Cutting Through Right-Wing Spin About Who's To
Blame For The Financial Crisis
hyperlinked to sources. For all
sources, see the data
Your sources today include: the New
York Times, mediamatters.org, the Boston Globe, Reuters, the Washington Post,
the website of the U.S. Treasury Department, Time magazine, npr.org, 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
And it seems like it's coming true
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
The securitization through
derivatives was what made the housing collapse system-threatening and global in
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
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?
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 --
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
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.
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.
December 2008 one of Bush's Federal Reserve Governors echoed
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
But right-wingers keep on spreading
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
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.
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
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.
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."
as well to right-wing pundit Dick Morris explaining
to Bill O'Reilly all about the evil Barney Frank:
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.
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
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.
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]
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
to prevent others from going after predatory lending.
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
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.
Bushians also forbid the states from using state consumer protection laws to
stop the abuses.
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.
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.
I'll tell you about second part of the framework, the financial shenanigans that
made the crisis systemic and global.
shenanigans took the form of complex financial instruments called derivatives.
types of derivatives were largely involved
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
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
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.
it or not, Wall Street firms actually hired
newly minted PhD's in physics to design these derivatives.
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
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
As the years went by, the
shadow banking system took over more and more of the banking business
of money involved are mind-boggling.
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
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.
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.
chronological order, here's some of the chapter and verse on the right-wing
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 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
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
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
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
throughout the two Bush adminstrations, enforcement of antitrust laws was
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
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
The lenders took their
profits off the top — with ruinous fees — then repackaged the suspect loans
and sold them to Wall Street. [source]
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.
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.
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.
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
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.