Mailbag: Ginnaty CPA writes: A Bit on Deregulation: Who caused the meltdown?

I know this got us into trouble last time, but the predominant spin that it was de-regulation that caused the mortgage meltdown is not accurate.

Fannie Mae and Ginnie Mae were creations of your beloved government meddlers. They created these GSE's (Government sponsored entities) to provide a purchaser of mortgage debt from the banks,etc who were generating the loans, and would purchase any such debt as long as they were "conforming" loans..meeting the specific underwriting requirements at that time (in our time it was 20% down, 80% loan, w-2 showing 2 years employment, tax returns, and credit history/worthiness).

Over time, the definition of "conforming" loans became politicized...ie. no longer subject to economic sense, but to Congressional/Presidential whim. In it's last version, conforming loans were only requiring in many cases - no down, no verified work history, no tax returns, no w-2s..just "stated" income..that is whatever income that the borrower stated. This meddling by Congress/Presidential Admin (please note here I am pointing to both parties) led us to the melt down. The governor (as in engine governor) has always been the person/entity lending the money. There has always been borrowers who want loans they can't afford. There has always been loan brokers that for a big enough fee will try to get loans for these people. There has always been appraisers that for a big enough fee will give ridiculous appraisals. The governor on the system was always the man/entity having the money to lend, requiring reasonable proof/security that the loan would be repaid. The beloved government took the "governor" off the system. More regulation does NOT solve the problem of governmental interference unless congress forbids itself the right to interfere...hardly a likely outcome.

P.S Just wait, think what the possibilities there are now that the beloved government has effective control over our largest banks. Give government some time..and we can really have some fun.

PSS: A liquidity crisis is caused by some people needing money, and not being able to get it. Simple enough! The problem can be fixed if the borrower is solvent, and they offer a sufficient interest rate (and or collateral) to get the lender to agree to loan. The current problem is not there isn't dollars out there. In fact, the world is awash in dollars (China - 1.5Trillion in $ reserves, Saudia Arabia - $1.0 Trillion in reserves, Japan .5 Trillion in reserves etc.) The problem is that they (beloved governments) do not want to let interest rates (the grease that makes the money flow) rise to the level required. Bernake in particular believes in controlling interest rates.....a losing strategy. There solution was to double the money in the system (1 Trillion or so) effectively devaluing the dollar and keeping interest rates stable. Europe did the same with the Euro. The market is riled because it is trying to figure out who the winners and losers are going to be, after the effect of this effective dollar and euro devaluation.

Rich
Capitalist Tool and Die Maker...and proud to be one.