Transcript #149

Cutting Through Right-Wing Spin About Who's To Blame For The Financial Crisis


Partially hyperlinked to sources.  For all sources, see the data resources page.


Your sources today include: the New York Times,, the Boston Globe, Reuters, the Washington Post, the website of the U.S. Treasury Department, Time magazine,, the CIA Factbook and McClatchy newspapers.


Imagine you're the ultimate right-winger, one of Wall Street's Masters of the Universe.  You've made huge profits by engaging in reckless financial behavior.  Your irresponsible actions have brought the world's financial system to the brink of collapse.  You then grab hundreds of billions, if not trillions of dollars more, as the government tries to stabilize and repair the system.


Finally, to top it all off, to put the cherry on the hot fudge sundae -- is there any dessert better than a hot fudge sundae? vegan ice cream of course, and vegan butter earlier -- to top it all off, you largely succeed in blaming the entire mess on a liberal gay congressman and a federal law designed to help the poor.


Liberals, gays, the poor.  Three right-wing bugaboos.


This is a right-winger's fantasy dream.


And it seems like it's coming true for them.


Listen carefully.


In order to counter all the right-wing spin and outright lies about the causes of the global financial crisis and the best remedies for it, you have to see the entire picture.  Put everything in context.


Let me sketch for you an overall framework, and then afterwards, I'll detail each of its pieces.


The framework has two major parts.


There's what I call the trigger, and what I call the ultimate cause.


The trigger part was the bursting of the housing bubble and countless mortgages, many subprime, going bust.


That was the trigger.


The ultimate cause was the so-called securitization of those mortgages through complex financial instruments called derivatives.


The securitization through derivatives was what made the housing collapse system-threatening and global in scope.


The right likes to focus only on the housing-mortgage element.  And even for that, they mis-assign blame.


As you'll see, with both the housing-mortgage trigger, and the securitization-derivatives ultimate cause, the villain is the right-wing deregulation frenzy during the Clinton and Bush administrations.


Let's now get into some details.  I've engaged in some streamlining, so the podcast doesn't last four hours.  If you want more information about any particular item I'm discussing, you can go to that point in the transcript and check out the sources I link to there.




You probably already understand that a subprime mortgage is one given to a person who would normally not qualify to get a mortgage.   Because they'd be unlikely to be able to repay it.


With no regulatory mechanism minding the store -- as a result of right-wing policies, more on that later -- subprime mortgages were handed out willy-nilly, enticingly offered with low initial rates.  Everyone acted as if housing prices would continue rising forever.


But housing prices, as you know, started to decline.  At about the same time, the initial low rates on many mortgages changed into much higher ones. This was under terms of the complicated agreements that many people taking out the mortgages didn't even understand.


So millions of new homeowners were threatened with default.  Many of them have already lost their homes.


Now this situation would ordinarily cause some concern in the financial world, but doesn't by itself account for the system-threatening crisis we've been going through.


The right wing, for reasons that will become apparent, would like you to believe that it's the housing crisis that by itself that caused the global financial meltdown.


And even on that mistaken assumption, can you guess who the right is blaming for the housing crisis? 


Here's Sean Hannity:


audio: Sean Hannity

HANNITY: [L]et's just stand back and see how we got here. The federal government and the Democrats, they forced these banks, through the Community Reinvestment Act, to make these risky loans. The risky loans started the subprime mortgage crisis --

GUEST: Right.

HANNITY: -- which impacted all these financial institutions, which needed government bailouts.  In other words, government caused that problem. 

How about Pat Buchanan speaking to Joe Scarborough:


audio: Pat Buchanan, Joe Scarborough

BUCHANAN: The feds, Joe, the feds leaned on banks and threatened some of these banks, "You've got to make more loans," so the banks -- and pushed them out -- you gotta help, frankly, in minority communities. And they pushed them out and the guys put nothing down and stuff, and then the banks sell the loans off to Fannie and Freddie.

It's not explicitly stated in this clip, but what Buchanan is also referring to, like Hannity, is the Community Reinvestment Act, the CRA.


The CRA was passed in 1977 to deal with the problem of redlining.  That's when banks refuse to write loans to entire neighborhoods or parts of a city.


The right claims the CRA forced the banks to write all these bad loans to poor minorities.


The right uses this alleged fact to claim that overregulation is the cause of the subprime mortgage crisis.


Well, if the law was passed in 1977, it sure took a long time to bring down the global economy, didn't it?


And directly countering the right-wing spin that the CRA caused the subprime crisis -- let alone the entire global financial crisis -- is a small thing called the facts.


It's Bush administration officials themselves who since several months ago have been putting the lie to the "CRA caused it" claim.


