News Analysis
IBD takes a look at the root causes of the subprime mortgage meltdown and the related financial crisis.
Part Five
Saddest Thing About This Mess: Congress Had Chance To Stop It
Could the crisis at Fannie Mae-Freddie Mac and the subprime meltdown have been avoided? The answer is yes.
Part Four
Congress Pushed Fannie, Freddie In Wrong Direction During 1990s
It was October 1992, nearly 15 years before the housing meltdown and subprime crisis. Republican Rep. Jim Leach of Iowa was on the floor of the House, talking about something that no one at the time seemed to care about: the potential danger that Fannie Mae and Freddie Mac posed to the economy.
Part Three
How A Clinton-Era Rule Rewrite Made Subprime Crisis Inevitable
One of the most frequently asked questions about the subprime market meltdown and housing crisis is: How did the government get so deeply involved in the housing market?
Part Two
Good Intentions Paved The Road To Subprime-Stoked Meltdown
For those looking for a real start to today's financial meltdown and government rescue, you need to go back — way back — to 1977, and the Jimmy Carter presidency.
Part One
'Crony' Capitalism Is Root Cause Of Fannie And Freddie Troubles
In the past couple of weeks, as the financial crisis has intensified, a new talking point has emerged from the Democrats in Congress: This is all a "crisis of capitalism," in socialist financier George Soros' phrase, and a failure to regulate our markets sufficiently.
More editorials on Business & Regulation and Economy
The rescue plan has been signed into law. Now what? IBD discusses how preparing for the challenges ahead begins with understanding the past — and the real causes and historical context of the current financial crisis. Part One By INVESTOR'S BUSINESS DAILY | Posted Friday, October 03, 2008 4:20 PM PT http://www.ibdeditorial.com/IBDArticles.aspx?id=307927474219610 Financial History: Those who don't know history are destined to repeat its serious mistakes. Today some have asked if we could have another 1929-like depression. No, it should not happen. Those who don't know history are destined to repeat its serious mistakes. Today some have questioned whether we could have another 1929-style Depression. The answer is no — at least, it shouldn't happen. Then we had over 25% unemployment; now it's 6% and could move somewhat higher, which is typical for economic corrections. Then, by 1934 about one-half of mortgages were in default, today it is only 6%. Nearly 94% of homeowners are still making their monthly payments. The reason we shouldn't have another 1929 is our Nasdaq composite (the stock index that includes America's modern-day entrepreneurial leaders) already had its 1929-like break in the three years from 2000 through 2002. Since then it put in a strong five-year recovery up to last November. That recovery was due to the broad-based, and highly successful, tax cuts pushed through by President Bush in 2001 and 2003. We are now in the midst of a normal cyclical market correction, with the economy having created 9 million jobs since the 2003 tax cuts. The Nasdaq's price action since the 1990s, like clockwork, closely parallels, tracks, and eerily replicates the Dow Jones Industrials' wild speculative run-up to its 1929 bubble peak, the ensuing three-year, 88% collapse to the Depression lows in June 1932, followed by the recovery run-up to 1937 and the ensuing sharp correction. Based on historical data, today's market is likely to be a repeat of 1938 — not 1929. To show what we mean, the accompanying chart overlays the Nasdaq index from the early 1990s to October 2008 with the Dow industrials chart from the early 1920s to the end of 1942. Maybe you're surprised to see these two indexes seem so remarkably similar — both their up cycles and their down cycles. The reason for this is simple: while technology continually changes, human nature remains the same. The stock market is human nature on daily display, and history continually repeats itself. Psychologically, the roaring 1920s were just like our "anything goes 1990s." America had just won World War I (the war to end all wars). It was the auto and airplane age, the radio was invented and speakeasies boomed. Likewise, in the 1990s we had just won the Cold War when the 70-year-old Soviet Union disintegrated onto the ash heap of history as Ronald Reagan's successful policy of "we win, they lose" replaced containment and the nuclear doctrine of Mutual Assured Destruction — dubbed "MAD." The "peace dividend" resulting from sharp cuts in defense spending helped Bill Clinton achieve a balanced budget. It was the new age of the Internet, biotech and high tech stocks. For nearly five years, prices on the Nasdaq soared. Indeed, to its peak the Nasdaq increased 2 1/2 times what the Dow Jones industrials did during its 1920s climax run. But those astronomical Nasdaq price gains culminated in the