While I agree with your premise, be careful before jumping into Federal theories over AIG.

Somehow, most likely through massive lobbying efforts, insurance has remained outside of the Federal regulatory schemes. Insurance companies are regulated by the state in which they are domiciled. AIG is domiciled in New York, which explains Elliot #9 Spitzer's jihad against Hank Greenberg and AIG.

In fact, the big brains over at Volokh are trying to figure out just how the Fed legally justified its conservatorship of a company chartered by and primarily regulated by the State of New York.

And here I thought all of this financial ruination actually started in the 1980s under Reagan with cries about redlining. So it was a Democratic president and a Democratic congress that got the ball rolling towards this financial meltdown. One where my extremely diversified retirement IRAs have plummeted by 20% since June. But hey, the Democrats are innocent of all charges. If this keeps up I may have to return to work and be penalized for doing so by losing $1 of my SS for every $2 I earn over $13,560 since I am not 66 years old yet. Ah, such is life.

I know, I know, I should have known better than to retire early trusting Bush with the economy; even if he did try to head this off in 2003 and McCain in 2005 while the Democrats and a few Republicans united to save the poor and down trodden from losing their right to purchase a home. (sarcasm)

Dafydd, I have to take slight exception to what you have written regarding the Community Reinvestment Act. Everything else is spot on.

The CRA was not responsible for sub-prime. It might have added slightly to it, but the real responsibility was Fannie and Freddie (and their Democratic whores that created them) along with a Fed Funds Rate of 1%. Since Fannie and Freddie could fund themselves well below market rates because they had a "government guarantee" and the rates were so low they just kept issuing more debt to buy mortgages. People loved this debt because it was technically identical to a Treasury (since it had an implicit government guarantee) yet it paid a higher interest rate. Why not buy the same AAA risk free debt with the higher yield?

As long as Frannie could raise money they did, as it effected their stock price and bonuses accordingly. These two clowns were levered at 70-1. That is unheard of. The Investment banks going under were levered at 30-1, the commercial banks going under were levered at 10-1. These guys were 70!!!! If you had $1 bil in capital and invested $70 bil, a 1.5% loss on your investment looses you $1.05 bil. Your entire working capital is lost. You are insolvent.

The problem with raising unlimited cash is that there are not enough mortgages to buy if we just stick to our usual 20% down and income metrics. We need more mortgages, and sub-prime is what created those mortgages that Frannie needed to buy.

This is simple supply and demand in both directions. There was excess demand for mortgages through Frannie and so they had to increase the mortgage supply. So how do you increase the supply of mortgages, you must increase the demand for houses. But houses were at their natural supply level, all seller had enough buyers. So what now? How do you increase the demand for homes? You create more buyers by lowering lending standards. Lower standards increase the supply of potential home purchasers (as would lower prices), thus increasing demand for homes and mortgages.

That is your sub-prime mess right there. Sheer greed on the part of lenders, real estate agents, mortgage brokers and politicians. More loans, more houses, more debt, more securitization commissions, more money for all those people involved.

And all these borrowers are not poor people. Sub-prime is a guy who can afford a $100k house but buys a $300k house. He is sub-prime for that mortgage, his income does not merit the payment level.

The easiest way to prove this is just time it. These new fangled mortgages started coming on the market in 2005, and two years later when they reset we had the housing collapse in 2007. CRA loans from prior to 2002 would be no more likely to default now. They have been making payments for 5 years already, they would have defaulted well prior to 2007.

Most people would have no clue about the CRA and how it works. It is a horrible idea as usual, liberal crap to give my money to other people that vote for the liberals. However, it did not cause this crisis and if by chance you mentioned this to the one or two intelligent liberals out there they would attack the mistake.

You can read more about it here:

http://www.prospect.org/cs/articles?article=did_liberals_cause_the_subprime_crisis

http://economistsview.typepad.com/economistsview/2008/04/yet-again-it-wa.html

Speaking of Freddie and Fannie, I'm a bit confused by who's "guarding" whom. Both are GSEs. As such they can borrow at treasury. They can then invest that money. Any profit (the difference between the two) is theirs to keep. That is not illegal...unethical, maybe, but not illegal. Now, they take those taxpayer dollars (which is what they really are) and give them back to those in congress who help regulate them. They call these payoffs campaign contibutions. For years most of thoes on the receiving end of these contributions have been quite happy to keep their hands off any form of regulation. Can you say "Shell Game?" To me, this is one of if not the biggest scandal this country has ever faced. And you know what? No one in the press will speak of it.

Thanks for hissing in, . Now you can slither in with a comment, o wise. (sign out)

(If you haven't hissed a comment here before, you may need to be approved by the site owner before your comment will appear. Until then, it won't appear on the entry. Hang loose; don't shed your skin!)

URL:
Remember me unto the end of days? AyeNay!

Comments: (Sssselect text and bite a button to apply HTML tagssssss...)