denied by our Government every application to expand.
- At the same time, both Republican and Democrat politicians in Washington and the bankers of The Fed attempt to manipulate the economy by lowering interest rates to boost economic growth.
- Low interest rates reduce the costs of borrowing money which increases the number of home loans created, increasing the number of homes bought, thus reducing home inventory which raises prices.
- As prices slowly rise, politicians continue to pander for votes by promising the American Dream and that owning a home is the right of every American. To backup that statement, they put the American taxpayer on the hook for every loan processed through Fannie Mae and Freddie Mac.
- As home prices rise, Fannie and Freddie, at the time both implied government entities (now explicit ones backed by taxpayer dollars) begin buying mortgages from the banks.
- Between 1998 and 2003 Fannie & Freddie were the most frequent buyers of home loans.
- Politicians encourage Fannie & Freddie to take on risky loans, and substantially lower their lending requirements, as Fannie CEO Daniel Mudd said, “…get aggressive on risk taking or get out of the company.”
- Unqualified borrowers (low-income, bad credit, no down-payment) are suddenly made “qualified” by banks being blackmailed by our own government.
- Banks finally get the message that the government doesn’t care how risky the loan is or how unlikely the borrower is to pay it back, so they learn to continue making home loans, no matter how risky, and just sell them off to Fannie and Freddie as fast as possible.
- By the time Countrywide was out of business, 90% of their loans had been sold to Fannie & Freddie.
- Fannie & Freddie have barely $83B in assets to cover a potential whopping loss of $5T in liabilities, an astounding and unheard of 60 to 1 ratio. Nobody in Washington cares because they know the taxpayer will foot the bill of all losses.
- As these “unqualified” borrowers flood the market overnight buying houses, a rapid decrease in housing inventory begins inflating prices beyond normal ranges. Basic supply and demand principle.
- Builders rush in and begin building homes but panic sets in as buyers continue to flood the market for fear of being “priced out forever.” The National Association of Realtors (NAR) perpetuates this fear in the media to make more money through Realtor sales commissions.
- Realtors routinely scare people during home buying process with claims such as, “they’re not building any more land” and “the next phase release will cost more, better buy now.”
- Speculators enter the market, flipping homes for profit further driving supply down to ridiculously low levels which, through supply and demand, pushes prices even further into the stratosphere.
- Buyers that would have been qualified at “normal” prices become unqualified as prices go out of even their range, fear sets in for them too so they begin using the same creative financing the banks were giving the original unqualified buyers to become qualified.
- Wall Street creates investment vehicles that buy these unqualified mortgages from banks, mixes them together in pools of investments and resells them.
- Normally, banks would be concerned that defaults from unqualified borrowers buying homes would cause the bank to fail. By selling these unqualified loans to Wall Street, the banks no longer have this fear.
- Imagine being able to drink as much alcohol as you want and never getting sick. Now that the banks can unload every mortgage, toxic or not, onto Wall Street (to be bailed out eventually by the taxpayer) or the taxpayer directly (through Fannie and Freddie), they go on a drinking binge of epic proportions, with no fear of a hangover.
- Banks enjoy all the fees they can charge for each loan they process and sell off to Wall Street or Fannie and Freddie. Banks accelerate loan processing to maximize fee revenue.
- The Party rages on into the early morning hours…fraud permeates marketplace. Fraud from buyers, from banks, from Wall Street, from rating agencies, from Fannie & Freddie, from our Government.
- There are no longer any “unqualified” buyers. Everyone can buy a house, even if they don’t have a job, or any money.
- Homeowners across the country see the rise in “value” of their own home and begin extracting that money from their home like an ATM machine buying cars, flat screens, iPods and taking vacations all over the world.
- Our Government and The Fed see what is happening, but the economy is booming, money is flowing, the party is rocking…voters are exuberant…so the Government does nothing to stop the inevitable catastrophe. They know they can just point fingers at the Banks and Wall Street leveraging that ancient tactic of turning the masses against the “rich” which works like a charm every single time.
