LBJ created the problem! Explained here:
From AEI.org: “The peculiar structure of the GSEs--shareholder-owned companies with a public mission--reflected a serious confusion of purpose on the part of the Lyndon Johnson administration and the members of Congress who created this flawed structure in 1968. In seeking to reduce the budget deficits associated with the Vietnam War and Great Society programs, the administration hit upon the idea of "privatizing" Fannie Mae by allowing the company to sell shares to the public. This, according to the budget theories of the time, would take Fannie's expenditures off-budget, while allowing it to continue its activities with funds borrowed in the public credit markets. But turning Fannie into a wholly private company was not acceptable either. Various special provisions were placed in Fannie's congressional charter that intentionally blurred the line between a public instrumentality and a private corporation. Among these provisions: Fannie was given a line of credit at the Treasury; the president could appoint five members of its board of directors; and its debt could be used, like Treasury debt, to collateralize government deposits in private banks.”
Democrats from the time of Clinton and continuing all the way thru to Obama caused this financial crisis in their trying to “level the playing field” with instituting and promoting these sub-prime mortgages for low-income people to take on. Many of the low-income people that took on mortgages knew they couldn’t afford them. Both Fannie Mae and Freddie Mac are government-owned or State-owned enterprises (GOC‘s). GOC’s are companies that are created by our government to undertake commercial activities. The GSE business model faces inherent conflicts due to being indebted to the government mission and trying to compete in the private sector at the same time.
More from AEI.org
"The government mission required them to keep mortgage interest rates low and to increase their support for affordable housing. Their shareholder ownership, however, required them to fight increases in their capital requirements and regulation that would raise their costs and reduce their risk-taking and profitability. But there were two other parties—Congress and the taxpayers—that also had a stake in the choices that Fannie and Freddie made. Congress got some benefits in the form of political support from the GSEs' ability to hold down mortgage rates, but it garnered even more political benefits from GSE support for affordable housing." Peter J. Wallison explains the peculiar structure, flawed structure in more detail as well as outlines other pertinent information on GSE‘s. Since these GSE’s were government backed our government allowed the GSE’s to take excessive risks. These excessive risks were done at the taxpayers expense.
“That result--the privatization of profit and the socialization of risk--has now come to pass. U.S. taxpayers are now called upon to fill in the hole that reckless and improvident investment activity--fueled by inexpensive and easily accessible funds--has created in the GSEs' balance sheets. The special relationship was also the GSEs' undoing, because it allowed them to escape the market discipline--the wariness of lenders--that keeps corporate managements from taking unacceptable risks. Normally, when a privately held company is backed by the government (for example, in the case of commercial banks covered by the Federal Deposit Insurance Corporation), regulation is the way that the government protects the taxpayers against the loss of market discipline. When Fannie Mae was privatized in 1968, however, no special regulatory structure was created to limit the taxpayers' exposure to loss. The Johnson administration officials who structured the privatization may not have realized that they were creating what we recognize today as a huge moral hazard, but when Fannie became insolvent (the first time) in the high-interest-rate environment of the early 1980s, policymakers recognized that the company represented a potential risk to taxpayers.” After recognizing the potential risk to taxpayers in 1991, Congress created their first time regulator, the Office of Federal Housing Enterprise Oversight (OFHEO) but unfortunately the OFHEO had only limited regulatory authority and it was housed under HUD which had no regulatory experience whatsoever.
“… and it was funded by congressional appropriations, allowing the GSEs to control their regulator through the key lawmakers who held OFHEO's purse strings.”
"In congressional testimony on September 23, James Lockhart, the director of their new regulator, the Federal Housing Finance Agency, cited these loans as the source of the GSEs' ultimate collapse, as reported in the Washington Post:
Fannie Mae and Freddie Mac purchased and guaranteed 'many more low-documentation, low-verification and non-standard' mortgages in 2006 and 2007 'than they had in the past.' He said the companies increased their exposure to risks in 2006 and 2007 despite the regulator's warnings.
Roughly 33 percent of the companies' business involved buying or guaranteeing these risky mortgages, compared with 14 percent in 2005. Those bad debts on mortgages led to billions of dollars in losses at the firms. 'The capacity to raise capital to absorb further losses without Treasury Department support vanished,' Lockhart said."
In 2003, the Bush administration tried to create a new agency to oversee Fannie and Freddie but unfortunately no reform bills materialized. Many Democrat members of Congress expressed faith in the solvency of Fannie and Freddie. Barney Frank, at the time stated that they were "not facing any kind of financial crisis."
None other than Jimmy Carter instituted the Housing and Community Development Act of 1977 which was designed to meet the needs of borrowers from all economic backgrounds, including those that live in low and moderate-income neighborhoods. Then, in 1994 the Community Reinvestment Act was passed under Bill Clinton. Bill Clinton enacted the Community Reinvestment Act in such a way that it basically put the Housing and Community Development Act on steroids, and this is what caused our country’s financial collapse in 2008. This kind of tinkering with the free market - forcing banks to make risky loans to those that in all actuality couldn’t afford their mortgages - is what caused the financial crisis. This kind of combination of Marxist/Socialist/liberal policies that started with Lyndon Johnson and ended with Clinton is what has turned out to be toxic for our economy. Bush was left with a raw deal and the Democrat’s toxic economic policies just happened to fester, surface and eventually burst while he was in office. One can disagree with how Bush handled this financial fiasco but the fact is that Bush was dealt a very bad hand by the Democrats. Plus, the Democrats blocked him from being able to cut off the problem at the impasse before the problem morphed into the financial disaster . Bush, and Capitalism were NOT the cause of this financial meltdown. The Democrats, who are beholden to the philosophies of Marxism/Socialism/liberalism and who in their misguided compassion endorsed and encouraged low-income persons to take on these sub-prime mortgages, all the while many of these people couldn't afford these mortgage loans in the first place, was in fact the cause of the financial crisis. Marxism/Socialism/liberalism is the cause of this financial crisis. The Dems compassion has resulted in economic mayhem which has continued under Obama with extremely slow job growth (if at all in the private sector) and other policies which hurt small business owners, the unemployed, such as higher taxes, a higher deficit due to the passage of the Stimulus, and Obamacare which is going to cause mega-rationing and higher health costs.
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