A Zogby poll sponsored by the organization Judicial Watch found that 81.7 percent of Americans believe that political corruption was a major factor that lead up to the current financial crises. According to Thomas Fitton, Judicial Watch’s President, the evidence suggests those 81.7 percent are correct.

“American’s seem to get what the problem is, but because ‘everyone’ is involved, you wont hear a peep about it from the city’s establishment,” said Fitton, speaking at a Judicial Watch panel discussion on the causes of the financial crisis.

“Arguably, the financial crisis is part of the biggest government corruption scandal in our nation’s history, and it doesn’t get much bigger than Fannie Mae and Freddie Mac…the companies took care of both political parties.”

Editor of the Real Clear Markets website John Tamny said that deregulation was not the cause of the crisis, as some democratic leaders are suggesting.

“If you look at the biggest freeze so far in this mortgage meltdown, it’s been of Fannie Mae and Freddie Mac If we ignore first of all the fact that both parties to varying degrees were literally horizontal in bed with these guys, the idea that they didn’t have oversight of their activities is laughable,” said Tamny.

Instead, Tamny attributes the origin of the crisis to the weak dollar.

“Real estate is very commodity like, and just how commodities always do well when the dollar is weak, so does real estate. And with housing making big gains upwards in nominal terms in recent years, Americans logically chased this performance and piled into the housing sector.”

This housing boom resulted in people purchasing risky mortgages under the belief that if they found out they could no longer afford it, they would be able to sell it easily in the empowered real estate market. Eventually, the housing market turned sour, and the housing investments followed.

Senior Fellow at the Cato Institute Alan Reynolds found blaming the recession that is taking place worldwide on U.S. housing to be a ‘bit of a stretch’, and claimed that a spike in oil prices had a role in the crisis, pointing to nine occurrences when oil prices tripled, only to be followed by periods of recession. Reynolds expressed skepticism to a government solution.

“Recessions happen. If energy prices get too high, they have to come down. If home prices get too high, they need to come down. If homebuilders build too many houses, they have to stop building for a while until they get the inventory down..if the governments really knew how to stop, prevent, alleviate recessions, why do we still have recessions?”
John Berlau, Director of the Center for Entrepreneurship said that the initial emphasis the government put on housing in the finance system was not as helpful as originally believed, and instead suggested that they should have focused on getting the poor to save and invest.

Berlau said that Fannie Mae and Freddie Mac were essentially hybrids of government and private industry which had dangerous consequences.

“Fannie and Freddie were kind of the worst of both worlds. They could lobby like the private sector could do, but they were also built by congress and had built in government support where they had a 2 billion dollar line of credit…that made investors think, and it turned out rightly, that if anything happened they would be bailed out by the government.”

John Berlau, Director of the Center for Entrepreneurship, said that Fannie Mae and Freddie Mac were essentially hybrids of government and private industry which had the dangerous consequence of making investors believe that their investments were risk free (0:32)

 

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Federal Housing Finance Agency Director James Lockhart III explains that Fannie and Freddie are funding their costs and that home rates for thirty year mortgages have fallen for the first time since January.

 

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In early September the two government sponsored mortgage finance companies Fanninie Mae and Freddie Mac were put under the conservatorship, or legal control, of the U.S. government. The CEOs were dismissed and the Federal Housing Finance Agency Director James Lockhart III was installed as a temporary replacement for the board of directors.

“We did not take this action lightly. We counseled with Chairman Bernake…we also consulted with Secretary Paulson. They both concurred with me that conservatorship needed to be undertaken,” said Lockhart during a House Financial Services Committee hearing.

“First signs, despite all the market turmoil are that the conservatorships are positive. I am pleased to say that the enterprises are funding costs and the spreads on the {Mortgage Backed Security} have declined.”

Lockhart went on to say that since the conservatorship home rates for thirty year mortgages fell below six percent for the first time in 2008.

In order to pursue stability, Freddie Mac and Fannie Mae both had to go through major changes. The CEOs were replaced by former U.S. Bancorp Vice Chairman David Moffit and former Merrill Lynch president Herb Allison. Both companies have severely limited approval of low document and no document loans, and common stock and preferred dividends were eliminated, saving the companies $2 billion. In addition, Lockhart says both CEOs have been urged to be more creative in preventing home forclosures.