Clinton stock market bubble, which burst in early 2000. Within the space of months, an estimated $8 trillion in U.S. stock market wealth was erased. So how did we get where we are now? What was the real true cause of the current subprime real estate debacle that endangered not only our entire financial system, but put so many lower income people out of their homes and forced the government to an emergency rescue package? Every American should know the truth about who engineered the rules for this extraordinary mess so that we all learn a valuable lesson. We need to be much smarter the next time around. In 1977, President Carter and a Democrat Congress created the Community Reinvestment Act mandating that banks must meet the credit needs of everyone in the banks' community, including uncreditworthy borrowers. It was done for a good social purpose and had the greatest intentions — expanding home ownership. And, through the 1980s and into the 1990s at least, it seemed to work. However in 1995, President Bill Clinton imposed more and stronger regulations and performance tests. These coerced banks into significantly increasing their loans to low-income borrowers in economically-troubled communities, or face possible fines and expansion restrictions. These new rules encouraged banks to bundle their risky subprime loans together with prime loans and re-sell them in packages to other financial institutions, thereby freeing the original lenders from any further risk. Thanks to the new rules and oversight from the CRA, Fannie Mae and Freddie Mac got involved in a big way, buying literally trillions of dollars of the questionable loans from banks and feeding the dangerous cycle that had begun. Eventually, it turned into a kind of pyramid scheme that overwhelmed some lending organizations when housing prices softened in late 2006 and 2007. So what's the big lesson to be learned here by the public? That this financial crisis was the result of yet another Big Government program that had great intentions but created devastating unintended consequences that hurt millions of people. It was not the fault of African American groups, which naturally want to help their people. Nor was it the fault of America's free enterprise system, or a lack of enough regulation. No, it was Big Government once again trying to run a private industry. You can't take one dollar and loan it 50 times. Watch out when Big Government spenders tell you they can run our entire medical industry, give you far better care and save you lots of money. Part Two By INVESTOR'S BUSINESS DAILY | Posted Monday, October 06, 2008 4:20 PM PT A nation that doesn't know history is destined to repeat its serious mistakes. People swayed by carefully crafted political propaganda relentlessly repeated and effectively delivered can easily lose their freedom and way of life. How many times have you been told by soaring, almost hypnotic oratory that "the direct causes of our financial crisis and subprime real estate loan mess were the greedy banks, big corporations and the failed economic policies of George Bush"? It's common to blame the one in power. This time, however, it's 100% wrong. Every American, young or old, must be told who was really behind the subprime loan disaster that threw our economy off track and injured the good people who lost their homes — like those now boarded up in Cleveland and other major cities — plus the millions of other citizens hurt by yet another failed Big Government-run program gone awry. In 1977, Jimmy Carter and a Democrat Congress created the Community Reinvestment Act mandating that banks make more housing loans to lower-income and inner-city borrowers. It was for a well-intended social cause and even appeared to work in the 1980s. Government regulators rated banks by how well they performed in meeting these strict new CRA obligations. Failure to comply meant stiff penalties and limits on mergers, acquisitions and expansion. Big Government forced the lowering of long-proven safe-lending standards. Most of the more than $1 trillion of new subprime CRA loans had adjustable rates. Many required no documentation of the borrower's income and little or no down payment. For the first time, the Clinton regulatory rules allowed and encouraged lenders to bundle the new, riskier subprime loans with prime loans and sell these packages to other institutions. The first one hit the market in 1997. That tragic blunder let loan originators make their profits faster and eliminate any future risk for those lower-quality loans. It let them turn around and make even more CRA-type loans and sell them off in packages again, with little future risk. It was a government-sponsored pyramid scheme, with Fannie Mae and Freddie Mac providing the implied government backing by buying ever larger amounts of these risky subprimes. Freddie and Fannie also became heavy donors to top members of Congress. These