RE: [asa] Deregulation Madness was Re: Ben Stein on Sub Prime Mortage Crisis...

From: Jon Tandy <>
Date: Mon Dec 08 2008 - 11:26:56 EST

While I find this an interesting discussion, as well as a sickening
commentary on both corporate and governmental leadership in this country,
this thread has strayed far from anything having to do with science or
religion, and should probably be continued privately by those interested.


Jon Tandy



From: [] On
Behalf Of Rich Blinne
Sent: Monday, December 08, 2008 8:52 AM
To: Lynn Walker
Cc:; AmericanScientificAffiliation
Subject: Re: [asa] Deregulation Madness was Re: Ben Stein on Sub Prime
Mortage Crisis...



On Dec 7, 2008, at 10:32 PM, Lynn Walker wrote:


On Sun, Dec 7, 2008 at 11:17 PM, John Walley <> wrote:

But wouldn't the Community Reinvestment Act (CRA) be an example of gov't
regulation rather than the dreaded deregulation? Wouldn't the sub-prime
issue been avoided if not for this gov't interference in the market?



"This was a HUGE step of deregulation by Clinton's administration." Read

In 1994 Clinton put Carter's 1977 CRA on Steroids

President Clinton also got HUD involved in the issue as they issued new
rules for Fannie and Freddie. First, Fannie and Freddie could now buy huge
amounts of subprime loans. In 1995, Fannie Mae bought an estimated $18.6
billion in subprime loans from banks and this number grew exponentially over

Non sequiter. There is little to no connection between subprime mortgages
and CRA.


1. More than 84 percent of the subprime mortgages in 2006 were issued by
private lending institutions.

2. Private firms, that is firms that are not eligible for CRA, made nearly
83 percent of the subprime loans to low- and moderate-income borrowers that

3. Only one of the top 25 subprime lenders in 2006 was directly subject to


This much I'll grant you, the Clinton administration was also
pro-deregulation but that didn't immediately cause the crisis. Why?
Deregulation was the fuel but it needed a spark. The spark was supply-side
economics. John go back to the original video you posted and watch before
Ben Stein comes on. One of the economists is Arthur Laffer of the Laffer
curve. He was convinced there was no problem but there was and it was of
his theory's making.

Bush's tax cut for the wealthy came at a time when interests rates were very
low. Furthermore, since 98% of all small business owners -- these are the
people who fuel most of the hiring in this country -- make less than
$250,000 a year. The tax cut went to people who did not own small
businesses. Where did it go? Into hedge funds because there was no real
growth in the economy. It was all in the mirage of the housing bubble. These
hedge funds bought into collateralized debt obligations and credit default
swaps. On a side note, the value of all the subprime mortgages is around 2
trillion dollars while the best guess for CDSs is in the neighborhood of 60
trillion dollars. The "wealth" that Art Laffer referred to in the video
wasn't there and was all on paper as correctly noted by Peter Schiff.

Here's what happened according to McClatchy

Fueled by low interest rates and cheap credit, home prices between 2001 and
2007 galloped beyond anything ever seen, and that fueled demand for
mortgage-backed securities, the technical term for mortgages that are sold
to a company, usually an investment bank, which then pools and sells them
into the secondary mortgage market. [RDB Note:There was a lot of excess
money at that time because of the aforementioned tax cuts along with an
increase in sovereign wealth funds of oil rich countries. ]

Between 2004 and 2006, when subprime lending was exploding, Fannie and
Freddie went from holding a high of 48 percent of the subprime loans that
were sold into the secondary market to holding about 24 percent, according
to data from Inside Mortgage Finance, a specialty publication. One reason is
that Fannie and Freddie were subject to tougher standards than many of the
unregulated players in the private sector who weakened lending standards,
most of whom have gone bankrupt or are now in deep trouble.

During those same explosive three years, private investment banks - not
Fannie and Freddie - dominated the mortgage loans that were packaged and
sold into the secondary mortgage market. In 2005 and 2006, the private
sector securitized almost two thirds of all U.S. mortgages, supplanting
Fannie and Freddie, according to a number of specialty publications that
track this data.

In 1999, the year many critics charge that the Clinton administration
pressured Fannie and Freddie, the private sector sold into the secondary
market just 18 percent of all mortgages.

Fannie and Freddie, however, didn't pressure lenders to sell them more
loans; they struggled to keep pace with their private sector competitors. In
fact, their regulator, the Office of Federal Housing Enterprise Oversight,
imposed new restrictions in 2006 that led to Fannie and Freddie losing even
more market share in the booming subprime market.

What's more, only commercial banks and thrifts must follow CRA rules. The
investment banks don't, nor did the now-bankrupt non-bank lenders such as
New Century Financial Corp. and Ameriquest that underwrote most of the
subprime loans.

These private non-bank lenders enjoyed a regulatory gap, allowing them to be
regulated by 50 different state banking supervisors instead of the federal
government. And mortgage brokers, who also weren't subject to federal
regulation or the CRA, originated most of the subprime loans.

In a speech last March, Janet Yellen, the president of the Federal Reserve
Bank of San Francisco, debunked the notion that the push for affordable
housing created today's problems.

"Most of the loans made by depository institutions examined under the CRA
have not been higher-priced loans," she said. "The CRA has increased the
volume of responsible lending to low- and moderate-income households."

In a book on the sub-prime lending collapse published in June 2007, the late
Federal Reserve Governor Ed Gramlich wrote that only one-third of all CRA
loans had interest rates high enough to be considered sub-prime and that to
the pleasant surprise of commercial banks there were low default rates.
Banks that participated in CRA lending had found, he wrote, "that this new
lending is good business."


I am not really in the blame game so as long as the current players are
against deregulation and supply side economics then that's fine with me. But
of all the factors that made this mess the one that doesn't belong is the

Rich Blinne

Member ASA


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Received on Mon Dec 8 11:27:34 2008

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