30 September 2008

Economic Crisis: How We Got Here From There

Call this The Best Simple Explanation Of the Current Crisis I've Read Yet (And I've read a lot).

Chairman of the Blackstone Group, Stephen Schwarzman:
It's a perfect storm. It started with Congress encouraging lending to lower-income people. You went from subprime loans being 2% of total loans in 2002 to 30% of total loans in 2006. That kind of enormous increase swept into the net people who shouldn't have been borrowing.

Those loans were packaged into CDOs rated AAA, which led the investment-banking firms [buying them] to do little to no due diligence, and the securities were distributed throughout the world, where they started defaulting.

When they started defaulting, out of bad luck or bad judgment, we implemented fair-value accounting....You had wildly different marks for this kind of security, which led to massive write-offs by the commercial-banking and investment-banking system.

In the face of those losses...you needed to raise new equity...which came from sovereign-wealth funds, in part, which then caused political resistance to sovereign-wealth funds, who predictably have withdrawn from putting money into the system....It seemed pretty obvious that would happen. We now find ourselves with a liquidity crisis where fundamentally the cost of money for financial intermediaries [such as investment banks] is significantly in excess of their cost of lending it. So several institutions found themselves in a structurally impossible position. ...Goldman reverted to a banking charter for a lower cost of funds, which today is still not low enough for the business.

So that's the story of how we got there.
This pretty much underscores what I've been saying all along--take Fannie Mae & Freddie Mac out of the equation and the economic crisis pretty much goes away. In fact, it doesn't just "pretty much" go away, it literally goes away.

And, Fannie/Freddie are government created institutions, spurred on in their reckless mortgaging by government enablers, backed by the government (now confirmed by fact), subsidized by the government, ergo, the current crisis was government created.

After everything I've read, I can't find a compelling reason for their existence in the first place. They didn't actually provide cheaper mortgages to anybody. In the second place, if they were to have all of these implicit and explicit government guarantees, the government should have made darn sure that they weren't making bad loans and putting the rest of the financial system and therefore the economy at tremendous risk.

But they didn't. Because Barney Frank, the same Barney Frank supposedly leading House Democrats in their efforts to resolve the crisis, stonewalled every attempt to actually, you know, provide some sort of oversight and regulation of Fannie & Freddie so that the crisis didn't occur in the first place.

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