LeRoy Collins Commentary 226

Commentary #226
5 October 2008

AMERICA'S FINANCIAL COLLAPSE.... BLAME....A BETTER REMEDY

If you want to do some finger-pointing re the U.S. financial crisis occupying the front pages during the last few weeks, the attached is about as good as any. Since Democrat Barney Frank is a long-time Congressman from Massachusetts (and chairs the House Financial Services Committee), we may be able to presume a reporter from the boston globe is credible to make these observations.

But that is more of "who shot John," which goes nowhere if the voters in Barney Frank's congressional district do not turn him out of office next month. The chances are he has been diligent in "bringing home the bacon" to his constituents, and they are likely to reward him again with their votes, which means he is likely to continue in his chairmanship of this hi-viz committee. That is the way the system typically works in all congressional districts, so the rest of the country has to deal with the consequences which are spawned locally.

But the solution to this mayhem seems equally flawed, i.e. the taxpayers for the future must fund this enormous bailout of lenders on mainstreet, the brokers on wall street, and a government/Congressional dichotomy of overseers functioning as overlookers for three decades!

As you recall a week ago, the House failed to pass the bailout plan proposed by U.S. Secretary of the Treasury. The stock marked responded with big losses, unemployment increased, the wheels of commerce labored to keep going, foreign stock markets reacted negatively, businesses called on Washington to "do something." From my vantagepoint it would appear nobody had a better idea, so the U.S. Senate sought to spur a re-vote in he House by proposing some sweeteners (added deposit guarantees by the Federal Deposit Insurance Corporation, i.e. coverage per depositor increased from $100,000 to $250,000. It sounds good to the public, so on Friday the House re-voted and passed the measure, which the President accepted promptly to quickly re-lubricate the wheels of American commerce...maybe.

While this may jump-start the economy quicker, at the cost of taxpayers for years to come, it may not, so here we may sit with our government mortgaging the future to China? Iran? India? But how do we prevent the same excesses from recurring in the future? Have you heard any plan to rescind those laws passed by the Congress in the late 1970s which set this failure in motion?

My suggest...passed along to Congressman Bill young, is to return those defective loans to their respective originators on Main Street, i.e. those lenders who made the bad credit decisions in the first place. With the borrower and security asset for the loan nearby, let the lender of first resort struggle with the workout. Also, those institutions along the audit trail who accepted/packaged/securitized those ' loans should share in the loss, if any. If that process caused undue hardship to those implicated along the audit trail, then and only then should the U.S. Government come in with ad hoc rescue loans.

Another factor to consider...on NPR I heard the principal officer of the American Mortgage Brokers Association say there are currently 51 million active mortgages in America nad 1.5 million of those are in foreclosure. So why should the government buy them all up front?

My plan may be harder to administer, but it puts blame where the blame should be..but without more remedies it lets the Congress off the hook. I propose that for those who voted for this confiscatory legislation in the past, they should receive a letter of admonition from the President, and the list of recipients should be published in the Federal Register and sent to all major news outlets for whatever they wish to do with it.

I know the last part sounds unorthodox, but those implicated may not commit such acts of fiscal ignorance again if they are publicly exposed.

/s/ LeRoy Collins, Jr.

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Frank's fingerprints are all over the financial fiasco
By Jeff Jacoby
September 28, 2008


"THE PRIVATE SECTOR got us into this mess. The government has to get us out of it."

That's Barney Frank's story, and he's sticking to it. As the Massachusetts Democrat has explained it in recent days, the current financial crisis is the spawn of the free market run amok, with the political class guilty only of failing to rein the capitalists in. The Wall Street meltdown was caused by "bad decisions that were made by people in the private sector," Frank said; the country is in dire straits today "thanks to a conservative philosophy that says the market knows best." And that philosophy goes "back to Ronald Reagan, when at his inauguration he said, 'Government is not the answer to our problems; government is the problem.'"

In fact, that isn't what Reagan said. His actual words were: "In this present crisis, government is not the solution to our problem; government is the problem." Were he president today, he would be saying much the same thing.

Because while the mortgage crisis convulsing Wall Street has its share of private-sector culprits -- many of whom have been learning lately just how pitiless the private sector’s discipline can be -- they weren't the ones who "got us into this mess." Barney Frank's talking points notwithstanding, mortgage lenders didn't wake up one fine day deciding to junk long-held standards of creditworthiness in order to make ill-advised loans to unqualified borrowers. It would be closer to the truth to say they woke up to find the government twisting their arms and demanding that they do so - or else.

The roots of this crisis go back to the Carter administration. That was when government officials, egged on by left-wing activists, began accusing mortgage lenders of racism and "redlining" because urban blacks were being denied mortgages at a higher rate than suburban whites.

The pressure to make more loans to minorities (read: to borrowers with weak credit histories) became relentless. Congress passed the Community Reinvestment Act, empowering regulators to punish banks that failed to "meet the credit needs" of "low-income, minority, and distressed neighborhoods." Lenders responded by loosening their underwriting standards and making increasingly shoddy loans. The two government-chartered mortgage finance firms, Fannie Mae and Freddie Mac, encouraged this "subprime" lending by authorizing ever more "flexible" criteria by which high-risk borrowers could be qualified for home loans, and then buying up the questionable mortgages that ensued.

All this was justified as a means of increasing homeownership among minorities and the poor. Affirmative-action policies trumped sound business practices. A manual issued by the Federal Reserve Bank of Boston advised mortgage lenders to disregard financial common sense. "Lack of credit history should not be seen as a negative factor," the Fed's guidelines instructed. Lenders were directed to accept welfare payments and unemployment benefits as "valid income sources" to qualify for a mortgage. Failure to comply could mean a lawsuit.

As long as housing prices kept rising, the illusion that all this was good public policy could be sustained. But it didn't take a financial whiz to recognize that a day of reckoning would come. "What does it mean when Boston banks start making many more loans to minorities?" I asked in this space in 1995. "Most likely, that they are knowingly approving risky loans in order to get the feds and the activists off their backs . . . When the coming wave of foreclosures rolls through the inner city, which of today's self-congratulating bankers, politicians, and regulators plans to take the credit?"

Frank doesn't. But his fingerprints are all over this fiasco. Time and time again, Frank insisted that Fannie Mae and Freddie Mac were in good shape. Five years ago, for example, when the Bush administration proposed much tighter regulation of the two companies, Frank was adamant that "these two entities, Fannie Mae and Freddie Mac, are not facing any kind of financial crisis." When the White House warned of "systemic risk for our financial system" unless the mortgage giants were curbed, Frank complained that the administration was more concerned about financial safety than about housing.

Now that the bubble has burst and the "systemic risk" is apparent to all, Frank blithely declares: "The private sector got us into this mess." Well, give the congressman points for gall. Wall Street and private lenders have plenty to answer for, but it was Washington and the political class that derailed this train. If Frank is looking for a culprit to blame, he can find one suspect in the nearest mirror.

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/s/ LeRoy Collins, Jr.
www.leroycollins.org


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