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The Dodd-Frank Wall Street Reform and Consumer Protection Act: The Triumph of Crony Capitalism (Part 1)

Econophile's picture




 

From The Daily Capitalist

Part 1

The new financial overhaul bill is the greatest government takeover of the financial sector of the economy since the National Recovery Act of 1933 when Franklin Roosevelt attempted to introduce central planning in America.

More than just a new law, the Dodd-Frank “Wall Street Reform and Consumer Protection Act” (the "Act") gives government a relatively free hand to set prices and wages, to make business decisions, to promote or eliminate businesses, and to break up businesses. It establishes a large new bureaucracy to enable the government to dictate its wishes to the industry.

A major law firm described the Act as follows:

The Act marks the greatest legislative change to financial supervision since the 1930s. This legislation will affect every financial institution that operates in this country, many that operate from outside this country and will also have a significant effect on commercial companies. As a result, both financial institutions and commercial companies must now begin to deal with the historic shift in U.S. banking, securities, derivatives, executive compensation, consumer protection and corporate governance that will grow out of the general framework established by the Act. While the full weight of the Act falls more heavily on large, complex financial institutions, smaller institutions will also face a more complicated and expensive regulatory framework.

The Act isn’t directed just at the financial sector; because of its vast scope, it is directed against everyone.

Startling as it may seem, the Act does nothing significant to prevent the real causes of this or any future boom-bust cycle. At best one may analogize this as the doctor breaking the thermometer to cure a fevered patient. At worst it is a massive federal power grab which will inhibit financial innovation, increase the cost of money, and open wide the gates to a favored few where politicians, politics, and lobbyists, rather than markets, determine the direction of the financial sector of America’s economy.

While the new law has been signed by the President, it has not yet been written. That task will be the job of federal mandarins, the career lawyers and economists inside and outside of government who live off of government regulation. As such the ultimate consequences of this Act are unknown and will not be fully known until years later after the regulations have been written, agencies are established, and power is distributed among the bureaucrats. In other words, the Act’s advocates have no idea how the new law will impact the economy.

The ‘Failure of Capitalism’

The Act assumes that the economic bust was caused by a failure of capitalism and a failure of government to properly regulate the economy.

Upon signing the Act, President Obama said:

"For years, our financial sector was governed by antiquated and poorly enforced rules that allowed some to game the system and take risks that endangered the entire economy," Mr. Obama said.

 

The new law, he said, would better protect consumers, empower investors and bring transparency to dark corners of the financial markets.

 

"The American people will never again be asked to foot the bill for Wall Street's mistakes," Mr. Obama said. "There will be no more taxpayer-funded bailouts. Period."

The President and most politicians, Republicans and Democrats, blame the crisis on capitalism itself, and, rather incredibly, on what they view as unregulated “laissez-faire” capitalism. They ignore the fact that the financial industry is one of the most regulated sectors of our economy. When they say “laissez-faire” what they really mean is that they want to completely control the financial sector.

The President views Wall Street and free enterprise with disdain, repulsed by what he sees as just the latest failure of capitalism and the “old ways and failed policies of yesterday.” He believes, as the benevolent legislator-in-chief, he must step in and protect us from evil predations of Wall Street like a shepherd guarding his flock: only the guiding hand of government can make capitalism safe for society.

The President, like most politicians, lawyers, and economists, believes that the economic bust was caused by greed, excessive compensation, fraud, speculation, complex securities that no one understood, predatory Wall Street practices, and a lack of sufficient regulatory powers. These factors, they say, allowed financial institutions to take unnecessary risks which jeopardized the world’s financial system and almost brought it down.

The problem is that their beliefs are wrong and they make up data to fit their beliefs. Their conventional wisdom fails to satisfactorily explain the actual underlying causes of this boom-bust cycle and the new law will do nothing to prevent another cycle. The factors they blame for the crash always exist in financial markets, and yet, for reasons they do not explain, actors on the financial stage suddenly explode into an orgy of greed directed at the housing market.

