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The blogosphere has done a fantastic job of tracking down the laws that forced banks to make loans to people who couldn't afford them:
* The original Community Reinvestment Act was signed into law in 1977 by Jimmy Carter. Its purpose, in a nutshell, was to require banks to provide credit to "under-served populations," i.e., those with poor credit.
The buzz word was "affordable mortgages," e.g., mortgages with low teaser-rates, which required the borrower to put no money down, which required the borrower to pay only the interest for a set number of years, etc.
* In 1995, Bill Clinton's administration made various changes to the CRA, increasing "access to mortgage credit for inner city and distressed rural communities," i.e., it provided for the securitization, i.e. public underwriting, of what everyone now calls "sub-prime mortgages."
Bottom line? It forced banks to issue $1 trillion in sub-prime mortgages.
$1 trillion, i.e., a thousand billion dollars in sub-prime,i.e., risky, mortgages, in order to push this latest example of social engineering.
But there's at least one more piece of the puzzle - and it's one more case of government regulation that strangles industry, and that contributed in large measure to the current financial crisis. It's the so-called "mark-to-market" regulations:
Newt Gingrich has gone on the record with a solution to the crisis that is the best I have seen so far. Rather than pass a $700 billion bailout, suspend the accounting rules that are causing the liquidity crisis to begin with.
In the past few years, accounting rules changed and these changes are in part causing the current crisis. Specifically, the problem is mark-to-market accounting where all assets are required to be valued at current market prices. If the market is temporarily depressed, it can cause an artificial crisis.
Mark-to-market regulations were passed as part of the Sarbanes-Oxley bill (SOX), which leading figures in both parties have expressed doubts about since that bill's passage:
It would seem that SOX was implemented to prevent the type of problems we're seeing today. Guess not.
According to Mike Huckabee we ought to kill SOX. It's not working, he says.
Democrats aren't too keen on SOX either. A spokesperson for Nancy Pelosi told The New York Sun in 2006:
"We cannot afford to disadvantage small companies with overly burdensome regulatory requirements."
The good news is that the government is already recognizing the error of these regulations, and is acting to repeal them so as to address the current crisis:
Financial crisis: SEC cheers finance companies with mark-to-market ruling
The Securities and Exchange Commission brought some much needed cheer to the US financial sector after issuing accounting guidelines that could help curb the billions of dollars of writedowns reported by the country's leading banks.
The US regulator told banks that despite fair-value accounting regulations they did not have to use only fire-sale prices to value bad assets but could also use their judgement.
The move led to a late rally in US stock market with the Dow Jones index up 485.2 to 10850.7 while the S&P 500 rose 58.3 to 1164.7, its biggest one-day rise in six years.
Fair-value accounting requires companies to value their assets at current market prices. Banks have been forced to push through billions of dollars of writedowns in recent months after valuing assets at the same prices raised by ailing companies undergoing last-ditch sales.
The SEC move effectively allows banks to switch from mark-to-market accounting to hold-to-maturity accounting, commentators said.
"If you plan to hold an asset to maturity or at least for the foreseeable future, why should you be forced to value it at the same price being realised during the worst financial crisis in living memory?" said one trader.
Fair-value accounting has come under growing criticism in recent days amid claims it has unjustly forced banks to write down tens of billions of dollars of assets that could regain their value in the years ahead.
Question for the blogosphere: to what degree, is this only an artificial, paper crisis? To what degree is it that so many powerful banking institutions have been destroyed, merely because of a bad accounting regulation, that forced their loan packages to be accounted for at unfairly low rates?