included Sen. Chris Dodd, a young Sen. Barack Obama and Rep. Barney Frank, who aggressively defended the highly leveraged, extremely risky lending against any reforms. Ironically, the Bush administration repeatedly went to Congress in 2004, 2005 and 2006 to obtain stronger oversight and some limits on Freddie and Fannie's reckless subprime lending. And each time, it was voted down by Democrats in Congress, led by Frank, now chairman of the Financial Services Committee. Bottom line: This whole mess was another Big Government program created, designed and run by Democrats. It started with great intentions but resulted in typically awful unintended consequences that materially hurt the very people they were supposed to help. Worse, this incompetence put our financial system in jeopardy. It's reminiscent of LBJ's two lost wars — the War in Vietnam and the War on Poverty. Many government housing projects, though well-intended as part of LBJ's War on Poverty, later deteriorated into slums that became recruiting grounds to get very young new gang members. That's how we got into this financial mess — and why the $700 billion rescue package was passed. But what about the future? What serious threats does America face in the next five years? The list isn't comforting: • Iran's Ahmadinejad and his mullah bosses, the leading terrorist country in the world that will have nukes, and want to wipe out Israel and have a world with no USA. • Al-Qaida and other radical Islamic global terrorists that want to strike us again. • Putin's resurgent Russia, which desires to take back Georgia and Ukraine, plus give nuclear capabilities to Venezuela and re-arm Cuba and Nicaragua. • Communist China's increasing military capabilities. • Foolish decisions that would result in weakening our ability to defend ourselves. Let's study the "History Repeats Itself" chart of our Nasdaq index from 1992 to October 2008 and how it has remarkably copied in parallel the Dow Jones industrials, pricewise, from the early 1920s up to the beginning of 1938. One reason for this is that while technology changes over time, human nature doesn't. Hope and fear, good and bad, and other basic drives are always with us. The market is human psychology on display, and history continually repeats itself. If our Nasdaq market continues to replicate the 1938 to 1942 market, as it did the prior 16 years, what may be in store for us? What happened in 1938 and 1939 and the early 1930s leading up to '38? What vital lesson does knowing history tell us? To begin with, Germany's Nazi party in 1928 won only 810,000 votes nationally, elected only 12 to the Reichstag and was considered sort of a joke. But the 1929 crash started the Depression, with unemployment soaring and poverty hitting hard, even among the formerly prosperous middle class. In 1930, the bad economy helped the Nazi party get 6.5 million votes nationally and put 107 deputies in the Reichstag, becoming the second-largest party. By 1933, again due to a poor economy, Hitler became Germany's chancellor. His storm troopers, Hitler Youth and Goebbels' propaganda departments grew rapidly. In 1935, Hitler announced a draft to build the national army to 500,000. An air force was already in place in violation of the Versailles Treaty. France and England protested but did nothing. Hitler said he wanted peace and people believed him. But in 1936 he marched into the Rhineland. France did nothing; Hitler said he had no further territorial demands in Europe. In 1937, he intimidated Austria and took it over. Only Britain's Neville Chamberlain and France protested. Jewish people were sent to concentration camps or extermination centers. Now we're up to the equivalent of 1938 on our Nasdaq chart — where we are today. Hitler stirs up demonstrations in Czechoslovakia's Sudetenland, claiming ethnic Germans are being persecuted. Britain's Neville Chamberlain visits Hitler in September 1938. Hitler wants Britain and France to let Germany take the part of Czechoslovakia with a German population. Chamberlain gives in to Hitler's demands; the Munich Agreement gives Hitler Czechoslovakia's Sudetenland. Chamberlain returns to London in triumph with a letter from Hitler declaring he thereafter would continue to work for peace. Crowds cheered when Chamberlain said, "I believe it is peace for our time." In Parliament, one man rose to state his opposition: "We have sustained a total, unmitigated defeat." But Winston Churchill was shouted down. In 1939, Hitler gobbled the rest of Czechoslovakia. Czechs were killed or enslaved. In September 1939, 1.5 million German troops defeated 30 Polish divisions in 18 days, as Russia invaded the rest of Poland from the east. World War II had begun — and Germany rapidly took one country after another until finally Chamberlain was replaced by Churchill in early 1940. Why dwell on all this history? Well, history tells us that showing weakness