There are two questions you should consider while evaluating the Act’s impact and scope that help explain this boom-bust cycle:

  1. Why did the housing market become a bubble?
  2. Why would any lender lend money to a home buyer who (i) had a credit score of 500, (ii) made a down payment of 5% or less, and (iii) didn’t have to prove his or her ability to repay?

I would answer these questions by saying:

  1. Only cheap money drives bubbles and there is only one entity that creates cheap money and that is the Federal Reserve—from 2000 to 2004 the Fed Funds rate went from 6.5% to 1.0% wildly distorting entrepreneurial behavior. This was the cause of this boom-bust cycle.
  2. No one would lend so carelessly unless they didn’t care. They didn’t care because someone else, in this case the government (Fannie, Freddie, and the FHA), would guarantee repayment.

Everything stems from these two factors yet there is nothing in the Act that prevents the Fed from starting a new cycle or that prevents Fannie or Freddie from again distorting the economics of the housing market. The purpose of this article is not to go into the ultimate causes of the bust as I have discussed them at length in other articles, but these factors highlight the foundational fallacies of the Act.

The Act’s Timing

This chart gives a good picture of the timing for implementing the Act:

This process is described as follows:

Now, the legislation hands off to 10 regulatory agencies the discretion to write hundreds of new rules governing finance. Rather than the bill itself, it will be this process—accompanied by a lobbying blitz from banks—that will determine the precise contours of this new landscape, how strict the new regulations will be and whether they succeed in their purpose. The decisions will be made by officials from new agencies, obscure agencies and, in some cases, agencies like the Federal Reserve that faced criticism in the run-up to the crisis.

 

The Commodity Futures Trading Commission has designated 30 "team leaders" to begin implementing its expansive new authority over derivatives, and has asked for $45 million for new staff. The Federal Reserve, Federal Deposit Insurance Corp. and Securities and Exchange Commission are also in the thick of the implementation.

Law firm Davis Polk Wardwell calculated the number of agencies involved in the rule making process. In the below chart, the “Bureau” is the Bureau of Consumer Financial Protection, the “Council” is the Financial Stability Oversight Council, and the “OFR” is the Office of Financial Research:

Courtesy Davis Polk Wardwell

Here is the reality: it will take many more years to write and implement the regulations which really define the Act. It may be that some of these regulations will never be written, something that is not unheard of in Washington.

The Act will be a siren call to lobbyists, lawyers, accountants, and economists.

Regime Uncertainty and Perfect Wisdom

The initial impact of any new and unwritten law is uncertainty, and uncertainty is what business abhors. “Regime uncertainty,” a concept developed by economist Robert Higgs, says that such legislation causes businesses to pause expansion until they know how the law will affect them. This is apparently already happening:

The timing of Dodd-Frank could hardly be worse for the fragile recovery. A new survey by the Vistage consulting group of small and midsize company CEOs finds that "uncertainty" about the economy is by far the most significant business issue they face. Of the more than 1,600 CEOs surveyed, 87% said the federal government doesn't understand the challenges confronting American companies.

Yet Treasury Secretary Timothy Geithner believes they can regulate us with perfect wisdom:

Treasury Secretary Timothy Geithner vowed the Obama administration would try to avoid choking off economic growth as it implements the financial-regulatory overhaul enacted last month and pursues new reform measures.

 

In his first public appearance before Wall Street executives since the Dodd-Frank bill was signed July 21, Mr. Geithner said the administration would eliminate old "rules that did not work" even as federal agencies are writing the more than 200 new rules required by the regulatory overhaul.

 

Mr. Geithner said the changes were needed to curtail "too much freedom for predation, abuse and excess risk," but said it should still seek to "safeguard the freedom, competition and innovation that are essential for growth."

