It’s About Making Babies!

Frank W. James writes Corn, Beans, Spent Brass, An Empty Page, and a Deadline. He summarizes the CRA/Jimmy Carter/Bill Clinton path to the bad loans crisis (he overlooked some of the reports that Freddie Mac and Fannie Mae funds trickled into a few Democratic Presidential hopeful pockets).

Sharon Astyk writes Casaubon’s Book, possibly the most contrary perspective from conservative, gun rights advocate, agribusiness farmer Frank W. James. Sharon’s premise is that the crisis today has been coming, and is part of the slide into an era of expensive energy – Peak Oil. Peak Oil predicts that by 2012, world demand will be consuming more oil than can be produced – the end of cheap energy, probably a dramatic shortfall of needed oil from what can be available. By 2012, many families will be unable to pay the utility bill, and will be living ‘off the grid’.

Sharon’s take is that economies grow as subsistence workers, farmers and others, begin working the entry level factory work force. Only now, rising cost of oil is raising food prices, and the entry level workers that had been driving economic growth are now starving, and what wages they earn go solely to food, instead of fueling the local economy. And the shrinkage is rising to the top.

It seems both summaries explain a lot. Does Sharon’s view of global food prices vs. rising oil prices happen to support her explanation, or is her explanation what it is, *because* of her premise? I don’t think it matters, both explanations are very worthwhile to consider.

But Frank may have started a bit late in his timeline. I recall President Lyndon B. Johnson announcing his ‘war on poverty’. And I think the CRA that Jimmy Carter signed was a followup to the Democrat’s favored child, the war on poverty. I also recall, during that era, when NASA funds were threatened, that an engineer showed how many people you could feed with $1,000,000 spend on NASA – with no tangible product, you fed a bunch of families – who spend their money and kept businesses going, feeding those workers and retailers, etc. $1,000,000 spend on welfare fed fewer people, the cost of getting that money to the people ate up a bunch of the money, and the low income of the recipients meant the money was spent on food and shelter, with very little contributed to either the economy or tax revenue. Since that time I have always know the need to care for those in need, but that government programs are disabling to the recipients, and a poor value for the nation.

But do check out these well thought out summaries.

On the google Blacksmith usenet group, in response to a post about how CEOs are greedy, and causing the current financial crisis. Interesting insight, about how the Democrats shot down a low-cost solution back when it would have mattered – and cost Obama and Clinton some $200,000 combined income.

From: “Rob Fertner”

-Don’t you mean Democrat’s and Greed?-

How the Democrats Created the Financial Crisis: Kevin Hassett

Commentary by Kevin Hassett

Sept. 22 (Bloomberg) — The financial crisis of the past year has provided a
number of surprising twists and turns, and from Bear Stearns Cos. to
American International Group Inc., ambiguity has been a big part of the
story.

Why did Bear Stearns fail, and how does that relate to AIG? It all seems so
complex.

But really, it isn’t. Enough cards on this table have been turned over that
the story is now clear. The economic history books will describe this
episode in simple and understandable terms: Fannie Mae and Freddie Mac
exploded, and many bystanders were injured in the blast, some fatally.

Fannie and Freddie did this by becoming a key enabler of the mortgage
crisis. They fueled Wall Street’s efforts to securitize subprime loans by
becoming the primary customer of all AAA-rated subprime-mortgage pools. In
addition, they held an enormous portfolio of mortgages themselves.

In the times that Fannie and Freddie couldn’t make the market, they became
the market. Over the years, it added up to an enormous obligation. As of
last June, Fannie alone owned or guaranteed more than $388 billion in
high-risk mortgage investments. Their large presence created an environment
within which even mortgage-backed securities assembled by others could find
a ready home.

The problem was that the trillions of dollars in play were only low-risk
investments if real estate prices continued to rise. Once they began to
fall, the entire house of cards came down with them.

