The primary causes of the financial crisis have been:
1) affirmative action policies to increase mortgages issued for low income individuals
These policies include the Community Reinvestment Act, affirmative action mandates by Fannie Mae and Freddie Mac, and HUD.
As this article in the City Journal -a leading urban-policy magazine- on the Community Reinvestment Act explains, these affirmative action policies arose out of the observation by civil rights activists that banks were not lending in low income communities, communities that were often predominantly black/hispanic:
The Act, which Jimmy Carter signed in 1977, grew out of the complaint that urban banks were "redlining" inner-city neighborhoods, refusing to lend to their residents while using their deposits to finance suburban expansion. CRA decreed that banks have "an affirmative obligation" to meet the credit needs of the communities in which they are chartered, and that federal banking regulators should assess how well they do that when considering their requests to merge or to open branches. Implicit in the bill's rationale was a belief that CRA was needed to counter racial discrimination in lending, an assumption that later seemed to gain support from a widely publicized 1990 Federal Reserve Bank of Boston finding that blacks and Hispanics suffered higher mortgage-denial rates than whites, even at similar income levels.
The reason behind these lending practices was later found to be fully explainable by credit-worthiness considerations, rather than any insidious racial discrimination:
A September 1999 study by Freddie Mac, for instance, confirmed what previous Federal Reserve and Federal Deposit Insurance Corporation studies had found: that African-Americans have disproportionate levels of credit problems, which explains why they have a harder time qualifying for mortgage money. As Freddie Mac found, blacks with incomes of $65,000 to $75,000 a year have on average worse credit records than whites making under $25,000.
The Federal Reserve Bank of Dallas had it right when it said —in a paper pointedly entitled "Red Lining or Red Herring?"— the CRA may not be needed in today's financial environment to ensure all segments of our economy enjoy access to credit." True, some household —those with a history of credit problems, for instance, or those buying homes in neighborhoods where re-selling them might be difficult— may not qualify for loans at all, and some may have to pay higher interest rates, in reflection of higher risk. But higher rates in such situations are balanced by lower house prices. This is not a conspiracy against the poor; it's how markets measure risk and work to make credit available.
Nonetheless, affirmative action activist groups seized on the political argument of discrimination, and with the aid of Clinton's 1995 provisions to the CRA, an industry was born around extorting banks into lending in low income communities:
The Clinton administration's get-tough regulatory regime mattered so crucially because bank deregulation had set off a wave of mega-mergers, including the acquisition of the Bank of America by NationsBank, BankBoston by Fleet Financial, and Bankers Trust by Deutsche Bank. Regulatory approval of such mergers depended, in part, on positive CRA ratings. "To avoid the possibility of a denied or delayed application," advises the NCRC in its deadpan tone, "lending institutions have an incentive to make formal agreements with community organizations." By intervening —even just threatening to intervene— in the CRA review process, left-wing nonprofit groups have been able to gain control over eye-popping pools of bank capital, which they in turn parcel out to individual low-income mortgage seekers. A radical group called ACORN Housing has a $760 million commitment from the Bank of New York; the Boston-based Neighborhood Assistance Corporation of America has a $3-billion agreement with the Bank of America; a coalition of groups headed by New Jersey Citizen Action has a five-year, $13-billion agreement with First Union Corporation. Similar deals operate in almost every major U.S. city. Observes Tom Callahnan, executive director of the Massachusetts Affordable Housing Alliance, which has $220 million in bank mortgage money to parcel out, "CRA is the backbone of everything we do."
These activist groups are deeply entrenched in the political world of Washington, with the current president having a long history of working in the civil rights/ minority empowerment activism industry:
he also joined Davis, Miner, Barnhill & Galland, a twelve-attorney law firm specializing in civil rights litigation and neighborhood economic development, where he was an associate from 1993 to 1996, then of counsel from 1996 to 2004, with his law license becoming inactive in 2002.
Obama was a founding member of the board of directors of Public Allies in 1992, resigning before his wife, Michelle, became the founding executive director of Public Allies Chicago in early 1993. He served from 1994 to 2002 on the board of directors of the Woods Fund of Chicago, which in 1985 had been the first foundation to fund the Developing Communities Project
Obama even represented a group suing Citibank for discriminating against minority applicants in its lending practices in 1994:
Buycks-Roberson v. Citibank Fed. Sav. Bank Fair Housing/Lending/Insurance
Docket / Court 94 C 4094 ( N.D. Ill. ) FH-IL-0011
Plaintiffs filed their class action lawsuit on July 6, 1994, alleging that Citibank had engaged in redlining practices in the Chicago metropolitan area in violation of the Equal Credit Opportunity Act (ECOA), 15 U.S.C. 1691; the Fair Housing Act, 42 U.S.C. 3601-3619; the Thirteenth Amendment to the U.S. Constitution; and 42 U.S.C. 1981, 1982. Plaintiffs alleged that the Defendant-bank rejected loan applications of minority applicants while approving loan applications filed by white applicants with similar financial characteristics and credit histories. Plaintiffs sought injunctive relief, actual damages, and punitive damages.