or appeasement by negotiating with tyrants is both gullible and dangerous. When a young JFK after the Bay of Pigs failure met with Khrushchev, the Soviets immediately moved to build the Berlin Wall. It stayed in place for 28 years. Next, the Soviets installed nuclear missiles in Cuba, threatening to turn the Cold War into WWIII. When a one-term governor from Plains, Ga., became president, he visited our strongest military ally in the Mideast and stopped selling our fighter aircraft to them. And why? Because Jimmy Carter didn't like the Shah of Iran's treatment of Soviet spies who had been undermining Iran. Carter preferred the exiled Ayatollah Khomeini as a leader because he was religious. So we stood by as the Shah, an ally, was overthrown. Today, Iran is the world's biggest sponsor of terror and is on track to have nukes in five years — all thanks to Carter's naivete. We'll have to have an older, wiser, far more experienced president to deal with this dangerous threat. We can't have another Carter or another Chamberlain. Incidentally, after Carter lost Iran in what amounted to total incompetence, he visited Leonid Brezhnev. Brezhnev afterward promptly invaded Afghanistan and Carter said, "I can't believe he lied to me." While Carter was in office, the Soviets took over a number of countries, including Afghanistan, Angola, Cambodia, Grenada, Mozambique, Ethiopia, South Yemen and Nicaragua. The more Carter talked, the worse it got for the U.S. Of our three youngest presidents since WWII, Kennedy, Carter and Clinton, Bill Clinton was 46 when sworn in. He was a great salesman and a smart, popular politician. He had never been in the military and didn't know much about it and was not successful in dealing with al-Qaida, who tested him only one month into office in February 1993, when terrorists trained in Afghanistan bombed the World Trade Center in New York. That October, al-Qaida hurt us in Somalia when they shot down our Black Hawk helicopters; 73 Americans wounded, 18 killed. Next, a joint Saudi-U.S. facility was bombed, then our Khobar Towers housing complex. July 1996, al-Qaida defectors tell us their direction; 1998, bin Laden declares "war on America"; 1998, they blew up our embassies in Nairobi, Kenya, and Dar es Salaam; 200 killed, 5,000 injured. In answer, we fired a couple of missiles into the vacant desert and an aspirin factory. October 2000, the USS Cole was bombed. The 9/11 report showed that the Clinton administration had up to 10 chances to get bin Laden when they knew where he was, but failed to act. In 12 different surveys by historians, the most recent in 2005 (and all available on the Internet), America's presidents are ranked: Of the 43 presidents, Ronald Reagan ranked 6th; Harry Truman 7th; Dwight Eisenhower 7th; John Kennedy, 15th; Bill Clinton 22nd; Jimmy Carter, 34th. Reagan was weeks from being 70 when inaugurated, Truman was 60, and Eisenhower 62; Kennedy was only 43, Clinton 46 and Carter 52. History shows that our very best, most productive, successful presidents were older. Why? They had the most experience, maturity and sound judgment in defending America. Harry Truman said our most handsome presidents that to the public looked presidential were Warren Harding and Franklin Pierce. How did they do? Harding in the 2005 survey ranked 39th, while Pierce ranked 38th. Could they have been a little less tested? So who do you think history tells us may be the most experienced person we can trust to be commander-in-chief and deal with Iranian terrorists with nukes; Putin's resurgent Russia that backs Iran and wants to give nuclear capability to Venezuela, re-arm Cuba and Nicaragua; an al-Qaida that wants to strike America again; and, let's not forget, up-and-coming China? Barack Obama: Is he really the centrist he claims to be? Barack Obama has styled himself a centrist, but does his record support that claim? Part Ninteen Election '08: Have Americans been so lulled by Barack Obama's smooth talk that they don't realize his plans would expand government into a massive socialist behemoth? His is a soft-spoken, hard-left agenda. Part Eighteen Election '08: Obama needed help getting into Harvard Law School. He got it from a disciple of Saul Alinsky who shared the socialist agitator's belief in the radical change the young community organizer could embrace. Part Seventeen Election '08: Barack Obama summed up well the perversity of Democratic Party thinking when he told Fox News' Bill O'Reilly that it is "neighborliness" for Washington to hike taxes on those who are "sitting pretty." Part Sixteen Election '08: Barack Obama's mocking of John McCain, while urging his followers to "get in their face," are tactics right out of his radical hero Saul Alinsky's playbook: ridicule and agitation. Part Fifteen Election '08: Barack Obama claims he worked for a "small group of churches" as a community organizer. In fact, he was hired by