Mr. Geithner believes in the “just right” Goldilocks philosophy of regulation. I question that any central planner would have the wisdom to supplant the decisions of millions of economic actors without negative consequences. One might say this is a form of arrogance associated with (almost) absolute power.????

‘Some Provisions of the Act Are Good’

When we evaluate the Act it would be a mistake to look at its individual parts rather than its whole. To look at one provision and say, “well that sounds reasonable” is a form of political diversion that only serves to obscure the fact that the thousands of provisions in this Act taken together vastly enlarge the power of the federal government and reduce individual freedom. That cannot be good.

I will say that some of the provisions, in light of the Wall Street-Washington Financial Complex’s system of crony capitalism, may actually reduce some risk that we taxpayers will eventually have to pay for. But that ignores the power and influence of Wall Street and its friends within government to influence rule-making to suit their needs (“regulatory capture”).

This revolving door between Washington and Wall Street allows people attracted to power and who are skeptical of the ideals of a free market, to dominate economic policy for their benefit. One way to say this is that it creates a partnership between the financial sector of the economy and the government (which is the controlling partner in this relationship). In the 1930s this type of political system was greatly admired in Washington. Today this system has evolved into “crony capitalism,” an oligarchic structure maintained by the Wall Street-Washington Financial Complex to perpetuate itself.


Tomorrow Part 2 of 4: descriptions of the Act's provisions revealing the vast scope of this new law.
After Part 4 is published, I will post a link for a downloadable PDF version of the complete white paper.

 

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Thu, 08/12/2010 - 14:36 | 518291 daneskold
daneskold's picture

Choosing to not bail out private companies is better known as Laissez Faire Capitalism.

A new law was not needed to prohibit Congress from bailing out the banks.

And besides, if Congress changes its mind in the future to provide bailout funds, this FinReg will be no hindrance.

Stupid politicians.

Thu, 08/12/2010 - 13:11 | 518025 divide_by_zero
divide_by_zero's picture

DONK needs a flowchart similar to the Obamacare one

http://www.house.gov/brady/pdf/Obamacare_Chart.pdf  
Thu, 08/12/2010 - 12:48 | 517969 P-K4
P-K4's picture

Typo spotted in the first paragraph, " The Act marks the greatest legislative change to financial supervision since the 1930s." The correct wording should be "stupid-vision" not supervision.

Also, the law firm forgot to include the Council on Foreign Relations and Trilateral Commission as the agencies that will provide oversight.

Last, we include the addendum "There will be no more taxpayer-funded bailouts. Period." - "Unless I change my mind again or don't read the bill like my colleagues."

 

Thu, 08/12/2010 - 12:29 | 517931 tempo
tempo's picture

The most important point in the blog is that the financial crisis was caused by the insane lending to people who could never repay the loan.   This was done because there was no risk to the lender who immediately resold the mortgages to the Govt.    The inbred Washington/Wall Street insider deals have not and will not be stopped the the new "reform" laws.  IMO, it will accelerate since nearly all power, money, control is in the hands of a very few super powerful families, firms, media and politicians.  The system is similiar to those in Russia and China.   Extend and pretend.

Thu, 08/12/2010 - 11:58 | 517858 jc125d
jc125d's picture

It's all about the power. People, you have none. You are owned. And your impotence is rubbed in your face by your leaders. Where in the constitution have the powers taken by the state and used against us been granted? As Pelosi said: Are you kidding? Are you kidding? They do it because they can. They can because we let them.

Thu, 08/12/2010 - 11:54 | 517846 BigSkyBear
BigSkyBear's picture

Sadly the American people know more Season 3 American Idol contestants by name than their own elected representitives. Thanks for the breakdown on this fiasco.

 

Baaaaahhhhhhhh....

 

 

 

 

 

Thu, 08/12/2010 - 11:30 | 517794 Agent P
Agent P's picture

Well written (as always).  Thanks.

Thu, 08/12/2010 - 11:18 | 517766 hbjork1
hbjork1's picture

Econophile,

Thanks for the good work. 