Barack H. Obama
Davis, Miner, Barnhill and Galland, P.C.
Fannie Mae and Freddie Mac are the other major affirmative programs contributing to America's economic problems. They are government sponsored enterprises that spend amounts lobbying politicians, particularly Democrats.
They are massive organizations that own or guarantee half of the $12 trillion worth of mortgages in the US. In 1999, under intense pressure from the Clinton administration, they began a program to increase home ownership in the minority and low income demographics, a program which precipitated the sub-prime mortgage bubble:
Fannie Mae Eases Credit To Aid Mortgage Lending
By STEVEN A. HOLMES
Published: Thursday, September 30, 1999
In a move that could help increase home ownership rates among minorities and low-income consumers, the Fannie Mae Corporation is easing the credit requirements on loans that it will purchase from banks and other lenders.
The action, which will begin as a pilot program involving 24 banks in 15 markets -- including the New York metropolitan region -- will encourage those banks to extend home mortgages to individuals whose credit is generally not good enough to qualify for conventional loans. Fannie Mae officials say they hope to make it a nationwide program by next spring.
Fannie Mae, the nation's biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people and felt pressure from stock holders to maintain its phenomenal growth in profits.
The Democrats' intense dedication to these organizations meant that efforts to regulate their activities and impose responsible lending standards on them were blocked repeatedly, especially by black pro-affirmative-action Democrats in Congress:
How much has Fannie Mae cost the US? Besides the indirect costs like the losses from the financial crisis and the $700 billion bank bailout that the sub-prime mortgages spurred, there is also another $750 billion that the US has paid in the way of the Federal Reserve's purchase of Fannie/Freddie backed mortgages.
Given the Democratic party's history with these affirmative action groups, it's very likely that the Democrats will not confront the problems these groups cause in the economy, and will keep these policies inspired by affirmative action activism in place, as they continue to corrode America's economic competitiveness.
The Democrats will blame every thing else: deregulation in the financial industry, greed on Wall Street, predatory lending practices, etc, but will ignore the root cause, thus the economic problem will be go undiagnosed and untreated.
2) the Federal Reserve
The Federal Reserve's low interest, inflationary monetary policy led to the credit bubble that fed the housing bubble. Coupled with Fannie Mae and Freddie Mac's massive subsidization and securitization of mortgages, housing prices boomed leading to a speculatory spiral of increased borrowing and investment into housing, on the expectation of fast profits on small margins. Like all speculatory bubbles, it eventually came crashing down, taking down the entire financial sector with it.
This isn't the first bubble that the Federal Reserve has helped create, but it is the worst one, because the industry that the Fed's easy credit flowed into was created by affirmative action government mandate, rather than market forces like in the case of the dot com bubble.
In the case of the dot com bubble, there was real economic potential that was being speculated on, and massive new companies like Yahoo, Google and Ebay that arose in the bubble and survived its crash.
People over-estimated the speed at which the internet market would grow, and invested in many companies that were not viable businesses, but not all of the speculation was groundless, and many of the money invested did return value.
The beginning of the housing bubble and the concurrent sub-prime crisis meanwhile can be attributed almost solely to government intervention, motivated by affirmative action policies. The market fundamentals didn't justify vast amounts of wealth being poured into the construction of new houses. There was no explosive economic opportunity being bet on the way the dot com bubble bet on internet technology.
Furthermore, the scale of the intervention of the government in the housing industry made the housing bubble much larger than the dot com bubble. While speculation on intrinsic financial value spurred the dot com bubble, expectations of government giants Freddie and Fannie continuing to pour money into the housing market and push up prices drove speculators to invest far larger sums with more confidence than they did in tech companies.
When the NASDAQ crashed, about $5 trillion dollars was wiped out. The sub-prime crisis on the other hand has already wiped $8 trillion from just the US economy, and the losses and decline are widely expected to continue, with some predictions of a looming ARM (adjustable-rate mortgage) crisis that could parallel the subprime crisis in scale.
Neither political party discusses what role the Federal Reserve's low interest rate policy may have had in creating the bubble, and very little is said about how government intervention in the housing sector may have started the speculatory rise in prices.
Some criticism of Fannie/Freddie has been levied by major Republican politicians, but it has been limited to criticizing the Democrats for their role in blocking efforts to regulate Fannie/Fannie. The only solution offered by the Republican leadership has been to reduce the scope of Fannie/Fannie, rather than dealing with the fundamental problem and abolishing affirmative action policies in housing altogether.