In November 2008, Bush's Comptroller of the Currency point blank stated that only 6% of the subprime loans were made by institutions subject to the CRA.  So


CRA is not the culprit behind the subprime mortgage lending abuses, or the broader credit quality issues in the marketplace. Indeed, the lenders most prominently associated with subprime mortgage lending abuses and high rates of foreclosure are lenders not subject to CRA.

In December 2008 one of Bush's Federal Reserve Governors echoed those sentiments:


The long-term evidence shows that the CRA has not pushed banks into extending loans that perform out of line with their traditional business…

The very small share of all higher-priced… loans…that can reasonably be attributed to CRA makes it hard to imagine how this law could have contributed in any meaningful way to the current subprime crisis.

And finally in February 2009, Bush's Chairman of the Federal Reserve, who Obama kept on, Ben Bernanke, unequivocally declared:


Our own experience with CRA over more than 30 years and recent analysis of available data, including data on subprime loan performance, runs counter to the charge that CRA was at the root of, or otherwise contributed in any substantive way to, the current mortgage difficulties.

But right-wingers keep on spreading their lie.


And concerning Fannie Mae and Freddie Mac, who Buchanan seemed to claim bought all these bad loans


audio: Pat Buchanan

… and then the banks sell the loans off to Fannie and Freddie.

Most of the subprime loans during the housing boom were issued by the private sector, not Fannie Mae and Freddie Mac.


Economist Dean Baker further explains:


Fannie and Freddie got into subprime junk and helped fuel the housing bubble, but they were trailing the irrational exuberance of the private sector. They lost market share in the years 2002-2007, as the volume of private issue mortgage backed securities exploded. In short, while Fannie and Freddie were completely irresponsible in their lending practices, the claim that they were responsible for the financial disaster is absurd on its face.

So as you see, neither the Community Reinvestment Act, nor Fannie Mae or Freddie Mac, are the cause of the subprime mess, let alone of the entire larger financial crisis.


In a moment, you'll hear about the right's also trying to assign blame for the subprime situation to a liberal congressman.  The congressman happens to be gay.  A twofer for the right.  Except they're wrong.  As usual.  Stay tuned.






Here's Rush Limbaugh speaking fondly of Barney Frank, Democratic congressman from Massachusetts:


audio: Rush Limbaugh

He created the problem…He created it. His definition of affordable housing was to make sure that people who couldn't pay the loans back got the loans, the mortgages. He forced Fannie Mae and Freddie Mac to do this.  ACORN was involved -- Obama's group. This was a Democrat [sic] Party operation through and through.


Well, it certainly was the way the subprime mortgage thing went down. It certainly was the way Congress was in charge of telling Fannie Mae and Freddie Mac what to do. Barney Frank leading the way, folks -- he was, and is, the "Banking Queen."

Limbaugh then played a parody song called "Banking Queen."


Listen as well to right-wing pundit Dick Morris explaining to Bill O'Reilly all about the evil Barney Frank:


audio: Dick Morris

What Barney Frank did was in the 1990s, he and the Democrats went to Fannie Mae and said, "You are not buying up enough mortgages of poor people. We want you to buy up 42 percent of your mortgages to be of poor people," and then they raised it to 50. And Fannie Mae said, "They can't put any money down." And Barney Frank and Chris Dodd said, "It's OK. Don't let it matter. Don't require any money down." So they gave mortgages they shouldn't have given, where people didn't have any investment. 

O'REILLY: OK. And that's an easy explanation. 

MORRIS: Yeah, easy answer. And then, when -- in the 2000s, when Bush proposed measures to rein in Fannie Mae, Barney Frank killed them.

Oh yeah?


There's one small problem with that.


Republicans controlled the House during much of the 2000's, so Barney Frank had no power to kill anything.


In fact, if you recall, Congress was a rubber stamp for Bush during those years of Republican control.   If it had wanted to, the GOP could have passed legislation on Fannie Mae and Freddie Mac even without Democratic support.  But they didn't.


I often tell you, whatever a right-winger says, the exact opposite is true.


Here's a good example.


You know when strengthened regulatory oversight legislation over Fannie Mae and Freddie Mac was passed?  When Barney Frank became chairman of the House Financial Services Committee in 2007, when the democrats took back the House.



Ok, if despite what the right claims, neither a bill designed to help minorities, the Community Reinvestment Act, nor a liberal, gay, "Banking Queen" Congressman, Barney Frank, are to blame for the subprime crisis, who or what is to blame?


The sad answer is, right-wing ideology.  The belief in deregulating everything, and failing to enforce regulations that already exist.


Not overregulation, but lack of regulation.


On the pure housing front, the financial crisis would have been lessened had federal banking regulators cracked down on predatory lending practices.  If regulators had been doing their job, many of these subprime bad loans would not have been written. 