a radical Alinskyite group, and Saul Alinsky's own son has outed him. Part Fourteen Election '08: Barack Obama has joined forces with a white socialist he calls a "good friend" — the Rev. Jim Wallis, founder of "Sojourners." He too believes in "liberation theology," sans the black nationalism. In fact, Wallis is the white version of Jeremiah Wright, sans the black rage. Part Thirteen Election '08: Democrats' reintroduction of militant Michelle Obama in Denver was supposed to show her softer side. But it only highlighted a radical part of her resume: Public Allies. Part Twelve Election '08: One of the "lies" Barack Obama says are being told about him is quite true. It involves a staunch admirer of the Soviet Union and its communist society who helped launch Obama's political career. Part Eleven Election '08: The saying that a man is known by the company he keeps is true of political relationships. In Barack Obama's case, some of the groups that support him are an indictment of his political orientation. Part Ten Election '08: Barack Obama's economic blueprint sounds like one his communist father tried to foist on Kenya 40 years ago, with massive taxes and succor shrouded as "investments." Part Nine Election '08: Most Americans revile socialism, yet Barack Obama's poll numbers remain competitive. One explanation: He's a longtime disciple of a man whose mission was to teach radicals to disguise their ideology. Part Eight Schools: While Obama's children enjoy the best education money can buy, he wants to deny inner-city children the education change we can believe in — school choice. He prefers cradle-to-diploma collectivist education. Part Seven Election '08: Barack Obama says Washington shouldn't just offer apologies for slavery, but also "deeds." Don't worry, he says, he's not talking about direct reparations. Relieved? Don't be. Part Six Election '08: The man who includes being a community organizer on his short resume has a long association with a far-left group that would organize our communities into socialist gulags. Part Five Election '08: The mainstream media have finally gotten around to revealing Barack Obama's early mentor. But they've downplayed the mystery man's communist background. Part Four Election '08: Barack Obama the lawyer-organizer could use a crash course in economics. His economic plan's assumptions, based on long-discredited Marxist theories, are wildly wrongheaded. Part Three Election '08: Barack Obama calls it "Universal Voluntary Public Service." We call it a plan for national involuntary servitude. Kennedy asked us what we could do for our country. Obama has ways to make us volunteer. Part Two Election '08: A plan by Barack Obama to redistribute American wealth on a global level is moving forward in the Senate. It follows Marxist theology — from each according to his ability, to each according to his need. Part One Election '08: Before friendly audiences, Barack Obama speaks passionately about something called "economic justice." He uses the term obliquely, though, speaking in code — socialist code. 
A Replay Of 1929? Don't Count On It
America is far bigger today, more diversified, productive, innovative and resilient and the government's rescue package will help stabilize our banking credit system and economy for the benefit of all Americans. The price of oil and other commodities has topped, so interest rates can and should be lowered, helping all consumers.Understanding history now is absolutely vital: How did we get where we are? What was the real cause, what were the true reasons behind our current subprime real estate loan mess — and not what politicians are now attempting to falsely claim? Finally, what are the most serious threats America will face in the next five years? 
View larger image
Wake Up, America
But in 1995, President Clinton imposed even tougher regulations that forced banks to make dramatically more subprime loans to previously unqualified people with lower credit scores in higher-risk areas. 
View larger imageThe Audacity Of Socialism
In this series, we examine Senator Obama's past, his voting record and the people who've served as his advisers and mentors over the years. We'll show how the facts of Obama's actions and associations reveal a far more left-leaning tilt to his background — and to his politics.
If Bailout Plan Is Too Socialistic, Just Wait For Obama Leviathan
Obama's McKnight In Shining Armor
Chicago Commune
How Obama Applies Alinsky's Rules
Community Organizer In Chief
Sojourning Socialists
Michelle's Boot Camps For Radicals
Alice In Obamaland
Finding Friends On Far, Far Left
Like Father, Like Son
Obama's Radical Roots And Rules
Obama's Little Red Schoolhouse
Reparations By Another Name
Obama Finds An ACORN
Young Obama's Red Mentor
Obamanomics Flunks The Test
Obama Wants You
Obama's Global Tax
Barack Obama's Stealth Socialism
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