How The U.S. Government Engineered The Current Economic Crisis
237 Commentsby Michael Arrington on September 26, 2008
These people (the U.S. government) need to be stopped. Every time we get ourselves into an economic mess, there’s usually some milestone idiocy we can point back to as the government action that made the meltdown inevitable.
Take the current housing crisis that has now spread to the financial markets in general. The cause was too-easy credit that fueled a massive increase in housing prices as people bought houses they couldn’t afford with mortgages they weren’t able to pay off.
In 1999 there was roughly $5 trillion in total U.S. mortgage debt. That number ballooned to $12 trillion by 2007, and we know what happened from there (data is from the U.S. Office of Federal Housing Enterprise Oversight). To put this into perspective, total U.S. GDP is about $11 trillion annually, and U.S. government debt is around $9 trillion. If the housing market really falls apart (meaning more than conservative estimates of a 20% drop), there’s no way the government can simply cover these losses.
Why did it happen? Let’s go back to 1999, when Fannie Mae, the nation’s biggest underwriter of home mortgages, was under pressure by the Clinton administration to find a way to get more loans to “borrowers whose incomes, credit ratings and savings are not good enough to qualify for conventional loans.” A pilot program was launched, which soon became general policy. Money flowed to people who couldn’t afford to pay it back.
These new policies came on top of previous changes in the 90’s that let consumers get zero-down payment loans.
In a 1999 article that now looks absolutely insane, the New York Times reported on the easing of credit terms. Fannie Mae Chairman Franklin Raines, who’s quoted in the article, was all sunshine and roses as he threw away the financial future of millions of Americans. But at least one person. Peter Wallison, had a good idea of how this would all play out:
In moving, even tentatively, into this new area of lending, Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980’s.
”From the perspective of many people, including me, this is another thrift industry growing up around us,” said Peter Wallison a resident fellow at the American Enterprise Institute. ”If they fail, the government will have to step up and bail them out the way it stepped up and bailed out the thrift industry.”
Too bad nobody listened to that guy.
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Comments Pages: [1] 2 3 » Show All
MarkSlindsey - September 26th, 2008 at 3:23 pm PDT
Mike, what’s your source for the graphic?
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Victor Caballero - September 26th, 2008 at 3:24 pm PDT
(data is from the U.S. Office of Federal Housing Enterprice Oversight)
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Steven Dole - September 26th, 2008 at 11:01 pm PDT
the true question is:
WHY BORROWERS BECAME SUDDENLY UNABLE TO PAY THEIR MORTGAGES 2-3 YEARS AGO?
The “poor” could pay their mortgage between 1999 to 2005 with no problem, so what happened?
I tell you what happened: unemployment. Yep, the rate rose from 4% to 6.1% in 8 years and will probably reach 6.5% by the end of the year. Thus it’s pretty easy to understand why it becomes difficult for those who loose their job to pay their mortgage.
And the so called “Economic Downturn” you’re talking about is due to the drastic change of political priorities since 2000 under the Bush Administration.
You want figures? I give you one: $600+ Billion. That’s the amount spent in Iraq so far (and counting), ironically getter every day closer to the Bush-Bailout’s amount. Funny, hu?
If we had spent this amount into our economy instead of this stupid war (investing in research and cut imports), the true victims of this mess wouldn’t have lost their job in the first place and wouldn’t have stopped paying their mortgages.
Access to ownership is a good thing, everyone deserve to own a house in our country. The problem is how good is the government at protecting you from loosing your job.
misleading graph - September 27th, 2008 at 12:20 am PDT
Graph does start from 0 trillion, hence it looks like it grew 10 times in 10 years, which is quite misleading.
Instead it grew from 5 trillion to 12 trillion, if inflation is taken into account it is less than double. If you normalize further wrt GDP, growth is further less.
Al Brown - September 27th, 2008 at 7:43 pm PDT
This did not happen because because people suddenly became unable to pay their mortgages 2 or 3 years ago.
This happened because the values of homes people purchased became less than what they owed. So they decided not to be suckers and stay in them.
The decline in value occurred because of homes were overvalued.
That happened for many reasons, most of which were government actions, either printing too much money, relaxing mortgage standards, eliminating capital gains on profits from many home sales.
A whole series of things happened that gave many the impression that houses would continue to appreciate faster than other assets.
But people knew it was happening. The real estate lobby knew but didn’t care. Congress knew but didn’t care. Ron Paul knew but didn’t…oops. Well, he actually did care and did speak out, but the media didn’t care.
Al Brown - September 27th, 2008 at 7:48 pm PDT
http://www.youtube.com/watch?v=raAtB1FONmg
Allen - September 28th, 2008 at 7:38 am PDT
Al Brown - hope that kool-aid tastes good. If you only didn’t have the luxury of living under the very freedom this country provides you - try moving to Iraq back in the Saddam era and tell me how it is. You wouldn’t even be able to type the sort of rhetoric you just did without being shunned (or killed) by a tyrant like Saddam. Hey - better yet, why don’t you move to Iran and speak of their government like you speak of ours - we’ll see how long you last. Why don’t you just thank those in leadership just once and allow them to do their jobs the best they can instead of just judging things after the fact.
P - September 28th, 2008 at 12:16 pm PDT
Allen - you are not refuting anything Al Brown has said. All you are saying is that he should shut up and be grateful. So under a Democratic president would you shut up?
Andy Wong - September 28th, 2008 at 11:34 pm PDT
Steven spotted on.