Watching Dodd on C-Span during the final comments before the vote on that bill.  He was standing behind and over Blanch Lincoln jawboning her constantly as comments were being taken prior to the final vote on the bill.  She was seated and had to half turn and bend her head back to face him.  Because he went on and on and on while Barrney Frank was pontificating toward the conclusion, it certainly appeared that Dodd was trying to keep her from making comment.  Frank and Dodd teamed very effectively in bringing this monstrosity to a vote and into law. 

I concluded from that and from his nonsensical on camera remarks that Chris Dodd is one very slimey piece of work.  "The Apple doesn't fall very far from the tree."

It is one thing to operate in support of your consituants (banking interest), it is quite another to obstruct others in the legslative process.  

We have another election coming up this fall and future elections down the road.  Laws can be ammended once the public is angry enough.  Hard times that last long enough will shift public attention from "Dancing with the Stars" to what is going on in the legslative process. 

Unfortunately, it seems there will have to be some pain to create public interest in how things are being brought into law.

Thu, 08/12/2010 - 10:53 | 517712 InconvenientCou...
InconvenientCounterParty's picture

IMHO these rules sting the cash flow of the kleptocracy. You can tell by the reaction. The bankster clawback activity is picking up steam. Scurrying to buy a new U.S. regime. I imagine the deals are being sealed in the off-year, out of the limelight.

When the new regime rolls out enemy 2.0 and the fitted black leather, were officially effed. The next world war could be the rebel alliance (a.k.a the world) against the empire (U.S.)

 

 

Thu, 08/12/2010 - 10:53 | 517707 crzyhun
crzyhun's picture

Hey Admin/Dearest Leader, leave your KIDS alone!!

Thu, 08/12/2010 - 10:52 | 517706 I think I need ...
I think I need to buy a gun's picture

its a little late for any positive legislation they already took all the money and have all the physical gold cornered. Buy gold

Thu, 08/12/2010 - 10:49 | 517698 digalert
digalert's picture

CNBS Santelli: "why did they pass FINREG before the congressional study on the financial collapse concludes?"

 Good question, the report is due out in December.

Thu, 08/12/2010 - 11:45 | 517829 Ripped Chunk
Ripped Chunk's picture

Because December is after November

Thu, 08/12/2010 - 10:26 | 517618 Ripped Chunk
Ripped Chunk's picture

Dodd & Frank are filthy scumbags.  A symbol of all that is wrong with our current form of government.

Thu, 08/12/2010 - 10:28 | 517626 Widowmaker
Widowmaker's picture

What's wrong with the fags of finance?

I hear they put out.

Thu, 08/12/2010 - 11:45 | 517824 Ripped Chunk
Ripped Chunk's picture

We put out with our tax dollars

They get rich.  I don't really care what their sexual orientation is. I despise crooks and assassins.

Thu, 08/12/2010 - 09:57 | 517543 Bitch Tits
Bitch Tits's picture

The financial industry has only itself to blame for this. They weren't as smart as they thought they were.

Thu, 08/12/2010 - 09:26 | 517492 Oswald Spengler
Oswald Spengler's picture

Barney's been taking it up the ass so long he wanted to extend the experience to the rest of us.

Thu, 08/12/2010 - 09:22 | 517486 Pinky
Pinky's picture

Over at my blog I titled my wrap-it-up post "It's All Over But the Whining."

This might be a little mindbending without one's first cup of coffee, but: When the private/financial sector owns the government lock-stock-barrel, aren't any surface attempts to regulate it, well, moot? The point is to regulate the competition. With this Enterprise to beat all enterprises, the private bankster/monopolist class has further entrenched itself and now is pulling up the moat. Surprise!

Oddly, given the ugly false choice I'd rather have it this way than the "other" stealth-overthrow that had been planned for us out of - ahem - Brussels/Basel. Srsly.

