Credit Crisis Debate...

[FireNexus]

I'm having a debate with my father about the credit crisis, and am attempting to argue that Bush policies of deregulation helped to cause the problem. The issue is that the white house in 2003 said that there needed to be regulation, and a democratic (my father assumes I support all democrats because I am one) Congressman, Barney Frank, opposed the legislation and killed it in committee. So is there something I'm missing about those recommendations? Was it simply a blatant attempt by Bush to grab power and therefore opposed? Was there some ulterior motive I can't find here, essentially.

[Samuel]

It was opposed by the Democrats on the grounds that it would reduce affordable housing. Of course, the Republicans controlled Congress at that time, so a good portion had to disagree.

The change would have moved supervisory power into a new agency and away from congress and the Department of Housing and Urban Development.

Someone else can give you more detail, but here is a NY Times article:
http://query.nytimes.com/gst/fullpage.h ... wanted=all

Of course, here is an important bit:

Nor would it remove the companies' exemptions from taxes and anti fraud provisions of federal securities laws.

Not exactly comprehensive reform, but more like a political move to cover your own ass.

[Darth Wong]

Housing is more a symptom of the problem than the source of the problem. The fact that Republicans focus on it is part of the way they try to distract from their systemic culpability in the mess. The real problem was tearing down some of the rules that had been erected after previous stock market crashes. They had firewalls to prevent banks and investment funds from being the same entity, for example. And rules to prevent investment funds from being too heavily leveraged. And rules to restrict what kind of derivatives could be offered. Tearing down those rules did three things:

1) It ensured that when a crisis erupted in one market sector (ie- housing), it would not remain contained in that sector, but would instead rapidly spread to the entire financial services market.

2) It dramatically increased the volatility of the system, because the heavy leveraging leads to a more unstable market and more panic behaviour when a crisis sets in.

3) It decreased the transparency of the market; people literally had no idea where the damned money was, or what it had really bought.

All of that falls pretty much on the heads of Phil Gramm and Alan Greenspan. And if the Republicans learned their lesson, then ask your father to explain why Phil Gramm was chosen to be McCain's chief economic adviser. Blaming low-income housing loans for this entire mess is extremely dishonest.

Of course, all of this is prefaced by the fact that I myself am not an economist. I'm just repeating what I've read in articles about the crisis. But this stuff is a matter of public record.

[FireNexus]

Thanks Mike. That actually gives me a good basis for additional research, so I can provide him sourced information next time we get into it.

[Surlethe]

Depending on whom you talk to, the mess is the fault of Democrats, for requiring Fannie and Freddie to make subprime loans to poor people over the objections of Bush, who wanted to more heavily regulate these loans; the fault of Republicans, for, as Mike pointed out, tearing down the walls between banking and investment banking and letting banks trade these bullshit derivatives; the fault of rich greedy Wall Street bastards, for making short-term profit decisions involving securities they didn't even understand without asking their actuaries first; the fault of greedy middle-class Americans, for latching onto the housing market as just another investment opportunity and buying $800,000 McMansions in the exurbs on $50,000 incomes; and the fault of poor people, for taking out loans they couldn't pay back.

I'm not an economist, and I haven't thoroughly studied this subject, so I can't pretend to say with any authority where the truth lies -- especially, and I think this is key in determining which policies (if any) were at fault in the creation of the crisis' initial impetus, in how many of the foreclosures are because of required loans to poor people, and how many are because of subprime sharking or stupid suburban assholes day trading with houses. But, in any case, if the firewalls in the economy hadn't been broken down by deregulation, these toxic assets wouldn't have been traded like STDs, and we wouldn't be seeing the consequent credit freeze. What would have been a crisis in the mortgage market because of housing deflation would not have percolated through the entire banking system as it did.

So perhaps the irresponsible Democratic encouragement of homeownership that ultimately started the ball rolling, but the rabid deregulation by Republicans is what let it become an avalanche.

[Alan Bolte]

While what has been said above is true to my knowledge, and one can certainly lay quite a lot of blame at the foot of Republicans and the Bush administration, I think it should be remembered that the act which tore down those walls between different types of financial institutions was passed during the Clinton administration, and both Democrats and Republicans were overwhelmingly in favor of it. Also, the Clinton administration thoroughly opposed any regulation of financial derivatives, which have played a part in the present crisis and seem likely to cause far more trouble in the months ahead. Deregulation in general was a Republican issue, but as far as banking goes it was fairly bipartisan.

[Darth Wong]

That's why I always like to remind people that "Democrat" is not a synonym for "liberal". Especially when we're talking about a Southern Democrat, which Bill Clinton was. You have the New England liberals, but that's pretty far from Arkansas.