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Sep 30, 2008


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William Apel

YouTube says the video is no longer available. Could it possibly be something negative about Democrats? Was it Jim Leach in 1992 (!) talking about the threats posed to our economy?

Any unbiased person will read Investor's Business Daily's series "Uncommon Knowledge - What Caused the Loan Crisis" before voting.

Michael W. Kruse

Not sure what happened, William. It is playing on my machine okay. Could be that there was a temporary glitch at YouTube. I've had it happen before.


A fun way to communicate the oddity and threat of the last decade(s).

So, I have a question for you. I've heard rival theories for why we're here. The thinking Right has latched onto the Community Reinvestment Act theory and the thinking Left has latched onto the Credit Derivatives theory.

Dude, I'm just an old diesel mechanic. I'm likely to believe the problem is "lack of regulation" if left to my own devices. It seems like the housing crisis is the cause, and the derivatives issue is why the cause was not detected. Without derivatives to make the way the banks were meeting CRA demands seem safe, someone would have gone belly up much more quickly.

Does that sound close? Because if it is, I think the blame-justice spreads much more equitably than either side is trying to paint. The Right is trumpeting loudly that they tried to stop the train, and soon enough someone in the chattering Left is going to find a way to trumpet how the nasty derivative tricks hid how far the train was already over the edge before the bottom fell out.

Just thinking out loud. Thanks for any insight you might share.

Michael W. Kruse

Codepoke, my theory goes like this. I think all of the below were involved.

A. CRA changes (under Democrat leadership) in the late 1990s mandated irresponsible lending practices from lending institutions, requiring them to lend to people who clearly were not creditworthy.

B. Freddie Mac and Fannie Mae become a central tool of implementing this irresponsible behavior. It become politically corrupt, answering to political power brokers instead of engaging in just legislation.

C. Some banking and finance companies saw opportunities to make big bucks in the poorly regulated market, engaging in behavior (like creating the derivative tools) that was irresponsible regardless of whether it was legal. As some institutions went this route, others felt compelled to follow in order to compete.

D. "Mark to Market" accounting principles compelled businesses to value mortgage backed securities according to whatever the most recent price was versus the value of anticipated cash flows and the value of underlying security.

This gets complex but as I understand it, banks are forced to record their assets at far below their actual value when people begin to file for bankruptcy. Banks have to have a certain ratio of assets to the amount of money they are lending. As their asset valuation radically declines they have to raise capital or reduce lending in order to keep the ratio. Unable to do this, some businesses (not your typical commercial bank) are going under. The accounting procedure didn't cause the problem but it essentially stepped on the accelerator.

E. Congress (Dems and Reps alike) and Bush failed to exert authority when various warning signs were there. Some Republicans, including Bush and McCain, did issue warnings but in the end did not muster the will to really address the problems. To do so would have been extremely unpopular to a variety of interests and probably would not have been popular with the general public.

F. Many in the public were greedy and once they were able to enter a lifestyle that was well beyond their means they likely would have punished whoever burst the bubble.

In short, I think you can point your finger in multiple directions and no one comes out looking very good.


Some Republicans, including Bush and McCain, did issue warnings but in the end did not muster the will to really address the problems.

I think it's correct to say that there's blame for both parties. However it was a Democrat political agenda that was imposed upon Fannie and Freddie (facilitated by a far too cozy relationship between Democrat "regulators" and CEO's Franklin Raines and Jim Johnson), that was also aggressively defended in the House and Senate when Republicans and independent regulators sounded alarms.


Giving any congress, Republican or Democrat, this kind of influence over financial policies that should be based on good business practices, not political pandering, is--as we're clearly seeing--like giving teenagers the key to the liquor cabinet, the car, and the gun cabinet. The solution to this mess isn't more politicization, it's the simple imposition of transparent accounting and business practices.


Thank you, Michael. I'll probably be linking your comment, and really appreciate you taking the time to spell it out.

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