Thu, 08/12/2010 - 09:21 | 517481 Species8472
Species8472's picture

Cause of housing bubble, let's not forget the favored cap gains treatment of $500k, revised upward with loosened requirements.

Thu, 08/12/2010 - 09:10 | 517461 aerojet
aerojet's picture

"The President, like most politicians, lawyers, and economists, believes that the economic bust was caused by greed, excessive compensation, fraud, speculation, complex securities that no one understood, predatory Wall Street practices, and a lack of sufficient regulatory powers."

 

And is that, in fact, an incorrect evaluation?  I don't agree with the "lack of regulatory powers" part becuase that would mis-characterize what was really capture of regulatory powers (e.g. Madoff).

 

 

Thu, 08/12/2010 - 08:42 | 517411 RacerX
RacerX's picture

"Atlas Shrugged" - Part 2

Thu, 08/12/2010 - 08:40 | 517406 BoeingSpaceliner797
BoeingSpaceliner797's picture

I have a question.  If the corporate/banking/oligarchal interests have coopted the US Federal government, then isn't this law really those interests taking over themselves? 

Thu, 08/12/2010 - 10:50 | 517703 Widowmaker
Widowmaker's picture

You are assuming that corporate/banking/oligarchal interests and the Federal Government aren't already one and the same to begin with.

Welcome to the matrix where the only change is more of the same.

Thu, 08/12/2010 - 21:56 | 519117 BoeingSpaceliner797
BoeingSpaceliner797's picture

Precisely.  Dem/'Pub and BigBusiness/BigGovernment being the most prominent examples of false paradigms served up for our diversion and division.

Thu, 08/12/2010 - 08:36 | 517396 newstreet
newstreet's picture

My understanding is OTC forex is history.

Thu, 08/12/2010 - 08:31 | 517388 The Rock
The Rock's picture

Please refer to it as the "Frodd" Act.

Thu, 08/12/2010 - 18:22 | 518817 Econophile
Econophile's picture

You are one clever dude. I like it. 

Thu, 08/12/2010 - 10:48 | 517669 Widowmaker
Widowmaker's picture

It's simply the fag act - for fags by fags.

Consumer protection is merely a cheap legislative prophalactic.   Wake me when fraud enforcement is discussed, otherwise all this nonsense called "re-form" is a distraction to continue ramming fraud up the people's asses.

Had enough of the thugs in charge?

 

Thu, 08/12/2010 - 10:00 | 517561 still kicking
still kicking's picture

I still think DONK is appropriate

Thu, 08/12/2010 - 10:28 | 517630 Lord Blankcheck
Lord Blankcheck's picture

D-ank

Thu, 08/12/2010 - 08:25 | 517379 Chunkton
Chunkton's picture

The bill was edited by some very smart people so that it seems that regulation has tightened and yet for the banksters it is business as usual, even the Fed escaped an audit and was given extra power.

This is a yet another huge win for the completely corrupt finacial industry from the completely currupt congress, life just keeps getting better. So a few bloggers and the peasant class complain, who cares as who owns the media? Whiners piss off, this is the change you suckers can believe in.

Thu, 08/12/2010 - 08:13 | 517366 Sean7k
Sean7k's picture

It was inevitable, that once bankers had raped and placed every developing country under their control, they would come after the developed economies as well.

Every US president has been a traitor to the "natural rights of man". Every congress has passed legislation that seeks to destroy liberty. Every supreme court has been a legitimizer of tyranny.

You have to give then credit though, they know and understand the weakness of populations and the best methods of managing them. We are beasts of burden, milked of our productivity until slaughtered for our final value.

Dark? History is a story replete with all the examples necessary to teach us the workings of the elite- both sophisticated and violent. This is the nature of humans. Those that commit violence, those that receive violence and those that die under violence. 

 

Thu, 08/12/2010 - 09:12 | 517465 aerojet
aerojet's picture

That's pretty close to how I explain our lives to people whom I talk to.  I try (in vain) to convince them that voting is a waste of time.  You're a farm animal, your vote is an illusion. 