“And the so called “Economic Downturn” you’re talking about is due to the drastic change of political priorities since 2000 under the Bush Administration.
You want figures? I give you one: $600+ Billion. That’s the amount spent in Iraq so far (and counting), ironically getter every day closer to the Bush-Bailout’s amount. Funny, hu?”
If a country spent billions on something (Iraq war) without any return, the country lost fortune, and the currency lost credit.
The cause of credit crises is simply the country losing credit. Isn’t that simple?
You just don’t need fancy economic theory.
Anyway, after all, countries around the world will pay US after the green back will be getting de-valuated again.
Techcrunch40 Sponsor - AGORACOM - September 26th, 2008 at 5:55 pm PDT
From someone a lot smarter than you on this issue:
“@techcrunch your post on the causes of the current credit crisis is oversimplified to the point of absurdity. ”
http://twitter.com/pkedrosky/statuses/936380652
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Tom - September 27th, 2008 at 7:03 am PDT
And what exactly does Paul Kedrosky have a Ph.D. in? All bark, no bite.
David Litsky - September 28th, 2008 at 7:51 pm PDT
It should also be noted that consumers were encouraged to use their houses as a piggy bank, taking on home equity loans and home equity lines of credit to fund home improvements, automobile purchases and other consumer spending. These are loan products originally aimed towards customers that have repaid their original mortgage and want to withdrawal a nominal amount of equity (20-40%) from their homes. But as housing prices rose, consumers were allowed to withdrawal this new equity from their homes without true consideration as to why housing prices were rising so fast or their ability to repay two mortgages on their home. And now that housing prices are falling and unemployment is rising, consumers are learning a tough lesson in the true cost of money.
James Collier - September 29th, 2008 at 11:01 am PDT
David, I think you’ve actually identified the greater point of instability - it isn’t in the new homeowners who suddenly couldn’t pay their mortgage, it’s in the inflated value they paid because others cashed in on home equity loans.
Mitch Rosen - September 26th, 2008 at 10:39 pm PDT
I come to this site to get away from politics. Stay away from it.
You could potentially lose the admiration of half your readers if they think you’re on one side of the political spectrum, Mike, even if you didnt intentionally mean to alienate them.
Just a warning before it happens. A second political post will probably do some damage.
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Steven Dole - September 26th, 2008 at 11:04 pm PDT
Arrington has always claimed to be pro-Obama. By this article though, it becomes obvious he is anti-Clinton too.
Shilabula - September 27th, 2008 at 9:18 am PDT
Its not about politics, its about economics - crap macro economic management to be more specific.
Both parties are guilty, thus the true cause is deeper than the democratic veneer. Deep in the chipboard of the American power system.
Gebadia Smith - September 27th, 2008 at 9:28 am PDT
So this is what freedom of speech has become in the US. You make threats when someone writes something you don’t like? If you are against the war you are unamerican, if you are against spying on your own people, you are unamerican.
Seems to me the America we use to aspire to be does not exist and instead has become a Tom Clancy/Fahrenheit 451 novel without a hero. Poor education, poor health care, a christian enemy, better TV shows, video games and magic phones make for a world where governments can do whatever they want.
Even now when things go south Mr. Dole you want to play politics and make generalizations about Mike losing half his readership. Not everybody is a party drone. Some appreciate different view points.
Peter - September 27th, 2008 at 8:16 pm PDT
The largest economic meltdown since the 20s is a political post? Look at almost any industry magazine, site, newspaper, and what’s now the lead topic?
Government Bailing Out The Oil Market! - September 27th, 2008 at 5:58 pm PDT
Read how the government kept Oil and other commodities prices high for the consumer to protect Morgan Stanley and Goldman Sachs. if this hadn’t been done Oil prices could be $65 to $75 per barrel today. Gas at? $2.25 gal?
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Government Bailing Out The Oil Market! - September 27th, 2008 at 5:59 pm PDT
Here’s the link to the story at forbes: http://www.forbes.com/energy/2.....nergy.html
Don Wilson - October 3rd, 2008 at 7:06 pm PDT
The graph above is very misleading. It shows as if $3b is nothing compared to $9. The graph SHOULD start at $0 but it wouldn’t make the last 12 years more exciting in growth of debt.
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wolfsbayne - September 26th, 2008 at 3:23 pm PDT
here’s a ugc video that echoes some of that, mike.
sorry, it has pro mccain stuff in it.
http://is.gd/3b4v
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Korak - September 26th, 2008 at 3:24 pm PDT
Yep… There is a lot of blame being pointed at the “free markets” for this but the observation that it is governmental driven is a good one. And, while the Bush administration certainly deserves its share of the blame, it’s nice to see someone point out that Clinton’s administration played a role too. It did. They all suck.
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Patel - September 26th, 2008 at 4:33 pm PDT
While the economy is really bad, I think that some businesses can still make it…Even though the markets are not “free”
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Brian Sherwin @ Myartspace Blog - September 26th, 2008 at 9:12 pm PDT
I agree Korak. I keep reading blogs that blame one part or the other. Both played a role.
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dave g - September 26th, 2008 at 10:51 pm PDT
im not going to get too deep into this…but during my 4 years in the military, if something went wrong on my watch - it was my ass.
end-of-story.
i guess the lower pay grades are held to a higher standard.