- Home prices reach an unsustainable peak, the collapse begins.
- The original unqualified borrowers begin defaulting on their mortgages and stop paying.
- The Wall Street investment vehicles begin collapsing as borrowers default and a sudden and rapid exit from housing related investments occurs.
- As the Wall Street investments collapse and more and more borrowers default, housing prices begin to plummet.
- The unqualified “qualified” borrowers begin defaulting too.
- Banks that were contractually liable for mortgage defaults they sold to Wall Street for 30 days begin to fail as Wall Street pushes those mortgages back on the banks. Banks begin collapsing.
- As homeowners begin to owe more than the house is worth, some abandon it while others squat in their house, never paying a mortgage as banks take years to complete the foreclosure process.
- Fear sets in, the economy begins collapsing, unemployment begins to rise.
- The Government, the same one that brought this entire mess to us, prints trillions of dollars in an attempt to bail out Wall Street and the Banks for what was ultimately our own Governments fault.
- The Government, in attempt to artificially prop up prices and keep the housing bubble inflated offers home-buyer incentives and tax breaks.
- The Government, in attempt to artificially prop up prices and rescue Fannie & Freddie, assumes control of both and prints billions of dollars to bail them out, all at taxpayer expense.
- The Banks, in an attempt to artificially prop up prices and keep the housing bubble inflated keep the majority of homes in foreclosure off the market so the number of homes available is reduced. Basic supply and demand.
- The Government, to protect the banks from failing, suspends the “Mark-To-Market” rule in Accounting, only for banks, allowing them to keep housing assets on their books at the inflated “bubble” value. If they had to do what all other companies do and re-value their assets (homes in this case) to current market values, most of them would not be able to cover the loss (the write-down) and would go bankrupt.
- As home prices are artificially kept too high, and banks are now responsible for defaulting mortgages (just like in the old days), nobody qualifies to buy a home through a bank. Banks stop loaning.
- The Government, steps in and now does 90% of mortgage loans through the FHA thereby continuing its efforts to keep home prices artificially inflated. They used to do only 3% of home loans. American taxpayer now directly on the hook for any future mortgage defaults.
- The Government, (the Democrats, liberal Republicans and Barney Frank-the hosts of the Government Party) blame Wall Street and Banks for the whole thing.
- The Government, hands the responsible taxpayer the bill for the party.
- Americans attack banks and corporate America as the culprit. The government supports this to keep attention away from the fact that they are the source of the problem.
- People call for the destruction of “Capitalism” not realizing that the problem is not capitalism. The solution is capitalism. Capitalism means that government does NOT get involved in the free market economy. But when the Government got involved in buying bad mortgages, lowering standards and bailing out the banks that bought these loans…capitalism was annihilated. What was created was CRONY-capitalism where the government bails out the corporations and the corporations do the bidding of the government for favors and protection.
- Capitalism dies.
- America as we knew it, dies.
Please see attached file by clicking here and found at this website for information on how the Federal government was controlling the expansion of banks if they were not meeting their Community Reinvestment Act of 1977 quotas. Article is from 2001. Excerpt below from Section 4: Enforcement.
4. The federal banking agencies enforce the CRA by examining the CRA record of a bank, issuing a written report with a rating, and taking the banks CRA record into account when considering the banks application to expand its business.
As part of their regulatory function, the federal banking agencies periodically send examiners to a bank to determine whether it is in compliance with the banking laws, including the CRA. At the end of the CRA examination, the agency issues a written report describing its findings and containing one of four ratings: outstanding record of meeting community credit needs; satisfactory record; needs to improve; and substantial non-compliance. In addition to these periodic examinations, the federal banking agencies also evaluate certain bank expansion applications to ensure that the bank is capable of expanding and qualified to do so. One of the issues the agencies consider when a bank applies to expand its business is the banks CRA record. An agency may deny an application if a bank has a poor CRA record or condition approval on improved performance.
Click here for the definition of blackmail…“exert pressure on someone through threats.”