In President Obama's first year in office, he had to face an economy in recession and an infuriated public. The federal government had just bailed out the banks to the tune of $700 billion, while the American homeowner suffered. The country was in a recession, and the banks were being bailed out of what was called the sub-prime mortgage crisis.
To understand the sub-prime mortgage crisis, we need to go back to 1992 when Fannie Mae an Freddie Mac added an affordable housing mission to their charter. This charter was used to avoid additional regulation by congress which restricted their accumulation of mortgage portfolios. By 1997, Fannie was offering a 97 percent loan-to-value mortgage and by 2001, it was offering mortgages with no down payment at all. Fannie Mae was fueling the subprime mortgage industry. Then in 1998, the Glass-Steagal legislation was repealed. The Glass-Steagal legislation separated regular banks and investment banks. Repealing it meant that banks with deposits guaranteed by the FDIC were now allowed to engage in risky business. Banks were given the green light to gamble, and many of these banks turned to subprime mortgages.
Many of us remember these days, Bill Clinton was president, interest rates were low and the American economy was booming. But in 2000, the dot-com bubble busted, and the Federal Reserve responded with lowering interest rates and kept them there for an extended period of time. Low rates meant asset managers could no longer get decent yields on bonds or treasuries, so they turned to high-yield mortgage-backed securities. These investments derived their valued from these mortgage-backed securities and were eagerly approved by the credit rating agencies, so most fund managers failed to do their own homework. To complicate matters worse, these derivative investments were often unregulated and exempt from all government oversight. In an attempt to find greater earnings, Wall Street got creative and began to bundle the underlying highest yielding subprime mortgages and sold them to private sector lenders who themselves were exempt from most regulations. To reach more customers, thees lenders created innovative mortgage products that could reach more subprime borrowers. Commercial and traditional bankers then jumped in on the bandwagon with a focus on volume, not quality. By 2007, the derivative market exploded uncontrollably at went from boom to bust globally. Fannie Mae and Freddie Mac did little to help. They jumped back into the game late to protect their profits, but the bulk of the subprime mortgages were underwritten by private firms and not Fannie or Freddie. Fannie and Freddie's market share declined from a high of 57% in 2003 down to 37% when the bubble was first developing in 2006.
Now the year was 2007, George Bush was in the presidency and the housing bubble busted. The housing prices peaked in early 2006, but began to decline in 2006 and 2007. And, on December 30, 2007, the Case-Shiller home price index reported its largest price drop in history. Foreclosure rates on mortgages increased among U.S. homeowners and it led to a crisis in the subprime mortgage. On October 2, 2008 President Bush signed into law the Emergency Economic Stabilization Act to bail out the banks at a price of $700 billion. Now as President, Barack Obama had to defend the federal government's response to the crisis. The American people blamed the banks for the crisis, but it was the banks that got bailed out, not the American People. In his first state of the union address, he promised America that he understood their frustration. "I promise you, I get it", he said. But as he explained, "It's not about helping banks; it's about helping people".
"Now, I understand that when the last administration asked this Congress to provide assistance for struggling banks, Democrats and Republicans alike were infuriated by the mismanagement and the results that followed. So were the American taxpayers; so was I. So I know how unpopular it is to be seen as helping banks right now, especially when everyone is suffering in part from their bad decisions. I promise you, I get it.
But I also know that in a time of crisis, we cannot afford to govern out of anger or yield to the politics of the moment. My job--our job is to solve the problem. Our job is to govern with a sense of responsibility. I will not send--I will not spend a single penny for the purpose of rewarding a single Wall Street executive, but I will do whatever it takes to help the small business that can't pay its workers or the family that has saved and still can't get a mortgage. That's what this is about. It's not about helping banks; it's about helping people. [Applause]
It's not about helping banks; it's about helping people. Because when credit is available again, that young family can finally buy a new home. And then some company will hire workers to build it. And then those workers will have money to spend. And if they can get a loan too, maybe they'll finally buy that car or open their own business. Investors will return to the market, and American families will see their retirement secured once more. Slowly but surely, confidence will return and our economy will recover."
http://www.presidency.ucsb.edu/ws/index.php?pid=85753
http://www.forbes.com/sites/stevedenning/2011/11/22/5086/
http://spectator.org/articles/42211/true-origins-financial-crisis
https://en.wikipedia.org/wiki/Emergency_Economic_Stabilization_Act_of_2008
https://en.wikipedia.org/wiki/United_States_housing_bubble
http://voiceofdetroit.net/wp-content/uploads/2011/11/Bail-out-the-people-not-the-banks-8.jpg
https://upload.wikimedia.org/wikipedia/commons/e/e9/Official_portrait_of_Barack_Obama.jpg
No comments:
Post a Comment