But the regulators sat on their hands. The Federal Reserve took three formal actions against subprime lenders from 2002 to 2007. The Office of Comptroller of the Currency, which has authority over almost 1,800 banks, took three consumer-protection enforcement actions from 2004 to 2006. [source]

Now that's bad enough.  But get a load of this.  Not only did the Bushians give the green light to, clear the way for predatory lending, but they took extraordinary actions to prevent others from going after predatory lending.


The Attorneys General of all 50 states -- obviously many Republicans among them -- the Attorneys General of all 50 states, both individually and in a joint effort, tried through negotiations, lawsuits and state legislation to curb predatory lending.


But the Bush administration ruled that state anti-predatory lending laws couldn't be enforced because they were preempted by federal anti-predatory lending law -- the very federal law which the Bushians weren't enforcing.   


The Bushians also forbid the states from using state consumer protection laws to stop the abuses.


So right-wing sins of omission and commission, were a good part of the reason all these subprime loans got written that shouldn't have been written.


And, critically, as I said earlier, even though they were made, if all these bad loans had stayed with their issuers, those issuers would have been in trouble maybe, but the entire financial system wouldn't have faced collapse.


So now I'll tell you about second part of the framework, the financial shenanigans that made the crisis systemic and global.


The shenanigans took the form of complex financial instruments called derivatives.


Two types of derivatives were largely involved here.


One is called a collateralized debt obligation, a CDO.


CDO's are created when you slice mortgages into pieces, and then bundle various pieces of various mortgages into a single investment, the CDO.


The lenders making the bad subprime loans would slice and dice them into CDO's and sell the CDO's, so the lenders didn't care if they loans were never repaid, since they didn't own them any more.


The other type of derivative involved here is a credit default swap.  These are like insurance contracts against the losses an institution could suffer if a financial instrument it holds becomes worthless.


Credit default swaps were issued to back up, to insure the mortgage-based CDO's.


But here's the rub:


The credit default swaps weren't issued to just the purchaser of a given CDO.  Third parties who didn't even own the CDO, would then buy additional credit default swaps on that CDO.  Like buying fire insurance on a house you don't own. You'd be speculating on whether the house will burn down.  And investors speculated on whether the CDO would fail or not, in other words, whether the underlying mortgages would default or not. 


There was a huge market, a global market, in issuing and buying and selling credit default swaps, again, even though purchasers of these credit default swaps had no direct interest in the underlying assets, the chopped up mortgages in the form of the CDO.


Believe it or not, Wall Street firms actually hired newly minted PhD's in physics to design these derivatives. 


The derivatives were so complex that very few people even understood what they were buying and selling.


Got it so far?


Sounds insane, doesn't it?


Finally, as if all this weren't bad enough, there's the use of leverage, in this case the ratio of debt to capital.


Investment banks and others issuing credit default swaps only had to have on hand a fraction of the money they put themselves on the hook for, if the credit default swap had to be paid off.


So when the subprime loan defaults started, all the heavily leveraged investment banks and others were in big trouble. They didn't have anywhere near the funds to cover the payments they now had to make.


And, since these derivatives had been sold around the world, you wind up with the global nature of the financial crisis.


You may be wondering by this point, was no one in charge?


No, no one was in charge.


As NY Times columnist Paul Krugman explains, what Wall Street essentially did was create a shadow banking system that functioned like the Wild, Wild West -- no sheriff, no government, no laws.  The shadow banking system


relied on complex financial arrangements to bypass regulations designed to ensure that banking was safe.

As the years went by, the shadow banking system took over more and more of the banking business

The amounts of money involved are mind-boggling. 


Credit default swaps themselves total $60 trillion. Yes, trillion with a T.  That's more than twice the value of the entire US stock market. 


The total of all derivatives in the world, beyond credit default swaps and not just related to mortgages, but everything, the total is, are you ready, $531 trillion dollars.    That's over seven times the amount of the entire world's GDP!


Who's to blame for this Wild West system of banking that brought the world to the brink of financial ruin?  You know who.


The right wing.  Let me tell you all about it.  Stick around.






Only because of right-wing deregulation, and right-wing failure to enforce the rules that remained, were these derivatives and the shadow banking system able to almost bring down the world's financial system.


Right-wingers don't talk about this aspect very much.  Hard to blame low-income African Americans and a liberal gay legislator named Barney Frank for what Goldman Sachs did.


In chronological order, here's some of the chapter and verse on the right-wing deregulation juggernaut:


During the Great Depression, the Glass-Steagall Act was passed in order to prevent commerical banks from engaging in speculative financial activity.  Banks could take in deposits for your checking and savings account, and make business and personal loans with those funds.  Boring but safe.   But not highly profitable.  So in 1999 under right-wing pressure, Congress repealed Glass-Steagall. Commercial banks were free to, and did, jump headfirst into investment bank-type speculation in derivatives.  The commercial banks crashed along with everyone else.


