The analysis is somewhat simplistic, but is on the right track. Thanks
for posting this.

i

What You're Not Told
About The Financial Crisis
By Perry Willis
3-18-8


"As Americans we must always remember that we all have a common enemy,
an enemy that is dangerous, powerful and relentless. I refer, of course,
to the federal government." -- Dave Barry


You can watch hours and hours of news, or read columns of print in most
newspapers, and come away no wiser about the causes and prospects for
the current financial turmoil.

Most journalists and TV talking heads don't really understand the
subject, and those that do speak and write using so much jargon that the
average person must feel he or she is trying to follow a conversation in
ancient Hebrew.

We're going to try to cut through the jargon, and explain the situation
as best we can, in plain English. If you find our explanation of value,
please forward it to others.

The current housing crisis, and all that flows from it, comes from two
main sources, both deriving from Washington.

First, Congress passed something called the "Community Reinvestment Act"
in 1977, resulting in the creation of bureaucratic regulations designed
to encourage, or even compel, financial institutions to make loans to
people with lower incomes. These regulations were then amended in 1995
and 2005 to create different rules for institutions of different sizes,
so that various kinds of institutions would be better able to meet the
government's goals for fostering home ownership in lower income communities.

Second, the Federal Reserve starting making loans available to the
banking system at extremely low interest rates.

Third, steps one and two combined to make cheap housing loans available
to people who could not have afforded or qualified for them before. This
caused an increased demand for housing that sent home prices spiralling
upward.

Fourth, mortgage lenders managed the risk involved in making these loans
by selling their mortgages to other companies, which in turn thought
that they were managing their own risk because they had a wide variety
of mortgages, from many different types of borrowers, in their portfolio.
Fifth, these decisions about how to manage the increased risk created by
the "Community Reinvestment Act" were all in error, because the Fed's
policy of easy money had falsely inflated the value of ALL homes. This
meant that good mortgages could not be used to manage the risk involved
in questionable mortgages, because the value of ALL homes was falsely
inflated.

Sixth, as with all inflationary booms, increases in home prices finally
absorbed the increased purchasing power provided by the Fed, leading to
a slow-down in home purchases. When this moment arrived everyone
realized that the homes they had purchased weren't really worth what
they had paid for them. The defaults and foreclosures then began, along
with the collapse of the financial institutions that owned these unsound
mortgages.
Now, the complicated, multi-part scenario described above has been
simplified in popular reporting to just two words: sub-prime loans.
These two words, combined with the idea that lenders took advantage of
poor unsuspecting customers, are supposed to explain everything. But
this explanation is both simple and simply insufficient.

A study by the Mortgage Bankers Association tells the true story. In the
third quarter of last year fixed rate mortgages accounted for 45% of
foreclosures, while sub-prime ARMs accounted for only 43%.

It's not hard to understand why. Who wants to be on the hook for a
mortgage that is tens or hundreds of thousands of dollars higher than
the property is really worth? Rather than bear this burden, many
borrowers are choosing to default, and walk away from their properties.
This is especially happening with speculators who bought houses in order
to "flip" them. To cope with these foreclosures . . .

Banks have offered their bad mortgages as collateral to borrow money
from the Federal Reserve. The money the Fed lends through this process
is created out of thin air. This has two shocking consequences. First,
the Fed is coming to effectively own an increasing portion of America's
stock of housing, and two, these Federal Reserve loans are inflating the
money supply, causing prices to rise all through the economy.

As the Fed creates more and more new dollars, the value of all the
previously existing dollars declines. This forces people to seek ways to
protect their accumulated wealth against the devaluing effects of
monetary inflation. Thus . . .

People buy other currencies, causing the exchange value of the dollar to
fall
They buy gold, pushing the price up above $1,000 an ounce
And they buy oil futures, driving up those prices too
But it gets worse . . .

Monetary inflation is making foreign investors reluctant to buy U.S.
Treasury bonds. Who wants to hold bonds denominated in dollars when the
Federal Reserve is reducing the value of the dollar?

The "London Telegraph" reports that foreign participation at a recent
auction of U.S. Treasury bonds fell from 25% to less than 6%.

