One of the most widely cited reasons for the GFC has been banker greed and deregulation.
"The PRIVATE SECTOR got us into this and it's government's role to get us out." - What every liberal loves to hear.
That's the mentality around the world and in America especially where new laws have been introduced to tighten up the banking industry. Another great catch-cry is that the GFC was a lesson against free-market capitalism run amok, Deregulation! Deregulation ! they cry. But let's take this path of thinking and see where it leads us.
Well according to many liberals the roots of the GFC were sown in the deregulation of the 1980's. Reagan's policies opened up the market for a huge increase in financial and capital flows. Now let's think about how deregulation helped create the GFC. It seems that one day the rich banker wakes up out of bed and thinks to himself * You know what i'm just going to throw out those longheld standards of creditworthiness and start lending to poor people. Lending to middle-income American home-owners was one of the safest most profitable businesses a bank could be involved in. But apparently banks dont care about money they just wanted to chase poor people around for their overdue mortgage payments and throw them out of their houses (which are now worth less than the mortgage) just for the fun of it. This demonstrates the fact that people (especially liberals) just don't think anymore.
It's also another example of people seeing the world through political lenses. See it all fits, the rich banker preying on the helpless poor home owner, repossessing their homes and government, the knight in shining armour, stepping in and fighting against deregulation. But that's all it is, a fairytale.
Instead what contributed to this massive scale of lending to poor and lower income families were these affirmative actions policies for home ownership, introduced under the Clinton and Bush Administrations. Lets take one example the Community Reinvestment Act that forced banks to meet the credit needs" of "low-income, minority, and distressed neighborhoods."It sounds really good, encouraging banks to lend to lower income households and help them build wealth through home ownership. Guess what? These are the same people who were labelled 'sub-prime' and couldn't afford the minimum standards of credit worthiness: a job, a secure form of income, other assets, etc. But we shouldn't blame people for having their own self interest in mind.
So government stepped in and pushed for lessened restrictions on mortgages. The two Government Sponsored Enterprises GSE's Fannie Mae and Freddie Mac were told to start underwriting more sub prime loans. Here is where Barney Frank comes in. Frank heads the House of Representatives Committee on Financial Services which is in charge of Fannie and Freddie. In 2004 he said "I believe that we, as the Federal Government, have probably done too little rather than too much to push them to meet the goals of affordable housing." He went further: "I would like to get Fannie and Freddie more deeply into helping low-income housing." Fannie and Freddie underwrite around 80% of new mortgages in the US, so they're not some small company that 'couldn't have possibly caused the entire crisis.' Another example of the absurdity realised in this push for affordable housing was a release by the Boston Federal Reserve to mortgage lenders suggesting to them that a lack of proof of a secure income "should not be a negative when considering a loan application." They also included a small clause about the threat of legal action for lenders who did not meet these new standards.
But when the shit hits the fan we see the politicians earn their pay As Kevin Rudd would describe it, they love to pass the buck. See after the housing collapse Barney Frank, as head of the Financial Services Committee summoned all the CEO's of Wall Street and gave them a public denouncement on television. See Barney Frank likes to blame everything and everyone else but himself: banker greed, deregulation, speculation, Reaganomics.... Frank loves to pointing the finger. The whole situation is very much like the saying "Heads I win, Tails you lose." When everything is going well, as it was prior to 2007, the lax lending standards were seen as a win for 'social justice' and 'equity' against the 'racist lending practices' of the banks. Frank can take all gratitude from his voters from their increased home-ownership. But now after the world has been brought to a near financial collapse, it was the private sector greed that drove us into this mess and more regulation is needed. If you want to see Barney Frank lying see below
But you have to hand it to the guy he literally did a 180 and painted himself as the great regulator battling against the Republican DEregulation agenda. This guy is a political genius a modern Machiavelli? or maybe not. Its easy to change people's minds when all they do is lap up propaganda (as could be said of Fox News). So next time you hear someone say the GFC proves that free markets don't work, don't get into a useless argument (its like arguing with a brick wall).