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Cory - September 26th, 2008 at 3:24 pm PDT
Careful Michael… you have a lot of readers who are eager to blame this whole thing on Bush and Republicans, and you seem to be blaming this on Clinton-era policies. I can’t wait to see the ensuing comments.
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Pete - September 26th, 2008 at 3:50 pm PDT
“you seem to be blaming this on Clinton-era policies”
–Duh!!! It was the reptilian slick Willie plus the usual suspects: Christopher Dodd, Barney Frank, Chuck Schumer and others, such as Andrew Cuomo at HUD: all of these guys, and others, ARE responsible for this mess.
Greed, greed, greed… In the Washington DC area, over 22% of sub-prime, no-docs mortgages were taken by illegal aliens, underwritten by bastard, greedy mortgage brokers.
There is a lot more going on now, like this guy Henry Paulson: a leftist democrat with close ties to Obama and the bastards named above, coming up –out of thin air, with the 700B dollars.
It is a huge setup for Bush and McCain: Congress’ approval of this fraud will not happen and –if Obama is elected president, he will take credit for this, for “saving” the American people from the ‘failed’ policies of the Bush administration… while immediately raising taxes on everyone and everything.
I work on Capital Hill [not for long] and am familiar with so much s**t going on here. It is incredible, every idiot is rooting for the bumbling, ignorant and supremely misinformed empty suit. You know who…
By the wary Obama is not an “African-American” he is an “Arab-African” having been born in Kenya [no records to be found] and appearing in Hawaii four days later [again, no birth certificate or any other records proving that he is an American citizen. Hope that this is an 'October surprise']
Pete
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AhmedF - September 26th, 2008 at 3:54 pm PDT
Wtf Arab?
FactCheck.org and Snopes.com have thoroughly debunked his birth certificate - please, find some other lie to spread.
Pete - September 26th, 2008 at 4:03 pm PDT
To AhmedF — It is not a lie: my brother lived in South Africa and Kenya, representing a London newspaper; he actually interviewed people who remembered that in the early sixties a white American woman gave birth to a black baby in the area where Obama’s relatives still live. My brother could find only an abandoned small building, no more than a few rooms and a roof, that used to be a hospital. Could not find any records although he looked at transportation logs [cars, buses, airplanes] of companies carrying passengers our of the country.
Pete
aaron choi - September 26th, 2008 at 4:07 pm PDT
someone born in africa is arab?
Pete - September 26th, 2008 at 4:18 pm PDT
To aaron choi — Yes, for instance, does the name ‘Egypt’ mean anything to you?
Also, the name ‘Hussein’, Obama’s middle name is Muslim / Arab.
He is still Muslim. “Not that is anything wrong with that…”
Pete
Pete - September 26th, 2008 at 4:23 pm PDT
To aaron choi — Obama attended a ‘Madrassa’ in Indonesia. If you do not know this, these schools teach the Quran [the central religious text of Islam] in Arabic [NOT American English, by the way], along with a profound hatred of ‘infidels’ –of course, Americans.
There several very active Madrassas in the US, all sponsored by the Saudi government…
Pete
Charles - September 26th, 2008 at 4:48 pm PDT
Pete -
Of course you’re pointing fingers - which is all the republicans can do these days. Anything to try and divert focus away from the complete failures of their policies that all started with Reagan. Free Market and trickle down economics - do not work - especially in an economy this large. In addition, the lie that has been propagated about smaller government is just that. Every republican in office since Reagan has increased the federal budget deficit by increasing spending.
As George Carlin once said, “politicians are like diapers, they need be to changed often”, and McCain (26 + years in office) is full of sh*t.
mahalo bruddah - September 26th, 2008 at 5:22 pm PDT
Why don’t you look to find out where John McCain was born ….
Pete - September 26th, 2008 at 5:39 pm PDT
To mahalo bruddah - McCain was born in Panama, at an American military base: this means, he was born to American parents, in American territory: he IS an American citizen. –All American military bases around the world and also embassies and consulates ARE considered AMERICAN territory. Something you are not expected to know, coming from who knows where…
To Charles — I am a registered Democrat who is going to vote for McCain. Why? Because I want the BEST president possible for our country, no matter what skin color…
Most American citizens expect the most capable person as president, not one that is going to ‘learn on the job’, with no substantial experience of any kind, who is capable only of running his mouth [as any lawyer would do, I admit] spewing garbled pseudo-intellectual crap with no real meaning and no clear plans for anything.
Now, you are quoting George Carlin???? Pleeeeeeeeeeeease!!!!!
Pete
Ann - September 26th, 2008 at 5:48 pm PDT
Even if it is true. Kenya is not an Arab country. Get your geography right.
Laughing - September 26th, 2008 at 6:01 pm PDT
Pete, Is this your source
http://www.monkeyreview.co.uk/.....in-america
Peter Pan - September 27th, 2008 at 10:05 pm PDT
Yo Pete, get your G.E.D. and head out of the trailer.
ConspiracyLocator.com - September 26th, 2008 at 4:15 pm PDT
Organized Crime plain and simple. goes by the last name greed. Follow the money. its not hard to see who got it all. Modern Day Economic Terrorism
(AKA rape). Where is homeland security when you need them. They would rather surround the house of palins hacker instead of the people who conspired the greatest act of economic terrorism this country has ever seen. They “all knew” this was coming because they orchestrated this. Its easy to see the future when your creating it. Instead of giving a bailout to the people who dont need the money, why not give it to the consumers and let them save and spend it since they are the core driving force of this whole economy.
