claire333 wrote:
Hmm...I try not to watch too much news .... but from what I understand; this is all a direct cause of the Clinton administration ordering the countries largent mortgage company to provide home loans to high risk applicants. Things are falling apart now.
That is too simple an explanation - both Clinton and Bush favored more people owning their own homes, and neither 'ordered' mortgage companies to accept people regardless of the risk. If it was only an executive order from Clinton, Bush could have reversed it 8 years ago.
The biggest factor in the subprime was the change in the way that mortgages are done. In the old days, a local bank (or local branch of a national bank) made a mortgage loan, and they kept it for 15-30 years and made a modest profit off it for however long the loan lasted.
Most real economists point to the repeal of the Glass-Steagall act and new rules for banks, stock brokers, and insurance companies with the Gramm-Leach-Bliley Act (created by Phil Gramm, economic adviser to McCain). Clinton did sign the law as part of his bipartisanship (along with welfare reform, NAFTA and other centrist positions). With Gramm's law, banks were free to do pretty much what they wanted. What they did was decide it was clever to bundle a thousand or ten thousand mortgages into a 'security' and then sell that block of loans to investors. So overnight, they lost any incentive to only give loans to people that could pay them back. Instead, they had a huge incentive to make as many loans as possible, as they got fees for doing this. It no longer mattered if the mortgages were solid, as long as they could be bundled and sold, the banks and mortgage companies made big money.
Add to this the bubble in real estate, where every Joe and Jane were convinced that prices would always go up (10-20% a year was common), so buying an extra house or upgrading to a larger, newer house seemed to make sense - buy it now for $200,000 and in ten years it will be worth $400,000.
There is also a huge bubble in other types of financial devices - AIG is an insurance group, and Lehman Brothers was a trading company - their collapse is not due to any order from Clinton, but from going beserk once they were deregulated.
The amount of derrivatives out there is incredibly huge - these are basically bets on how something is going to move in the market ... the amount of oil future contracts bought and sold each year has become far, far larger than the amount of oil bought and sold. There are derrivatives so strange and twisted that few people really understand them.
The history of capitalism is a history of booms and busts, of bubbles and hangovers. Glass-Steagall was supposed to limit people, and once that was removed, the money boys in Wall Street went on the mother of all binges. Now you get to pay.
http://en.wikipedia.org/wiki/Glass-Steagall_Act
http://en.wikipedia.org/wiki/Gramm-Leach-Bliley_Act
http://en.wikipedia.org/wiki/Tulip_mania
19 Sep 2008, 11:42 pm
