Fiscal Fiasco – who’s at fault?

Lots of people and lots of reasons.  However, when things go wrong, engineers look for the "root cause" – the baseline reason as to why things went south in a hurry.  It may be a real small thing – a loose screw, a short in a circuit, a bad line of code.  Often times, once started, things start to pile on – one problem piles on top of an accident hit from the side by a bad decision and then add in just some bad luck.

But there is always a root cause (even if we cannot find it in a forensic search – by definition, EVERYTHING starts somewhere).

In the case of the meltdown on Wall Street (and so far, the meltdown of what passes for reason in DC), we do see a cascading effect of bad policy over hands-off, politics over reasonable financial fundamentals, and plain pork, patronage, and pay-offs (both in favors and money).  This editorial by IBD, however, seems to summarize, in plain language, what got done when and by whom that got the snowball rolling (emphasis mine):

Congress Tries To Fix What It Broke

Regulation: As the financial crisis spreads, denials on Capitol Hill grow more shrill. Blame an aloof President Bush, greedy Wall Street, risky capitalism — anybody but those in Congress who wrote the banking rules.

Such denials won’t hold against the angry facts banging on their doors. The only question is whether the guilty party can keep up the barricade until Election Day.

A visibly annoyed House Speaker Nancy Pelosi rejected suggestions that Democrats share blame for the meltdown. "No," she snapped at reporters who dared ask.

Stick to our narrative, she scolded: The bursting of the housing bubble was another story of market failure and deregulation.

"The American people are not protected from the risk-taking and the greed of these financial institutions," she said, while calling for investigations of the industry.

Only, the risk-taking was her idea — and the idea of all the other Democrats, along with a handful of Republicans, who over the past 30 years have demonized lenders as racist and passed regulation after regulation pressuring them to make more loans to unqualified borrowers in the name of diversity.

They are right – much has been made by those in politics pointing their fingers elsewhere than themselves.  Our politicians, mostly Democrat but Republicans were not excluded, have done what they cannot seem to do – foist their ideas of how good they are about social engineering upon us – with the usual results of big government -> they propose and we duck to get out from the shrapnel.

They were the ones who screamed — "REDLINING!" — and sent banks scurrying for cover in low-income neighborhoods, where they have been forced to lower long-held industry standards for judging creditworthiness to make the subprime loans.

If they don’t comply, they are threatened with stiff penalties under the Community Reinvestment Act [re: 1986  -Skip] or CRA, a law that forces banks to make home loans to people with poor credit risks.

No fewer than four federal banking regulatory agencies are responsible for enforcing the law. They subject lenders to racial litmus tests and issue regular report cards, the industry’s dreaded "CRA rating."

The more branches that lenders put in poor neighborhoods, and the more loans they make there, the better their rating. Those lenders with low ratings can not only be fined, but also blocked from mergers and other business transactions needed to expand.

Got that?  Their ratings had nothing to do with solid financial fundamentals…

…with due diligence of number crunching.  Instead, it was all about the politics.  This was central planning from the Federal  Gov’t, from politicos and bureaucrats, who decided they knew better about what we wanted and needed and that their notions of social engineering had no connection with fiscal reality.

So, what’s the timeline and who started the ball rolling?

The regulation grew to monstrous proportions during the Clinton administration, obsessed as it was with multiculturalism. Amendments to the CRA in the mid-1990s dramatically raised the amount of home loans to otherwise unqualified low-income borrowers.

The revisions also allowed for the first time the securitization of CRA-regulated loans containing subprime mortgages. The changes came as radical "housing rights" groups led by ACORN lobbied for such loans. ACORN at the time was represented by a young public-interest lawyer in Chicago by the name of Barack Obama.

That’s right – multiculturalism!  This is social engineering, this is social behavior modification expressed without a thought of the consequence.  And the timeline is over 20 years (think: frog, boiling water).Regulations from politicians.  Changes in the law from politicians. 

And you just have to love the fact:  the one Presidential candidate who rails against lobbyists in campaign staffs, the most famous community organizer of all – Lobbyist Barack Obama. This Saul Alinsky devotee agitated the citizenry and then LOBBIED the government for money for his projects.

HUD, in turn, pressured Fannie Mae and Freddie Mac to purchase more subprime mortgages, and Fannie and Freddie, in turn, donated to the campaigns of leading Democrats like Barney Frank and Pelosi who throttled investigations into fraud at the agencies.

Got that? The Federal Government regulators (a little loose here, but these GSEs were authorized to watch over the markets by legislators.  And these political patronage hacks then gave money to those that SHOULD have been investigating them (through staffs and others). 

Political incest!

Soon, investment banks such as Bear Stearns were aggressively hawking the securities as "guaranteed." Wall Street’s pitch was that MBSs were as safe as Treasuries, but with a higher yield.

But they weren’t safe. Everyone in the subprime business — from brokers to lenders to banks to investment houses — absolved themselves of responsibility for ensuring the high-risk loans were good.

The mortgage lenders didn’t care, because they were going to sell the loans to other banks. The banks didn’t care, because they were going to repackage the loans as MBSs. The investors and traders didn’t care, because the MBSs were backed by Fannie and Freddie and their implicit government guarantees.

In other words, nobody up and down the line — from the branch office on main street to the high-rise on Wall Street — analyzed the risk of such ill-advised loans. But why should they? Everybody was just doing what the regulators in Washington wanted them to do.

So everybody won until everybody lost, including the minorities the government originally mandated the banks to serve.

It is often said that politicians (especially Liberal) love their programs but hate to analyze the results.  Engineers (and I is one!) love their crackpot ideas, too – but we have to do the after analysis.  Either it worked or it didn’t.  And that is examined.  But not for politicians as they are not brave enough to stand up and say that we screwed up.

The original culprits in all this were the social engineers who compelled banks to make the bad loans. The private sector has no business conducting social experiments on behalf of government. Its business is making profit. Period. So it did what it naturally does and turned the subprime social mandate into a lucrative industry.

Of course, it was a Ponzi scheme, because they weren’t allowed to play by their rules. The government changed the rules for risk.

Actually, they didn’t change the rules for risk – those rules don’t change.  What they tried to do is redefine the terms.  That looks ok, but the numbers, in the long rule, cannot be bent.  Eventually, the risk was going to reappear – and now it has.

In order to put low-income minorities into home loans, they were ordered to suspend lending standards that had served the banking industry well for centuries. No one wants to talk about it, so they just scapegoat Wall Street. Even John McCain has joined the Democrat chorus on this.

And now the numbers have come home to roost.  What the Liberals tried to do is exactly what the Communist nations tried to do for decades and finally came up dry.  Our Liberal politicans (can somebody PLEASE give them a math test – oh yeah – can’t – the NEA wouldn’t like that!).

The FBI is now investigating 24 large mortgage lenders for alleged abuses. But who will investigate the pols and the lobbyists and the community agitators who made the bad decisions that ultimately forced businesses to make their bad decisions?

Indeed.