GovernmentLocator.com
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Abdalateef Taha - October 8th, 2008 at 5:30 am PDT
I thinc this economic crisis due to mismanagements
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Stephanie - September 26th, 2008 at 3:26 pm PDT
As I have been absolutely obsessed with and glued to CNBC since last Monday I really enjoyed your post!
A personal fave…
http://www.youtube.com/watch?v=SWksEJQEYVU
and another response.
http://www.youtube.com/watch?v=IG8uBhNEh7U
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ajadoniz - September 26th, 2008 at 3:27 pm PDT
I’m glad someone knows history from more than 5 years ago. I applaud you, Michael. People, nowadays, are always ready to pin everything on Bush and the GOP. Socialism doesn’t work in the long term. Social security, Fannie-Freddie, welfare, universal health care.
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AhmedF - September 26th, 2008 at 3:58 pm PDT
Except Fannie is not the cause of the overall market issue.
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TYPICAL_BAY_AREA_DEVELOPER - September 26th, 2008 at 3:27 pm PDT
Typical Bay Area Reply:
“It’s all the dot-commers fault for creating that excess wealth that pumped up house prices and demand!”
Yawn. Not very original.
Here’s a better question: how much of the mortgage debt is sub-prime? Home prices have definitely inflated over the past 10 years due to speculation, cash-rich folks, etc. Do they hold a larger of the debt pie than sub-primers who live Fontucky?
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Jim S. - September 26th, 2008 at 3:29 pm PDT
Take a look at this Times article from 2003: http://tinyurl.com/6lp5qu
The best quote is probably this one towards the end:
”These two entities — Fannie Mae and Freddie Mac — are not facing any kind of financial crisis,” said Representative Barney Frank of Massachusetts, the ranking Democrat on the Financial Services Committee. ”The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing.”
Of course, the administration’s plan for reigning things in went no where because priorities were elsewhere and there was little political capital left to burn.
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RSS Reader - September 26th, 2008 at 3:30 pm PDT
Mike, c’mon, this is not a politics or a finance blog.
If I wanted that I’d go to DealBreaker or ClusterStock - you’re great at tech, not so great at politics and economics.
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Michael Arrington - September 26th, 2008 at 3:39 pm PDT
You are so right. What could this situation possibly have to do with the tech economy.
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jg - September 26th, 2008 at 3:58 pm PDT
I think it was a good post - go ahead and write about whatever the hell you want. As long as it’s well written and thoughtful, I’ll keep coming back.
Great points - concise and well written. I will fwd this around to a lot of people that aren’t in the tech world and don’t read TC. Thanks.
UMapper - September 26th, 2008 at 4:07 pm PDT
I agree, no matter what industry you are in, most likely, you are going to ‘feel’ the consequences… keep writing
mahalo bruddah - September 26th, 2008 at 5:24 pm PDT
What morons…. tech industry is next. All those PE and Hedge Fund players who are now temporarily barred from playing in the financial sandbox will divert their attention to tech.
Hang on to your shirts kids…
dave - September 28th, 2008 at 6:23 pm PDT
You are only marginally qualified to talk about tech; you are totally unqualified to talk about the broader market.
itchy - September 26th, 2008 at 3:32 pm PDT
“you get full points for telling me things BEFORE they happen”
-mike milken
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Your Daddy - September 26th, 2008 at 3:34 pm PDT
I blame the dot.com boom, bubble and Clinton for all this shit!
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Slick Willy - September 26th, 2008 at 3:49 pm PDT
Oh go smoke a cigar!
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Allan - September 26th, 2008 at 3:34 pm PDT
@Wolfsbayne - why does it matter if something is pro-McCain or pro-Obama when facts are involved? Why would you need to be apologetic about the truth? Whoever came up with this policy should be driven out of office - Democrat or Republican.
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wolfsbayne - September 26th, 2008 at 3:44 pm PDT
disclosure is good.
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sarabdeep singh - September 26th, 2008 at 3:37 pm PDT
Crux of the matter in any financial transaction is how you create a system where in people have some disincentive in not honoring the commitment , housing loans with zero dwnpayment basically reduces the incentive of the user to pay back , because if he defaults none of his funds will get stuck up , India has seen similar real estate bubble and now prices have cooled down but still there has been no major default because here most of the real asset properties have a book value which is much less than the market value , as a result the effective loan comes in the range of 50-60% of the asset value , as a result inspite of lowering of market prices there has not been huge defaults , because stakes for the borrowers are higher { not a legal way but effective }
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Victor Caballero - September 26th, 2008 at 3:38 pm PDT
I worked for a foreclosure aggregation service years ago and we saw this coming. Everyone in the office called it, the bubble burst and all these people riding the wave cashed out and who is left holding the bag, us, the people who have to pick up the pieces and pay for the mess. I am amazed that this took so long, some very powerful people kept our economy propped up and they just couldn’t do it any more.
Michael, I think there typo in the story, “(data is from the U.S. Office of Federal Housing Enterprice Oversight)” should be Enterprise.
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antje wilsch - September 26th, 2008 at 5:17 pm PDT
Enterprice is more appropriate
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Wille - September 26th, 2008 at 3:39 pm PDT
don’t forget loose monetary policy and low interest rates long into a boom.
Central banking is a bastion of socialism, if we don’t want our food supply centrally planned, why in the world would centrally planned money be a good idea?!