They could do so because they weren't regulated


In 2000, Republican Senator Phil Gramm pushed through the Commodities Futures Modernization Act, which forbid the government from regulating derivatives.


It wasn't just right-wing Republicans.  Bill Clinton and his Treasury Secretary Larry Summers drank from that same Kool Aid fountain, and were  supporters of Gramm's effort.


Derivatives and the shadow banking system were thus able to be created by the large financial institutions.


They could do so because they weren't regulated


In 2004, the Securities and Exchange Commission removed a 15 to 1 debt to capital ratio requirement.  Investment banks could come up with their own numbers.  Some pushed it to 40 to 1. 


Super leverage meant super risk on the down side.  Which came to pass.


They could do so because they weren't regulated


Two more here.


In 2006 Congress passed legislation that was far too weak to effectively regulate the financial rating agencies, agencies that were giving all these derivatives phony good ratings.  This also enabled the entire house of cards to be erected.


All together now: They could do so because they weren't regulated


Finally, throughout the two Bush adminstrations, enforcement of antitrust laws was effectively abandoned.  Multi-trillion dollar bailouts were required because megabanks were able to grow to "too big to fail" status.


One last time with gusto: They could do so because they weren't regulated



How about a quick summary of the entire framework I've given you for understanding the financial crisis?


On the trigger, the housing-subprime element:


In the years before the crash, brokers, appraisers and lenders conspired to herd borrowers into risky, high-cost mortgages that many could never hope to repay. [source]

That herding of borrowers into inappropriate mortgages was only possible because of right-wing refusal to enforce predatory lending laws. 


On the ultimate cause, the securitization-derivatives element:


The lenders took their profits off the top — with ruinous fees — then repackaged the suspect loans and sold them to Wall Street.  [source]

Used judiciously, derivatives can limit the damage from financial miscues and uncertainty, greasing the wheels of commerce. Used unwisely — when greed and the urge to gamble with borrowed money overtake sensible risk-taking — derivatives can become Wall Street’s version of nitroglycerin. [source]

It was the right-wing deregulation frenzy that allowed greed and the urge to gamble to run amok.


And an explosion is what you got.



You should know that not everyone of course was on board during this deregulation frenzy. Some politicians still maintained a progressive outlook.  At the time of the debate over repeal of Glass-Steagall, North Dakota Democratic Senator Byron Dorgan warned:


I think we will look back in 10 years' time and say we should not have done this but we did because we forgot the lessons of the past, and that that which is true in the 1930's is true in 2010.

I wasn't around during the 1930's… But I was here in the early 1980's when it was decided to allow the expansion of savings and loans. We have now decided in the name of modernization to forget the lessons of the past, of safety and of soundness.

Billionaire investor Warren Buffett warned a few years later that derivatives were potential “weapons of mass destruction.”


But the gargantuan financial wealth of Wall Street trumped all.


According to one study, over the past decade, the financial sector spend more than $5 billion in lobbying and political contributions.


$5 billion.


They got -- or should I sat they bought -- the deregulation they wanted.



If you've been listening to Blast The Right for any length of time, you know my bottom line distillation:


Everything the right-wing does is designed to accomplish one of two things, either (a) transfer wealth from everyone else to the rich, or, (b) distract everyone else from the fact that (a), that wealth transfer, is occurring.


Well, today you've heard a and b.


As to (a), the wealth transfer, you have the entire shadow banking system.


The wealthy don't set up financial structures and mechanisms to transfer wealth downward.  Quite the contrary.

And that probably applies to the bailouts as well. Joseph Stiglitz is a Nobel Prize-winning economist and a former chief economist for the World Bank.


He's expressed a fear that Obama's plan to fix the economy is


the kind of Rube Goldberg device that Wall Street loves — clever, complex and nontransparent, allowing huge transfers of wealth to the financial markets.

As to (b), the right is trying to distract people from the wealth transfer by screaming about poor black people getting loans they shouldn't have gotten, and that a congressman who just happens to be liberal and gay, two right-wing bugaboos, is the villain in all this.


Wow!  What a situation, huh?


To lighten up a bit at the end here, a question somewhat out of left field:


Did you know that Snickers, Tootsie Rolls, and the Three Musketeers Bar were all introduced during the Great Depression?


So, maybe something nice and sweet will also come out of our current mess.


But for now at least, the Masters of the Universe and their right-wing enablers are laughing all the way to the bank.  Oh, wait, they are the bank.  They're laughing all the way home. 


Let's put an end to their good mood.




Podcast Home Page