This is not surprising as the Republicans are responsible for pushing for affirmative action policies in housing as well (e.g. Bush's 'ownership society'), and thus can't attack the principle of government intervention in housing without admitting that they too contributed to the problem.
3) neocon foreign policies
The loyal opposition, the Republicans, have been discredited due to their partnership with the Likudnik Israeli right and their Christian Zionist allies. With people afraid of what the AIPAC allied McCain might do if he were elected, many fiscal conservatives actually favored Obama over McCain, despite their disdain for Democratic economic policies.
The Republican elite have allied with the likes of Pastor Hagee, head of "Christians United for Israel", a darling of the Israel lobby, and an advocate of war against Iran. Likewise, Joseph Lieberman became a close ally of McCain's during his campaign, and was one of the leading advocates of war against Iran.
Meanwhile, McCain's advisor, Randy Scheunemann, was a former lobbyist for the Georgian government, and an advocate of bringing Georgia into NATO. As Pat Buchanan points out, had Georgia been a NATO member in its recent conflict with Russia, the US may have had to go to nuclear war with Russia:
Who is Randy Scheunemann?
He is the principal foreign policy adviser to John McCain and potential successor to Henry Kissinger and Zbigniew Brzezinski as national security adviser to the president of the United States.
But Randy Scheunemann has another identity, another role.
He is a dual loyalist, a foreign agent whose assignment is to get America committed to spilling the blood of her sons for client regimes who have made this moral mercenary a rich man.
From January 2007 to March 2008, the McCain campaign paid Scheunemann $70,000—pocket change compared to the $290,000 his Orion Strategies banked in those same 15 months from the Georgian regime of Mikheil Saakashvili.
What were Mikheil's marching orders to Tbilisi's man in Washington? Get Georgia a NATO war guarantee. Get America committed to fight Russia, if necessary, on behalf of Georgia.
Scheunemann came close to succeeding.
Had he done so, U.S. soldiers and Marines from Idaho and West Virginia would be killing Russians in the Caucasus, and dying to protect Scheunemannâ€™s client, who launched this idiotic war the night of Aug. 7. That people like Scheunemann hire themselves out to put American lives on the line for their clients is a classic corruption of American democracy.
U.S. backing for his campaign to retrieve his lost provinces is what Saakashvili paid Scheunemann to produce. But why should Americans fight Russians to force 70,000 South Ossetians back into the custody of a regime they detest? Why not let the South Ossetians decide their own future in free elections?
Not only is the folly of the Bush interventionist policy on display in the Caucasus, so, too, is its manifest incoherence.
Defense Secretary Robert Gates says we have sought for 45 years to stay out of a shooting war with Russia and we are not going to get into one now. President Bush assured us there will be no U.S. military response to the Russian move into Georgia.
That is a recognition of, and a bowing to, realityâ€”namely, that Russiaâ€™s control of South Ossetia and Abkhazia and occupation of a strip of Georgia cannot be a casus belli for the United States. We may deplore it, but it cannot justify war with Russia.
If that be true, and it transparently is, what are McCain, Barack Obama, Bush, and German Chancellor Angela Merkel doing committing the United States and Germany to bringing Georgia into NATO? For that would commit us to war for a cause we have already conceded, by our paralysis, does not justify a war.
Not only did Scheunemann's two-man lobbying firm receive $730,000 since 2001 to get Georgia a NATO war guarantee, he was paid by Romania and Latvia to do the same. And he succeeded.
Latvia, a tiny Baltic republic annexed by Joseph Stalin in June 1940 during his pact with Adolf Hitler, was set free at the end of the Cold War. Yet hundreds of thousands of Russians had been moved into Latvia by Stalin, and as Riga served as a base of the Baltic Sea fleet, many Russian naval officers retired there.
The children and grandchildren of these Russians are Latvian citizens. They are a cause of constant tension with ethnic Letts and of strife with Moscow, which has assumed the role of protector of Russians left behind in the "near abroad" when the Soviet Union broke apart.
Thanks to the lobbying of Scheunemann and friends, Latvia has been brought into NATO and given a U.S. war guarantee. If Russia intervenes to halt some nasty ethnic violence in Riga, the United States is committed to come in and drive the Russians out.
With these dynamics at play, the reign of affirmative action groups that leech off the economy seems like a good alternative to a Republican administration. That is the sorry choice America has had to make.
The only bright side to all of this is that with the election of Obama, one of the three root causes of the financial crisis may possibly be addressed; the neocon policy of foreign interventionism. The hope is that the Obama administration can bring peace to the middle east thereby reducing the power of the pro-war Israeli right and its influence over Republican foreign policy.
This would allow the Republicans, with the influence of the Ron Paul core, to re-emerge as a credible party that addresses domestic fiscal policy, rather than one that risks a nuclear war for countries on the other side of the planet.