We need sound money backed by more than a hope and a prayer, and market based interest rates.
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Alex Eck - September 26th, 2008 at 3:41 pm PDT
Actually the problem is way more complicated. Throw in Investment Banks, cheap money, low food and oil prices, insane short-term bonuses, lack of understanding, the inevitable regulatory loopholes, standardized rating software. And you still haven’t captured the whole image.
Still you did get a point, Mike. And you got me commenting. So you’re article is great (because many, many more will follow me, and even more will read this populistic article).
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Mr. Recycle - September 27th, 2008 at 1:28 am PDT
ya, it was DEFINITELY the low food prices that got us in this mess.
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Stephen - September 26th, 2008 at 3:41 pm PDT
Sigh. This claim that it was Clinton and Fannie & Freddie has been repeatedly debunked, for quite a while now, too.
Here’s a good summary:
http://economistsview.typepad......-it-w.html
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Michael Arrington - September 26th, 2008 at 3:52 pm PDT
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Stephen - September 26th, 2008 at 4:16 pm PDT
Except for the share of the market held by F&F dropping off starting in 2002, replaced by asset backed securities lenders:
http://4.bp.blogspot.com/_nTCQ....._By_Holder(1)(1).jpg
Rebuttals back and forth are included in the original thread linked, also in this one:
http://economistsview.typepad......annie.html
delroy mckenize - September 26th, 2008 at 6:14 pm PDT
Stephen, you are perfectly correct, Mike has obviously joined the “talking heads” in trying to “blame” someone instead of understanding where we are now and finding solutions. According to this graph showed by Mike, that such a sharp increase in lending why didnt the market crash back in 2000 or 2001 or 2002 or 2003. The answer is simple, until the sharks on wallstreet entered into the market and started creative CDO and other asset back securities.
I would suggest you continue to focus on tech as your understanding of macro economics and its policies are either blurred by your political view or you simple dont get it.
Plain and simple, greed is why we are here now, plain and simple. As someone who as worked as an analyst for 4 year, i have seen first hand how greedy, they will sell their moms if they think she would net the right price.
Let me share with you a personal experience, while working at X IB firm, my group that was responsible for analyzing risk came across a few secrurties that was being push in the market place. A member of my team brought to our managers attention that we (X IB) was taking on far risker securities, his reponse was dont worry about it, we will just repackage it with a few other securities and offer a much higher return. Now clearly this was way above the risk level we should be have been taken, but you know what, we all got paid and everyone kept their mouth shut as long as the money was rolling in.
So i dont intend to attack you Mike, its just amusing to me, when i hear people talk about what caused the problem, when i have first hand experience in the system. Another thing to remember, Banks made bad decisions and lost confidence with investors. So if you want to point the blame at someone or something then we all have to share the responsibility.
And if you dont believe me, take a look at your mutual funds.
ICE - September 29th, 2008 at 12:37 pm PDT
Jamie G, and Franklin Raines, are the two people responsible, made possible by Clinton, duh,
Mike is basically right on the money.
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Righteous Marketing - September 26th, 2008 at 3:41 pm PDT
So wait, are you saying that when the government messed up the free market controls in order to help all those poor, working-class people get houses that it started this problem? Well I’ll be!
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Randall - September 26th, 2008 at 3:48 pm PDT
Wow, when I saw that Arrington was writing something about the economic crisis, I had my “STFU and talk about what you know about” post all queued up, and then he goes and posts something intelligent on the issue.
Though I’m sure your audience of SF socialists will take great umbrage at this argument.
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Doug - September 26th, 2008 at 3:48 pm PDT
Yeah Michael I’m not with you on this one. What is clearly a problem in this graph is that the debt increased very regularly over the years. But in this same time period we had the dot-com bust, 9-11, Afgan War, Iraq War, and ensuing recessions. Not to mention 2 Presidential elections and several Congressional elections. The problem, I think, was that lenders went too far on who they were granting credit too and in times when loose credit may not have been a good idea. I can’t blame the government in entirety for this. There’s plenty of blame to go around for all of this.
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Tom - September 26th, 2008 at 10:26 pm PDT
Doug, the lenders didn’t “go too far” - they were being ORDERED to. Take a look at Justice Dept. actions under both Clinton and Bush administrations, threatening banks that we’re meeting the guidelines under the CRA, as well as Fannie/Freddie pressures.
Not to be outdone, plenty of old-fashioned greed among the IBs and retail banks played into it with the creation of Mortgage Backed Securities and the derivatives. Add in Sarbanes/Oxley accounting requirements and then see what happens when a relatively small (at least manageable) percentage of the underlying mortgages go bad… POOF! Valuation evaporation across the board.
To those House Republicans who are trying to hold out on the bailout, while I admire your populism (and I don’t like being saddled with the bill as a taxpayer), I don’t see the alternative. The Gov’t created this mess and pushed this situation onto Wall Street, and thus bears responsibility for covering the losses it essentially mandated.
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JP - September 26th, 2008 at 3:50 pm PDT
THANK YOU TechCrunch! Everyone there’s still plenty of time to call / email your Congress members…they are getting flooded with messages now. Also, there were 251 Emergency Rallies held in 41 states this week.
CONTACT CONGRESS: http://www.visi.com/juan/congress/
JOIN FACEBOOK GROUP: http://tinyurl.com/482wv4 - This is Christopher Penn’s “Americans To Stop the Bank Bailout!” Facebook Group.
