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Remembering the prime cause of the economic crisis

Most Americans are puzzled and, of these, most are angry that Tim Geithner and Obama keep forking over our cash to a failing Europe via the IMF.

In fact, these politicians are some of the few who realize that the US Left actually triggered the world economic crash and therefore, in a sense, owes Europe and everyone else an apology at the very least.

It is interesting that even the most conservative authors, writing on the economy, rightfully blame the banks, the Fed and the 1999 repeal of Glass-Steagall for the economic crash, but most of them fail to look back at the prime cause, the bleeding heart giveaway policies of the CRA (Community Reinvestment Act). True, these other factors were absolutely key and no one is denying that. But without the CRA, it would not have happened, at least not in the same way.

“Most people do not realize this, but derivatives were at the center of the financial crisis of 2008,” states an article at theeconomiccollapseblog.com.

Nothing wrong with that statement. (This blog is in fact one of the best sources available on the progress of the West’s current economic suicide attempt.)

Indeed, neither party noticed the enormous destructive power of these instruments back when the market was bearish.

But let’s be more specific. In the case of the current crisis, it was not just any old derivatives that caused the initial tremor in the markets. It was mostly a derivative known as MBSs, or mortgage backed securities, that got the avalanche rolling. And the repeal of Glass-Steagall (which had denied banks the right to act as both investment houses and banks) was the enabler.

However, we need to look back further to find the root cause. To recap for those who have forgotten: Back in the 70s Carter, always the bleeding heart and skeptic of the free market, decided banks were deliberately refusing to service blacks, Hispanics, etc, on the basis of race. That assumption was in itself unproven at best and maliciously phony at worst. Nonetheless, the CRA (Community Reinvestment Act) became the law of the land in 1977. No one tried to seriously enforce this law until Clinton became president because Republicans used to know that forcing banks to lend to the insolvent would inevitably lead to ruin. Ironically, by the founding of the Clinton Dynasty, businesses were even more conscientious than before about eliminating racial considerations from their lending practices. A well-off black men could secure a loan just as easily — if not more easily (thanks to affirmative discrimination) — than a white man.

But Clinton had declared himself the “first black president” and he had to live up to his absurd title. So his HUD secretary Henry Cisneros, with equal absurdity, started to put teeth into the law that had, mercifully, lay fallow in the intervening years:

Here is what the CATO Institute says:

In 1992, HUD was given regulatory authority over these government-sponsored enterprises, and it began pushing the two firms into the subprime lending business.

The ensuing horrors we see all around us could perhaps have been mitigated, or even averted, had GW Bush not tried so hard to be a “compassionate conservative” (code for socialist in sheep’s clothing). In fairness, Bush had initially warned against these policies, but by January 2004, his HUD web site was trumpeting:

“Offering FHA mortgages with no down payment will unlock the door to homeownership for hundreds of thousands of American families, particularly minorities,” said HUD’s Acting Secretary Alphonso Jackson. “President Bush has pledged to create 5.5 million new minority homeowners this decade, and this historic initiative will help meet this goal.”

It was the serious enforcement of a less-than-serious law, coupled with the repeal of another law that would have prevented the securitization and sale of mortgages that indirectly led to a debacle that has engulfed the entire world and has led to a situation in which derivatives with an estimated notional value of $1.4 quadrillion have flooded the world market – a value of about 23 times world GDP. Not only the issuance of MBSs, but the practice of creating and selling these potentially lethal instruments, is what threatens every inhabitant of our globe.

So keep this in mind: without the repeal of Glass-Steagall and without the “compassionate conservatism” and outright socialism of our past governments, you and your friends would have reasonable job security and/or a job.

Good reasons to avoid voting for a RINO or a Democrat next year.


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5 Responses to “Remembering the prime cause of the economic crisis”

  1. I will comment on this piece after the ‘ESA barakout’ is over.
    awl

  2. BTW, I hope no one took my article to mean that the greed of bankers was not a major cause. If you read my opening remarks, you will see I did not let them off the hook.
    One reader said the CRA did not do much damage because it only affected some banks, not others, and the enforcement had tapered off by the time the crash came.
    However, the CRA was like a match that started a forest fire. It did not do its dirty work by forcing anyone to lend to the insolvent.
    Instead it carried an implicit sort of guarantee that any bank or institution that assisted minorities in acquiring their own homes would enjoy a certain quasi-protected status.
    The bailouts are proof that the government did indeed intend all along to protect them, and I do not think it is coincidental that so many banks threw all caution to the winds all at the same time.
    The forest is burning. No need for matches.

  3. Thanks for this informative article.
    I would suggest that Glass-Steagall was more of a symptom than a cause.
    I would suggest that the principal cause was the collapse of the USSR and with it, any credible threat of American workers’ “expropriating the expropriators.”
    It is no co-incidence that the golden age of American working class co-incided with the Cold War.
    This was because the Soviet system was benighn!
    It did, however, keep the American oligarchy on its good behavior…

  4. Thanks for this informative article.
    I would suggest that Glass-Steagall was more of a symptom than a cause.
    I would suggest that the principal cause was the collapse of the USSR and with it, any credible threat of American workers’ “expropriating the expropriators.”
    It is no co-incidence that the golden age of American working class co-incided with the Cold War.
    This was not because the Soviet system was benign!
    It did, however, keep the American oligarchy on its good behavior…

  5. jm,
    Thanks for your thought-provoking comment. I hadn’t thought of that.

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