Conservative's Conscience

2008 Crisis in the U.S. Financial System, Part One of Two

Ideas have consequences. -- Richard M. Weaver

The crisis in the U.S. financial system does not have its origins in the failure rate of sub-prime loans over the past few years.  Like many great historical events, its roots were planted decades ago when a noble idea -- own a home with initial assistance from the federal government -- evolved into a de facto right to home ownership enforced by government. 

Exactly when "dream" turned into "right," and "assist" became "enforce" cannot be precisely determined.  But the motivation for allowing such a perversion is always present and will inevitably spring into life whenever power falls into the hands of social engineers who genetically oppose free enterprise, and eagerly embrace the proposition that informed government action and lots of cash can remove all of life's hurdles.  

The ideal environment for humanists came into being with the 1960 election of John F. Kennedy, and it became a working political reality when Lyndon Johnson succeeded the assassinated Kennedy and went on to serve for five more years, during which the first shingle fell from the roof of the first foreclosure of 2008. 

Kennedy/Johnson ruled the White House for eight years supported by Sam Rayburn and John McCormack in the House, and Mike Mansfield in the Senate, Democrats all.  They had the government by the throat -- they could and did pass whatever social legislation they pleased.  House control under Democrats continued until 1994; the same was true of the Senate except for two years under Bob Dole during the 1980s. 

That 34-year period was as close to social-engineering heaven as left-wingers are likely to see (The same environment threatens to repeat after the 2008 election -- Obama plus Nancy Pelosi, House, and Harry Reid, Senate, leading Congress.). 

The seeds of the current crisis were planted during those years.  And they slowly grew the branches of destruction that encircled the financial system and, finally, squeezed the life out of it.     

 When did "dream" turn into "right?" -- "help" turn into "enforce?"

Franklin Roosevelt officially recognized the dream of home ownership when he signed several laws during the Great Depression aimed at helping distressed homeowners.  The now infamous Fannie Mae (Federal National Mortgage Association), for example, was formed in 1938 as a federal agency, its innocent-sounding mission to provide liquidity to a distressed housing market.

When World War Two converted the U.S. from being an economic cripple to the status of giant, one would have expected to see Fannie Mae close down and get out of private sector business.  But Washington being Washington where nothing is ever closed down, Fannie Mae continued in existence for the next thirty years (1938-1968) as a federal agency.

Fannie Mae in 1968 was turned loose under Lyndon Johnson as a government sponsored enterprise.  Congress at the time was led by two Democrats, John McCormack and Mike Mansfield.  Fannie's business function was to buy mortgages from lenders that it thereafter packaged and sold to other financial institutions as asset-based marketable securities.  The new government sponsored enterprise grew and grew and became a dominant force in the secondary mortgage market. 

Freddie Mac (Federal Home Loan Mortgage Corporation) was formed in 1970 under Richard Nixon.  Congress at the time was run by the same two Democrats, McCormack and Mansfield. Freddie's function was to join Fannie in the secondary mortgage market business.  Between them, they dominated the field.

ACORN, a grassroots organization that was to become a political and controversial powerhouse over the subsequent decades, was also formed in 1970.  It may be fairly described as a by-product of the civil rights movement that was so active during those years.

President Carter was in office when the 1977 Community Reinvestment Act (CRA) was passed.  Congress was controlled by Tip O'Neil (House) and Robert Byrd (Senate).  It may be arguably stated that this legislation was the proximate cause of the 2008 financial crisis. 

 The law was passed as a response to the charge that lending institutions were not providing equal credit opportunities to urban neighborhoods -- it may be fairly described as another godchild of the civil rights movement. 

Banks were thereafter subject to examinations by federal officials relative to the fairness of their practices; advocacy groups were given the right to protest bank practices.  The results of this oversight would be taken into account when banks requested planned expansions.  In other words, if banks didn't behave according to CRA rules, expansion plans could be denied. 

Groups like ACORN were handed the tools of power when this law was passed and, according to critics, they have used it to extort millions from banks.  The organization has repeatedly been scrutinized by the law following charges of voter fraud.    

Financial stress has been the result of laws activated over a period of 17 years (1960-77) that made government, through Fannie/Freddie, major players in the housing industry.          

Congressional committees supervised Fannie/Freddie.  What a comfort!