Following the president’s statement in the Rose Garden, White House spokeswoman Dana Perino and Director of the National Economic Council briefed the press on the government’s increasing role in attempting to restore investor confidence to the struggling financial markets.

Hennessey outlined the steps that have been taken and those that the government would like to happen, “So we’ve got the conservatorship for Fannie and Freddie. Treasury and Fed worked over the last weekend, they were up in New York working with firms in the industry,” he said. “We had the Fed taking steps just a couple days ago to prevent what they would call the disorderly liquidation of AIG, the insurance company. And then the Fed has been increasing significant amounts of liquidity into the financial system to keep things moving.”

Hennessey reiterated statements made by President Bush about urging the Congress to pass legislation that would allow the federal government to buy illiquid assets from struggling financial institutions to further increase liquidity.

“The most obvious example of an illiquid asset is a mortgage asset, a mortgage-backed security that’s probably lost value as the values of the homes that are underlying those mortgages have declined,” he said. “And what’s happening is, as those assets have lost value, people don’t want to buy them, they become illiquid, it’s hard for people to buy and sell them, and so they’re stuck on the balance sheets of financial institutions.”

Hennessey said that the White House would be in negotiation with congressional leaders over the weekend. Congress and the administration will need to hammer out the details of this authorizing legislation. Hennessey said that they would have to make “significant, substantive progress on the details” over the weekend.

“This is a very bold set of actions, we are calling on Congress to do something that is very big and that we believe needs to be done quickly,” he said.

Rep. Michelle Bachmann (R-Minn.) says that government bailouts to financial companies were rationalized as those companies being “too big to fail.” (0:42)

 

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The Hill is still reeling from Department of Treasury and Federal Reserve market interventions in the hard hit financial section.

“Enough is enough…We’ve got to bailout the taxpayer from bailout mania,” said Rep. Jeb Hensarling (R-Texas). Hensarling and other House Republicans spoke out against government intervention in the market, including the recent government assistance of Bear Sterns, AIG and the takeover of government sponsored enterprises Freddie Mac and Fannie Mae. Hensarling, along with Marsha Blackburn (R-Tenn.), Michelle Bachman (R-Minn.), Tom Price (R-Ga.), Scott Garrett (R-NJ), and Tom Feeney (R-Fl.)

“The government is the lender of last resort,” said Price. He said that risk is an inherent part of the free market system. Price and Feeney emphasized their view that the government is socializing risk as profits are kept private. The recent moves to facilitate sales and give loans to struggling financial giants by the Treasury Department are expected to add to the long term debt to be absorbed by the tax payer. “Again we believe that any short term gain by bailing out one another financial institution is not worth the long term pain of the moral hazard of taking us…to a lost decade of economic growth,” said Hensarling.

Following a press conference to highlight recipients of certain government assistance programs like the Children’s Health Insurance Program and the Low Income Energy Assistance Program, Senator Harry Reid (D-Nev.) and House Majority Leader Steny Hoyer (D- Md.) addressed the bailout of American International Group.

Reid, the Senate majority leader, decried “secret meetings” between Congress and the administration to lay out government assistance measures. “I think it’s time that there’s more than one branch of government. The American people deserve some transparency.” Reid said that he believed that the Senate could do something to stabilize the economy by passing a bill to fund infrastructure before the current session comes to an end.

Hoyer said that there would be hearings in both the Financial Services and Oversight committees. He said that Financial Services Chairman Barney Frank (D-Mass.) would look into the future of regulations and that Oversight Chairman Henry Waxman (D-Calif.) would investigate what happened to lead up to these government bailouts. Hoyer said that committee would answer the questions “What went wrong? Why did we not regulate? Why did we not have the referee on the field?”

The Senate Banking, Housing and Urban Affairs Committee held a full committee hearing on the Federal Reserve’s semiannual monetary policy report to Congress. Sen. Chris Dodd (D-Conn.) presided over the hearing and said that in considering the state of the U.S. economy, it is important to distinguish between fear and facts. Dodd explained that in the country’s markets today, in particular during the turmoil of recent days, far too many actions are being driven by fear, and are ignoring crucial facts. This neglect of the facts, Dodd said, has caused Americans to experience unprecedented hardship and uncertainties, and now more than ever, they need to know when things will start to turn around and when the country will get back on track. (more…)