The Economic Crisis

For the past few months, I've been engaged in internet discussion and research concerning the economic crisis, the bailout of American banks and its origins.

What motivated this interest was a question in my mind regarding right wing, conservative claims, primarily on public internet forums, that the origin of the crisis could be traced to the Carter Administration's sponsered legislation termed the Community Reinvestment Act (CRA). The "theory" put forward is that, through this legislation, and subsequent amending legislation during the Clinton Administration, U.S. banks were "forced" by the Federal Government into making bad loans to low-income, minority neighborhoods and that this federal government intervention led directly to the collapse of the subprime mortgage market.

Additionally, the more recent Democratic guilty parties are Christopher Dodd, currently head of the Senate Banking Committee and Barney Frank, Chairman of the House Financial Services Committee (the House of Representatives equivalent of the Senate Banking Committee).

Supposed "proof" of these charges are that Dodd received special treatment regarding his own home loan from a Countrywide mortgage program called "Friends of Angelo," Angelo being the founder and CEO of Countrywide. The "proof" regarding Frank is that Frank (with an openly gay sexual orientation) had a boy friend at one of the Government Sponsered Enterprises (Freedie Mac or Fannie Mae) and repeatedly defended the GSEs, referring to them as "financial sound," when in fact they were on the brink of bankruptcy due to their portfolio of bad mortgages. Associated with these charges are the repeated attempts by the Bush Administration and the Republican Congress to "reign in" the GSE's and prevent undue risk.

In sum, the conclusions arrived at from this interpretation of the cause of the economic crisis are: 1) government intervention into the banking system - via the CRA - orginated the bad mortgage problem leading to excessive forecluses leading, in turn, to the economic crisis. 2) Democrats were basically behind the CRA and the subsequent protection of the GSEs, which led to the crisis, since the GSEs are the single largest underwriters in the U.S. mortgage industry.

There are a few "side-lights" to this general theory. One is that ACORN, supported by Democrats, particularly Barack Obama (during his work as a Chicago Community Organizer)was a major, basically African-American, organization that pressured Democratic politicians into support for the CRA and banks (through the organization of demonstrations, disruption of banking business and discrimination law suits), and thus played a major role in causing the economic breakdown.

After checking into the above, I found that there was indeed "some truth" in the facts, but that the facts in themselves did not lead to a cause and effect conclusion regarding the charges and the economic meltdown. Further, I had two doubts regarding that cause and effect: 1) if the CRA "caused" the meltdown, why didn't it occur earlier, at a time closer to the inception of the CRA? 2) if Democrats were primarily to blame for subprime loans, why did the growth in the number and value of subprime loans virtually double under a Republican President, George Bush, and a Republican Congress?

Thus, I began my own research into the economic crisis of 2008-2009.

What follows in a series of posts are my own conclusions...beginning in the next post with a debunking of the above theory and then exploring what I now consider to be largely an accidential convergence of errors into the "Perfect Storm."

Those "errors" consist broadly of four events: 1) massive deregulation of the financial services industry; 2) The events of 9/11/2001 and its impact on national economic policy; 3) the failure of risk management models; and 4) global competition in a global economy, wherein the United States, ridden with debt, and guided by obsolete economic policy, has tried to maintain its post WW II status as the "model" for that global economy.

More in the next Post.