By Bruce Shortt, J.D., Ph.D.

Because The Continuing Collapse always wants its readers to understand important events, we will now take a brief detour into finance.

 

Please be patient. There is an hilarious, but quite informative, video coming up, but you may not fully understand it unless you read what follows.

 

The current melodrama involving Congress, mortgages, and the markets is a political phenomenon. At the center of the storm are two odd entities known as Freddie MAC and Fannie MAE.

 

These federally chartered entities, known as "government sponsored entities" ("GSE's"), largely control the mortgage markets.

 

Because the GSE's are politically controlled and have vast amounts of money at their disposal, they have become both corrupted by, and, through massive campaign contributions, corrupters of, Congress.

 

While other factors are involved, by far the single greatest contributor to the mortgage market crisis was the passage of legislation known as the "Community Reinvestment Act" in 1977. This legislation was a Carter-era pay off to left wing groups that wanted legislation that would allow them to extort money from the banking industry and transfer wealth to their "constituencies".

 

In simplest terms, the CRA mandated that the finance industry give mortgages to people who aren't creditworthy. The left wing groups got their money through the power given to them by the CRA to harass financial institutions over whether the financial institutions were doing "enough" CRA lending.

 

During the Clinton administration the GSE's were filled with liberals who greatly expanded CRA-style lending. In fact, Janet Reno threatened legal action against financial institutions that were deemed not to be doing "enough". In particular, banks were warned not to rely on "outdated" lending criteria (such silly things as being able to make down-payments or document income).

 

Having the had lending practices distorted by liberal politicians and the folks who ran the GSE's, Wall Street and the finance industry "got with the program".

 

This wasn't hard for them to do because, after all, the government told them that these things must be done and, contrary to conventional wisdom, many, if not most, of the people in the higher levels of finance are quite liberal (e.g. take a look at how much money Goldman Sachs has contributed to the ABM campaign).

 

Consequently, the financial industry set about doing what they were told and, at least for the short-term, doing it quite profitably by packaging up sub prime mortgages in securities such as collateralized mortgage obligations, which they could sell as a high grade investments because the market understood the securities to have an implicit guarantee from the federal government. There is much more to the story, but this largely gets to the core of what was going on.

 

At various times, some of the more responsible members of the federal government warned about what was happening, but the GSE's "owned" enough members of Congress through having made massive campaign contributions and by other means that nothing was done to prevent the sub prime disaster from running its course.

 

Here is a video containing excerpts from Congressional hearings several years ago in which you can see for yourself that some in Washington were trying to prevent the current financial disaster and that liberal politicians made sure that nothing was done. In fact, the bullying of the regulator at the hearing is quite remarkable. You really need to see this.

 

Now for a look at the financial services side of the problem. Even though this video clip is comedy, it captures the truth about the financial "Masters of the Universe." The Continuing Collapse knows because the Continuing Collapse used to work with such people.

 The Solution

The solution to the problem, of course, has nothing to do with what Congress has been trying to do. Here is a first approximation of what should be done: 1. repeal the CRA and Sarbanes-Oxley (including "mark-to-market" valuation rules), 2. dismantle the GSE's, 3. exempt the securities (or underlying mortgages) that have been targeted in the "bailout"  from all income and capital gains taxes (this will attract private equity investors to buy the assets, thereby establishing market valuations), and 4. investigate all government officials (elected and otherwise), non-profits, and private sector players involved in creating the mortgage crisis, and impeach, censure, and prosecute as the evidence indicates.