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pj - September 26th, 2008 at 3:52 pm PDT
Good article and valid point !
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TheChris - September 26th, 2008 at 3:53 pm PDT
Mr. Arrington have you read about the Gramm-Leach-Bliley Act? It repealed a piece of the Glass-Steagall Act.
It had a much larger role than Fannie Mae. That’s okay, you must have a little crush on Ann Coulter.
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Drew - September 26th, 2008 at 3:53 pm PDT
First post I ever sent my girlfriend, a very committed liberal and PHD in Poli Sci, from TechCrunch. She loves to rail against the free market but this was never a free market. Government protection and intervention distort markets and this is the outcome. Now we want to double down with $700,000,000,000 more and provide even more government oversight. In ten years we are going to have a much bigger mess.
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SteveR - September 26th, 2008 at 3:58 pm PDT
damn guvmint also blew up the WTC and faked the lunar landings.
Fannie and Freddie were woefully undercapitalized and mismanaged, but that wasn’t the root cause of the housing bubble.
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Aaron - September 26th, 2008 at 4:10 pm PDT
Yeah, I guess having Fannie and Freddie back every sub-prime mortgage did nothing to make it easier for people with no reputable credit to buy homes and I guess that having millions of previously unqualified people finally enter the housing market did nothing to drive up demand and housing prices.
/Sarcasm off
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Fact checker - September 26th, 2008 at 8:07 pm PDT
Fannie and Freddie definitely did not back every sub-prime mortgage.
Carla - September 26th, 2008 at 3:58 pm PDT
I feel the blame should ultimately be placed on the banks. I worked in housing during the boom years and bank were providing loans to individuals with 550 credit scores with little down payment. They also were providing loans for homes that were going up in value at 10% a month. (Vegas, Phoenix, Miami etc..). They understood that homes do not appreciate at this level but it’s hard to turn away money….. Yes, there were consumers made bad choices, idiotic investors who snatched up these sh*** mortgages, and a president who pushed home ownership, but if the banks had followed sound lending practices all of this would have been avoided.
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Thank you - September 26th, 2008 at 3:59 pm PDT
Thank you Michael Arrington for being brave enough to call out the true reason for this mess. People want to blame it on the free market while ignoring the true cause of this mess. Look up the CRA and ACORN’s involvement in this disaster.
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Ryan - September 26th, 2008 at 4:00 pm PDT
Here is video of Barney Frank in 2003 during a House Finance Committee meeting defending Fannie Mae. Its very damning. It gets good at about 4:40 into the video.
http://www.taxfoundation.org/blog/show/23617.html
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Pete - September 26th, 2008 at 4:12 pm PDT
Let’s not forget another type of ‘incestuous’ relationship: until a few months ago, Barney Frank was [truly] sleeping with one of the managers at Fannie Mae…
Pete
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damon - September 26th, 2008 at 4:04 pm PDT
US Annual Tax revenue - $3 trillion
US Total Debt - $9 trillion
If the government takes 10% of revenue each year to pay off the debt, it would take 30 years.
Of course, we typically pile on 10% each year, just digging the whole deeper.
Will a politician please stand up, call a spade a spade, and fix this, and stop with the endless pandering of how they will spend money to help every demographic if they would just for for ME.
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David - September 26th, 2008 at 6:56 pm PDT
yes. this is what has to happen. I’m a republican because it was our party who was supposed to do this. but obviously bush was a disaster with regard to spending. where is the real leadership? McCain nor obama will really fix the situation. We seem to be getting further away from reality with each passing day. No, 700 Billion isn’t a fix. No, we don’t need anymore spending.
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Tim - September 26th, 2008 at 4:05 pm PDT
Good to see your audience being used to get this thinking happening mike, there’s no way this was unexpected, all the data ha been pointing at it, and the graph you’ve shown, which is one of many is a simple look at an unsustainable metric that you’d hope one day we’ll not lose sight of.
We have rethink the debt driven approach to economic growth. ‘The money Masters’ video on google video sheds some good insight on how we’ve got here over a longer time horizon
http://video.google.com/videos.....&aq=f#
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Graham Langdon - September 26th, 2008 at 4:05 pm PDT
This is classic Mike Arrington -kicking ass and taking names. Yesterday it was Apple. Today it’s the US government and their mortgage company cohorts trying to plunger a trillion dollars from taxpayers.
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Alex G - September 26th, 2008 at 4:08 pm PDT
This is a royal misunderstanding of the issue to say the least. The reason why you seeing this nice little curve going up like that is because entire economy and monetary system is based on DEBT, also known to few as “fractional reserve banking”. This curve is a natural progression of banking where you need to have $1 of reserve to loan out $10. That $10 can be deposited at another bank which would allow them to loan out $100 and so on… as long as somebody is willing to borrow, DEBT will grow… and the only, the ONLY way to repay interest on this debt is to borrow some more because there’s no other way the money can possibly come from when all available money already comes from borrowed sources.
For as long as economy is control by a private bank (ie federal reserve) and is based on fractional reserve, you will continue seeing this. The next step to this nice little program is recession caused by contraction of available moneys through the fed. This has been done quite a few times before.
700B will accomplish only one thing. It will converts IOUs to actual money, therefore increasing banks’ reserves which will allow them to lend out more. This will depreciate and devalue US dollar even further.