Sadly, there is every reason to expect this phenomenon to continue. This
will leave the Federal government with only two options for funding its
ever growing deficits. The government must either pay much more interest
on its bonds, to compensate lenders for the monetary inflation, or it
must sell its bonds to the Federal Reserve System, which will buy the
bonds with yet more money created out of thin air, adding still more
fuel to the inflationary fire.

The more the Federal government has to pay in interest, the larger the
deficits will grow, or, the more it borrows from the Federal Reserve,
the more it will have to pay in interest to private lenders. It's a
vicious bind.

There is one thing the Federal government could do immediately to lessen
this bind. It could cut spending to balance its budget, thereby reducing
inflationary pressures. Please use our "Unfunded Liabilities" campaign
to ask Congress to do exactly that.

Use your personal comments to tell Congress that you know foreign
participation in U.S. bond auctions is declining. Tell them you do not
want them to sell their bonds to the Federal Reserve, thereby driving up
the money supply. CONGRESS MUST BALANCE THE BUDGET NOW.

_________



Perry Willis
Communications Director
DownsizeDC.org, Inc.
D o w n s i z e r - D i s p a t c h is the official email list of
DownsizeDC.org, Inc. & Downsize DC Foundation

http://www.DownsizeDC.org

OK, since you're being good about it, let me try to play "fair and
balanced" about this, and I ain't talking about Fox News. I'm not
interested in making some ideological point about it. I'm only
interested in the facts as best we can figure them out.

I'm not an expert but the mortgage part, at least, is something I'm
fairly familiar with. My understanding is this:

The Community Reinvestment Act, dating from 1977 and stiffened in the
'90s, does bear some culpability in this. But not very much. The act was
intended to stop "redlining" by mortgage lenders. They were refusing to
write mortgages for certain communities -- mostly black ones -- and it
didn't matter how well qualified the borrower was.

It worked fairly well. It did slightly increase mortgage lenders' risk,
but they had it pretty well covered by somewhat higher rates. The market
was pressing to minimize these loans, and the government was pushing
back, so we had an equilibrium that was working Ok.

Sometime in the '90s, the shadow banking world came up with
"securitization." Now they had a way to bundle these mortgages and morph
them into new instruments, where they could bury their subprime
mortgages. This is where the *real* culpability lies, from what I can
determine. The rating agencies for some bizarre reason allowed these
bundles to get rated as investment-grade securities, and the market
pressures reversed. Now, the lenders were going after those formerly
redline-district buyers and low-income buyers, pushing them into
mortgages because the original lender could discount that junk and flip
it into the shadow banking system, making a big profit.

Now, instead of a working equilibrium, it was Katie Bar the Doors. The
lenders (or brokers, really, because they weren't holding any paper)
were chasing these potential buyers with advertising, "introductory
rate" terms, and every other scam they could come up with. They drove
the whole thing. The CRA could have disappeared at this point and it
probably wouldn't have mattered a bit. The money guys had created a new
gravy train, and it was running on its own.

The article you pointed to (when I see bold type on a brown textured
background, I assume it's an amateur or a crank, and that's seldom wrong
d8-)), in true LewRockell/RobertMises/Hayak fashion, misrepresents the
facts. It implies that the mortgage failures are really slightly higher
from the fixed-rate borrowers, neglecting to point out the 10:1 ratio I
mentioned and also failing to point out that 40% of the subprime loans
are, in fact, fixed-rate. It also doesn't mention that something like
85% of the subprime loans are *not* going to first-time buyers (I'd have
to check this -- there's an industry report that gives us these
numbers, updated every year or six months, but I haven't looked at it
since December), but actually represent re-financing by people who are
cashing out of homes they've had for a while -- sometimes a very long while.

So the whole thing is a lot more complicated and nuanced than either
side is admitting. There is no real, useful explanation that fits on a
single page.

--
Ed Huntress

On Mon, 24 Mar 2008 13:09:58 -0600 in rec.crafts.metalworking,
cavelamb himself wrote,
What You're Not Told
About The Financial Crisis

Please do not post OFF-TOPIC articles.