Turning Point

Take away Fannie and Freddie, or regulate them more wisely, and it’s hard to
imagine how these highly liquid markets would ever have emerged. This whole
mess would never have happened.

It is easy to identify the historical turning point that marked the
beginning of the end.

Back in 2005, Fannie and Freddie were, after years of dominating Washington,
on the ropes. They were enmeshed in accounting scandals that led to turnover
at the top. At one telling moment in late 2004, captured in an article by my
American Enterprise Institute colleague Peter Wallison, the Securities and
Exchange Comiission’s chief accountant told disgraced Fannie Mae chief
Franklin Raines that Fannie’s position on the relevant accounting issue was
not even “on the page” of allowable interpretations.

Then legislative momentum emerged for an attempt to create a “world-class
regulator” that would oversee the pair more like banks, imposing strict
requirements on their ability to take excessive risks. Politicians who
previously had associated themselves proudly with the two accounting
miscreants were less eager to be associated with them. The time was ripe.

Greenspan’s Warning

The clear gravity of the situation pushed the legislation forward. Some
might say the current mess couldn’t be foreseen, yet in 2005 Alan Greenspan
told Congress how urgent it was for it to act in the clearest possible
terms: If Fannie and Freddie “continue to grow, continue to have the low
capital that they have, continue to engage in the dynamic hedging of their
portfolios, which they need to do for interest rate risk aversion, they
potentially create ever-growing potential systemic risk down the road,” he
said. “We are placing the total financial system of the future at a
substantial risk.”

What happened next was extraordinary. For the first time in history, a
serious Fannie and Freddie reform bill was passed by the Senate Banking
Committee. The bill gave a regulator power to crack down, and would have
required the companies to eliminate their investments in risky assets.

Different World

If that bill had become law, then the world today would be different. In
2005, 2006 and 2007, a blizzard of terrible mortgage paper fluttered out of
the Fannie and Freddie clouds, burying many of our oldest and most venerable
institutions. Without their checkbooks keeping the market liquid and buying
up excess supply, the market would likely have not existed.

But the bill didn’t become law, for a simple reason: Democrats opposed it on
a party-line vote in the committee, signaling that this would be a partisan
issue. Republicans, tied in knots by the tight Democratic opposition,
couldn’t even get the Senate to vote on the matter.

That such a reckless political stand could have been taken by the Democrats
was obscene even then. Wallison wrote at the time: “It is a classic case of
socializing the risk while privatizing the profit. The Democrats and the few
Republicans who oppose portfolio limitations could not possibly do so if
their constituents understood what they were doing.”

Mounds of Materials

Now that the collapse has occurred, the roadblock built by Senate Democrats
in 2005 is unforgivable. Many who opposed the bill doubtlessly did so for
honorable reasons. Fannie and Freddie provided mounds of materials defending
their practices. Perhaps some found their propaganda convincing.

But we now know that many of the senators who protected Fannie and Freddie,
including Barack Obama, Hillary Clinton and Christopher Dodd, have received
mind-boggling levels of financial support from them over the years.

Throughout his political career, Obama has gotten more than $125,000 in
campaign contributions from employees and political action committees of
Fannie Mae and Freddie Mac, second only to Dodd, the Senate Banking
Committee chairman, who received more than $165,000.

Clinton, the 12th-ranked recipient of Fannie and Freddie PAC and employee
contributions, has received more than $75,000 from the two enterprises and
their employees. The private profit found its way back to the senators who
killed the fix.

There has been a lot of talk about who is to blame for this crisis. A look
back at the story of 2005 makes the answer pretty clear.

Oh, and there is one little footnote to the story that’s worth keeping in
mind while Democrats point fingers between now and Nov. 4: Senator John
McCain was one of the three cosponsors of S.190, the bill that would have
averted this mess.

(Kevin Hassett, director of economic-policy studies at the American
Enterprise Institute, is a Bloomberg News columnist. He is an adviser to
Republican Senator John McCain of Arizona in the 2008 presidential election.
The opinions expressed are his own.)