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jg - September 26th, 2008 at 4:25 pm PDT
Debt is not evil. Debt is a source of capital and if it’s invested properly it leads to productivity gains and growth. You need to go pick up an econ book. I suggest reading up on Paul Romer and his ideas around technology as THE factor driving the productivity GDP growth equation.
http://en.wikipedia.org/wiki/Paul_Romer
Debt can be a good thing if the capital is invested properly. Credit is important to an economy and you have to ensure liquidity in the markets.
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Nick Savides - September 26th, 2008 at 4:12 pm PDT
Hey Mike,
Thanks for sharing. I actually like reading about how technology thinkers see the economy. After all, tech companies usually require lots of start-up capital, so the technologists have a vested interest in getting economics right.
Prior to reading this, I assumed that almost every west-coast technology guy thought the same way. I was surprised to learn about the Clinton initiative that accelerated the sub-prime mortgages, but I was even more surprised to see you writing about it.
The link from Wolfsbayne http://is.gd/3b4v was also informative.
Thanks again for venturing into this hot-button topic.
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Joe Bowers - September 26th, 2008 at 4:13 pm PDT
Michael Arrington, armchair economist.
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EL JEFE - September 26th, 2008 at 4:14 pm PDT
“Engineered” makes it sound like they intended to screw it up. Other than that you are spot on. Owning a house and even a second house almost became an inalienable right, despite a person’s income.
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Dan Isaac - September 26th, 2008 at 4:15 pm PDT
I put the blame on the millions of Americans who live beyond their means and pretend to be rich as well.
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tim - September 26th, 2008 at 5:30 pm PDT
finally, someone who gets it. if you’re in debt and can’t pay it back, you have no one to blame but yourself. when will americans be held accountable for their own actions?
i believe it is the false sense of entitlement most americans have that got us into this situation. if you make 100k a year, you shouldn’t live in a million dollar house.
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RJ - September 26th, 2008 at 10:33 pm PDT
I think the upcoming recession will make sure that “american’s are held accountable for their actions”
adam - September 26th, 2008 at 5:34 pm PDT
exactly. let’s not forget to place blame on the people who were stupid enough to buy homes they had no business buying. that banks allowed them to do it means they too deserve blame. But the most blame should fall directly on the millions who tried to live way beyond their means, even when they absolutely knew they couldn’t.
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dewde - September 26th, 2008 at 8:35 pm PDT
I agree!
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silicon valley dropout - September 26th, 2008 at 4:16 pm PDT
blame ruby on rails
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jay - September 27th, 2008 at 12:29 pm PDT
i tried to respond via twitter but they were down again…
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Matthew Flaschen - September 26th, 2008 at 4:24 pm PDT
Stopped reading when I saw your perfect exponential graph without a source in the caption. Don’t bother posting it now. You’ve already wasted your credibility.
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Joe Bowers - September 26th, 2008 at 4:26 pm PDT
hurr hurr
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Al Brown - September 26th, 2008 at 4:24 pm PDT
This is excellent information. The government is to blame for this mess.
The government has also inflated the dollar a great deal. With downward pressure on the rest of the economy due to globalization, the extra money had to go somewhere. It went into higher prices for housing.
And now the Federal Reserve has let the dollar deflate a bit recently, deflating the stock market and making people take money out of 401Ks, etc., creating pressure on banks involved with the mortgage mess.
After much exhaustive study, yes, it does seem that the use of force to distort economics has destructive effects. Who could have guessed?
Restore stability to the dollar and reality to decision making.
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Sylvia - September 26th, 2008 at 4:29 pm PDT
The real cause of the problem was not government policy implemented by Fannie Mae and Freddy Mac during the Clinton presidency.
The root cause of the problem started with the destruction of manufacturing in the U.S., and outsourcing jobs that only created bigger CEO bonuses instead of investment in R & D to create new jobs that replaced those outsourced or lost as the manufacturing sector disappeared.
Impatient shareholders are also to blame. Demands for quicker profits motivated CEOs and Boards to focus only on the next quarters results. This impatience combined with growing consumer demands for free and low cost products and services when reality is there are no free lunches, fueled unemployment.
The final straw was greed by the financial services sector by creating exotic MBS. As employment continued to drop and interest rates rose on creative financial mortgages, the meltdown began.
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Joe - September 26th, 2008 at 4:37 pm PDT
Where was your post before the collapse and did you Short AIG, Lehman and Wamu?
Monday morning quarterback.
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Andy McKenzie - September 26th, 2008 at 4:41 pm PDT
I agree with your point, but that is a highly deceptive graph. Truncating that y axis is a classic way to get people to see your point better. The data is already good, you didn’t need to embellish it.
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Mikael - September 26th, 2008 at 4:45 pm PDT
it boggles the mind how countries are run. everybody knows that you should not put yourself in debt or minimise debt but countries put themselves billions , or trillions in debt without a thought.
Its sad but true when they say ‘banks privatise profits but nationalise the risk’. i fully understand why tax payers are so against this.
If anyone wants to stay ahead of things check out this blog.
http://www.bbc.co.uk/blogs/the.....bertpeston
———–
liberta-togo.com
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ME - September 26th, 2008 at 4:46 pm PDT
Hmmm. Still wondering exactly how $700BB is gonna cover $12 trillion?
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Andrew - September 26th, 2008 at 5:28 pm PDT
Why? That’s only 18.5x leverage, almost half what an investment bank would do. That’s conservative for the governement.
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Raskin - September 26th, 2008 at 4:46 pm PDT
I think this topic is over the heads of most TC readers.