Thu, 08/12/2010 - 11:02 | 517733 Blankman
Blankman's picture

It always strikes me as funny when you start talking politics with people and voting for the president comes up.  Very few people even understand that no their vote does not count, it is the electoral college who votes yeah or nay on the seat of the president, not the hoi polloy.  I have been reading that several states are trying to abolish the electoral college and just use the popularity vote.     

Thu, 08/12/2010 - 08:27 | 517382 The Rock
The Rock's picture

Long live the House of Ruthlesschild and the Frauderal Reserve!!

Thu, 08/12/2010 - 08:01 | 517355 zobes
zobes's picture

"The American people will never again be asked to foot the bill for Wall Street's mistakes," Mr. Obama said.

When were we asked? The Federal kleptocrats just did like the elitist ruling classes have always done - they just went right ahead and spent the money that they have yet to collect from us. This is the "Change We Can Expect".

Thu, 08/12/2010 - 10:55 | 517716 Conchy Joe
Conchy Joe's picture

Were the American People ever asked?.... The Government "volunteered" that on our behalf.

 

Thu, 08/12/2010 - 08:55 | 517418 Translational Lift
Translational Lift's picture

"The American people will never again be asked to foot the bill for Wall Street's mistakes," Mr. Obama said.

Correct....They WILL NOT ask us....they will just continue to spend/print like it grows on trees.  Come to think of it......that's where it does come from!!  Do any of these azzholes have any idea what a Trillion $ is or how much energy/work/time is required to generate a Trillion $??

SICK  SICK  SICK

http://www.pagetutor.com/trillion/index.html

Thu, 08/12/2010 - 08:13 | 517367 breezer1
breezer1's picture

obama is an idiot. perfect for the role.

Thu, 08/12/2010 - 07:56 | 517352 tmftdoyle
tmftdoyle's picture

why even read it, we know that two of the longest serving, most corrupt members of congress wrote it. why would one expect anything but a power grap for the dynamic duo's fan club.

Thu, 08/12/2010 - 07:55 | 517351 tmftdoyle
tmftdoyle's picture

why even read it, we know that two of the longest serving, most corrupt members of congress wrote it. why would one expect anything but a power grap for the dynamic duo's fan club.

Thu, 08/12/2010 - 07:52 | 517350 AnAnonymous
AnAnonymous's picture

unregulated “laissez-faire” capitalism. They ignore the fact that the financial industry is one of the most regulated sectors of our economy. When they say “laissez-faire” what they really mean is that they want to completely control the financial sector.

 

Well, well, how is that measured? By the weight of legislation texts books? The number of rules enacted and enforced? How?

What are the other most regulated sectors of the economy? What are the least?

I dont know if that act is that important to understand but working on such premise, where is the difference with the 'other side'(Obama, Bernanke etc)?

Thu, 08/12/2010 - 10:10 | 517566 Mercury
Mercury's picture

Well, well, how is that measured? By the weight of legislation texts books? The number of rules enacted and enforced? How?

Yes, that would be a good place to start.  The U.S. residential mortgage market has been the most regulated and meddled with financial market on the planet for a long time and yet it was at the very root of one of the biggest financial disasters of the modern era.  See if you can connect the dots.

Everyone knows about The Community Reinvestment Act of 1977 but that's just the tip of the iceberg.  Check out some of the mortgage market regulatory highlights from 1989-1990 alone:

The HUD Reform Act of 1989, The Homebuyers and Renters Relief Act of 1989, The Housing Opportunity Zones Act of 1990, The Department of Housing and Urban Development Accountability Act of 1989, The Community Housing Investment Partnership Act, The Recycling of Existing Assets for Cost-Effective Housing Act of 1989, The Low-Income Housing Credit Act of 1989, The Low Income Housing Preservation Act of 1989, The Housing Affordability Act, Homeownership and Opportunity for People Everywhere Act of 1990, Fair Lending Enforcement Act of 1990, The Housing and Community Development Act of 1989, The Housing and Community Development Act of 1990, The Community Housing Investment Partnership Act, The Homeownership Assistance Act of 1989, The Home Mortgage Overcharge Prevention Act of 1989, he Neighborhood Mortgage Lenders Accountability Act, he First-Time Homebuyers Assistance Act of 1989, The Homeownership Through Sweat Equity Act of 1989 and The Fair Lending Oversight and Enforcement Act of 1989. (hat tip: ep http://equityprivate.typepad.com/ep/2009/02/dare-ye-inquire-concerning-s...)

Does that look like laissez faire?

Add to that the fact that FNM and FRE, with their lower cost of capital,  were able to pick off most of the low hanging, good credit borrowers from the marketplace and that, late in the game, the government would simply just sue or legally harass banks if their loan portfolios didn't "look like America" and you end up with guys like Angelo Mozillo who gave the government the results they wanted: lots and lots of loans.

I guess we need even more cowbell.

Fri, 08/13/2010 - 10:21 | 519763 AnAnonymous
AnAnonymous's picture

It looks as it looks.

Measurement is always done relatively to other things.

It might measure activity per year for law producing institutions.

But it gives no hint on the financial sector being one of the most regulated sectors.

What about other sectors?

Thu, 08/12/2010 - 13:29 | 518075 Zeus Gekko
Zeus Gekko's picture

 

That's because the myth of homeownership is one of the biggest scams going. It was the ultimate perpetual bubble, or so they thought, but no one bothered to tell them that there is no such thing thing as perpetual growth. $400,000 dollar homes being purchased by people making $40,000 per year... yeah right.

Everyone from the FED on down were actively promoting this disaster that could only end one way - and that was badly. Sir Alan Greenscam himself was the biggest cheerleader for ARMs and he knew full well what the out come would be, as did the banksters that assembled and packaged the trash because they had no skin in the game and took out derivatives to clean up after the meltdown. This was planned and executed and by both DC and Wall Street. It was a TEAM effort.

 

Thu, 08/12/2010 - 14:36 | 518274 Mercury
Mercury's picture

I actually think a lot of otherwise smart and thoughtful people arrived at the home ownership = wealth creation vehicle honestly.  For decades one Great Society type program after another failed to help alleviate multi-generational poverty or near poverty in any significant way.  The data showed however that people who bought and owned their own home built far more wealth over their lifetimes than those who didn't.

Bingo. Silver bullet - expand homeownership and you have a viable means of solving one of the most intractable social problems of the post WW II era. Let's make us some 'Acts' to make that happen! The problem is not all real estate is created equal and not every potential mortgage holder is of uniform credit risk.  At one point there were X number of otherwise creditworthy people who were being refused mortgages based on their skin color or ethnicity but not nearly as many as we've been led to believe.

The only way to fulfill the mission then was to loosen standards. More loans were then made which created more demand for housing stock.  Wall Street was able to resell the mortgage debt to yield hungry asset managers through a combination of financial alchemy and an appeal to the fact that US residential mortgage defaults had been historically very rare (mostly because of higher lending standards and different demographics).

Amazingly, even with all this chicanery, the U.S. home ownership rate was only juiced a few percentage points: http://2.bp.blogspot.com/_aGvk7g9hxtg/TFHZy-uL_mI/AAAAAAAACrM/A7FLJGnAd1...

That's all it took to blow the whole system sky high.

Thu, 08/12/2010 - 13:06 | 518009 sbenard
sbenard's picture

What a great post! Very informative! Thanks for that!

Might I add just one word? Near the very end, where you wrote, "...you end up with guys like Angelo Mozillo who gave the government the results they wanted: lots and lots of loans."

I would like to change it to, "you end up with guys like Angelo Mozillo who gave the government the results they wanted: lots and lots of /BAD/ loans."

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