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Seth Wagoner - September 26th, 2008 at 5:03 pm PDT
No kidding.
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dewde - September 26th, 2008 at 8:38 pm PDT
Then perhaps this is just the sort of thing to help them realize the importance of getting a handle on it. I was encouraged to see the topic covered here.
peace|dewde
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ME - September 26th, 2008 at 4:47 pm PDT
Well, at least the $8 Trillion part that is the excessively leveraged position….
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Seth Wagoner - September 26th, 2008 at 4:49 pm PDT
If a policy decision back in 1999 actually did make this “inevitable” then that is a sign that the US political system is very, very broken, and needs fixing, badly. But we all knew that, right?
I don’t think you can blame Clinton. Most of the loans causing problems *now* weren’t written in 1999 or 2000, those ones sank or swam a long time ago. But you certainly could point a finger at the executives of Fannie and Freddy and their corporate lobbyists (most of which are now employed by the McCain campaign), who kept buying *ever more stupid* subprime loans as time went on. 1999 was just the start of it…
Most people simply weren’t paying attention to the fact that the housing market was propping up the US economy in an unsustainable way. Senior economists like Krugman and Roubini have been talking about it for years, but the banking sector was making money hand over fist and paying lobbyists to keep the gravy train going, and the politicians were eager to put of the recession if possible.
The pathetic thing is that all the extra money sloshing around was used so poorly. It paid for dodgy investments, more and more houses, vast numbers of SUVs, and of course, the war. At least the VCs have hoarded a fair bit of it and will have plenty of dry powder to work with over the next few years.
Also, the crisis engineering was *very* much a public-private partnership. The banking sector and their bizzare array of CDOs and CDSs managed to hide the build up of risk and spread it like poison through the whole financial system in a way that was never before possible, and the government really had nothing to do with that. The whole 62 trillion dollar Credit Default Swap market is completely unregulated, and under the guise of spreading risk around it actually set the banking sector up for a great big round of systemic failure.
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Pete - September 26th, 2008 at 5:45 pm PDT
It is really amazing how ignorant you are and the extent your misinformation reaches: the Fannie Mae CEO, who was paid 90M in about five years of sloppy work is now the closest financial advisor to, you know who?, well, none other than Barak Hussein Obama. Check it out…
Pete
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Seth Wagoner - September 27th, 2008 at 5:29 am PDT
Oh please. Are people really so dumb that they believe this sort of thing without looking it up? The guy said in an interview that he had one or two phone conversations with someone on Obama’s team about housing. This somehow makes him Obama’s closest financial advisor? Get real.
http://www.washingtonpost.com/.....03604.html
click - September 26th, 2008 at 5:04 pm PDT
So, if Democrats are always broadbrushed as big government, yet Clinton reduced government oversight in this, which would seem more of a Republican stannce.
So this was started by the open market, hands off gov’t approach that let the free will of greedy opportunists to market. Go on any school playground, there are bullys, dorks and peddlers.
So, if government intervention is the solution, being driven by a Republican administration, isnt’ that more of a stereotyped Democrat stance?
The ironies of all this are astounding.
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RJ - September 26th, 2008 at 10:36 pm PDT
I’m pretty sure you didn’t actually read the post. Clinton was pushing “affordable housing” which is INCREASED gov’t. Also I think affordable housing is another way of saying, getting people into homes they can’t afford.
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johnny - September 26th, 2008 at 11:00 pm PDT
You have a fundamental misunderstanding. The Clinton administration increased government intervention by forcing financial institutions to do something they did not want to. The gov’t forced the financial institutions to lend money to people they didn’t think financially deserved it.
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Larry Freeman - September 26th, 2008 at 5:05 pm PDT
In my view, we can blame both the current administration and the previous administrations.
Anyone who doesn’t see this is way too caught up in the political horse race.
Clinton should not have pushed for loans that people couldn’t afford without specifying a cap on the number allowed (the number that is affordable).
Bush should have stopped it. He stopped plenty of Clinton initiatives he didn’t agree. He could have stopped this one too.
I found this article very informative. Data to think about.
Thanks, Michael!
-Larry
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dewde - September 26th, 2008 at 8:44 pm PDT
According to the NY Times, Bush did try. But he sure as hell didn’t try hard enough if you ask me.
http://tinyurl.com/6lp5qu
peace|dewde
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dewde - September 26th, 2008 at 8:46 pm PDT
Oh yeah, and I agree both administrations are to blame.
I vehemently disagree with Obama’s press conference last night in which he said, “This didn’t happen on our watch.”
peace|dewde
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travis - September 26th, 2008 at 5:15 pm PDT
wow…just fuckin’ wow…
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Jerome Silverstone - September 29th, 2008 at 4:52 am PDT
Looks like you yankees have not revised your economic and political policies. You believe in the cut throat capitalism of survival for the fitest. Thats why you do not mind the homeless in your streets. Its also why you had no problems with slavery. The point is, you cannot make a man remain down, without remaining down with him. The current problems you have is because by embracing capitalism in its most brutish style, greed made wall street goons giddy with grutony. They became careless, and heartless. Now, the whole house of cards is coming crashing down. Why dont you guys ask the Sweds, the Fins, The Brits, an the Swizs how they do it? Make you system more humane. Otherwise the China man will come calling back his debt. Then we shall see where you will all be. Down with all the homeless you so despise!!!!!
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