Emailed Comment...

I think that you gave Barney Frank and Senator Dodd a pass by not specifically mentioning their names in the "who's responsible" piece.

Yes, all the listed entities were part of the development of the bubble and the world-wide crash when the bubble burst.

But I think that Frank and Dodd were arguably the worst of the "who's responsible" cast of characters.

They have recieved very little criticism for, what I think, was the unlatching of the box from which all the others crawled out - with perhaps the exception of congress, all the other villians saw an opportunity to make fast profits - and took the opportunity.

Even congress had a significant economic incentive, in that, Fannie and Freddy gave massive amounts to congressmen - to enhance the bubble agenda.

Question: Why have Frank and Dodd apparently received so little personal blame?

Wayne
Placerville, CA

Thanks for sharing your thoughts. Sadly, I tend to agree with you about Dodd and Frank. I, too, am surprised about how little attention has been placed on them for being major contributors to the crisis. Honestly, I can’t explain why. Perhaps it is because the topic is somewhat esoteric for the average American?

Steve

I had to go to the rcbank web site to find and view Mr. Fleming's excellent "who's responsible" presentation.

It was refreshing to view a candid and objective explanation for the causes of the 2008-2009 sub-mortgage collapse. Too bad such candor and objectivity is lacking in the current election political rhetoric. That prompts me to ask you what you believe Chris Dodd and Barney Frank did that significantly helped cause the collapse. Mr. Fleming, since you "tend to agree" with Wayne, by copy of this e-mail I ask the same question of you.

I'm not saying you two are wrong that Dodd and Frank belong (by name) on the blame-list. However, I'm assuming we agree that the balloon that collapsed was many years in the making. But, Dodd and Frank didn't assume their powerful Senate and House committee chairman roles until January, 2007. How did they exercise that power in such a relatively short time to contribute significantly to the collapse? Or, were their Republican committee predecessors actually the significant contributors?

I also wonder why the Bush administration isn't on the blame-list. Bush had the powerful veto from January 2001 to January 2009 and should have blocked any legislation endangering the economy. Yet, Bush regularly boasted that the economy was strong and growing. Indeed, in 2008, he announced that "we can have both renewed tax cuts (his tax cuts scheduled to expire this December) and a balanced budget by 2012."

As I observe the current election campaigning, I feel that voters are being badly misled; for example, those blaming the Obama administration for the unemployment problem and the slow creation of new jobs. Which is why I think we need two Problem/Blame lists: One for our federal government and its role and one for our private sector's capitalistic free-enterprise economy (PSCFEE) and its role.

The Fleming Collapse blame-list would be a component of a larger PSCFEE.Problem/Blame list. For example, anger about the collapse and its impacts , e.g., its loss of jobs, would be directed at the leaders of our free private sector economy. Such leaders are responsible for job creation and maintenance of employment levels in the private sector. In this regard they have failed, strategically, to anticipate and cope with the changing global economy, technology effects, a surplus low-paying global workforce, etc. The collapse has resulted in many calls for reforms. I suggest that our PSCFEE, as an entity, is over-due for major reform.

The Federal Government Problem/Blame list should address budget deficits, the debt and its interest expense, unaffordable/unwinnable wars, global warming inaction, etc. I believe our government also needs a major reform. America is supposedly the worlds economic/military superpower yet our federal government cannot balance its budgets resulting in an already unpayable debt. Moreover, the government faces a looming $50 trillion of unfunded obligations as Boomer retirements ramp up. We are in deep doo-doo but candidates (with media cooperation) are successfully evading it as an issue.

Dick
Durham, NC

Dick:

I think that you make some really good points. As it relates to the public sector, I certainly do not place all of the blame on the doorsteps of Dodd and Frank. The seeds for the housing bubble were planted on a bi-partisan basis over an extended period of time in the reckless pursuit of a noble policy i.e. expanded home ownership.

That said, I do not believe that the recent legislation that they sponsored (the Dodd-Frank Wall Street Reform and Consumer Protection Act) will achieve its articulated goals, including avoiding a financial crisis in the future. The regulators have always had the authority to prevent bubbles from forming, they don't need more. Laws and regulations are not a substitute for competency. Moreover, there is no doubt that Barney Frank has been an ardent supporter of the GSEs (FNMA and FRE). Check out this quote made two months before the government forced the mortgage giants into conservatorships and pledged to invest up to $100 billion in each.

"I think this is a case where Freddie Mac and Fannie Mae are fundamentally sound. They're not in danger of going under I think they are in good shape going forward." -- Barney Frank (D-Mass.), House Financial Services Committee chairman, July 14, 2008

I also agree that a number of captains of industry are just as culpable as our government leaders. Their lack of integrity in the pursuit of short term personal gain is appalling. Still, while I acknowledge the imperfections of capitalism, I will still argue that it is better than the alternatives.

Best regards,

Steve

Emailed comment...

Steve,
Thanks for replying. However, after reviewing your comments, I see no evidence of Dodd and Frank having taken any action that would justify blaming them for personally contributing to the collapse. Certainly, passage of the the Dodd-Frank Wall Street Reform and Consumer Protection Act didn't contribute. Nor, for that matter, did Frank's July 14 assessment of Freddie Mac and Fannie Mae agencies. I also wonder why you chose not to comment on Bush administration responsibility for the 2008 collapse since Republicans controlled the White House from 2001 until 2009 and the Congress for most of those 8 years.

Regardless, my guess is that our free-enterprise economy was at least 95% responsible for its 2008 collapse (I include the Fed central bank, households, consumers and investors as members of the free economy).

Regarding your remark, "Still, while I acknowledge the imperfections of capitalism, I will still argue that it is better than the alternatives,"

I'm a retired IBM manager/senior engineer (37 years) and very proud of IBM's business ethics and basic beliefs (respect for the dignity of individuals, strive for excellence in everything we do, and best possible customer support). IBM's beliefs and business ethics helped the company to be recognized as "America's best managed company" multiple times. Clearly, IBM was a role model for our country's capitalistic free-enterprise economy and we were proud of that.

But, our capitalistic economy has deteriorated and its collapse indicates it again got woefully out of control (something I've seem multiple times since my 1928 birth). I believe it needs to be studied, audited and evaluated from top to bottom and then reformed still as a free-enterprise entity but with entity leadership, organization, rules, etc. Such a reform should also define the free-enterprise economy's societal responsibilities, working relationship with government(s) and other economies and recommend necessary oversight controls for those relationships. The reform should also result in a guiding 5, 15 and 30 year economic strategy which is tracked and upgraded as required.

So, I close, saying that, like you, I still believe in a capitalistic free-enterprise economy - but as a defined entity and one much better in performance, predictability, dependability and accountability than those we've experienced during my lifetime. But, I also recognize that my hope for the economy's future is only achievable with exceptional leadership (and willing followers) that seem unproduceable in today's America.

Your further comments will be welcomed but, please, don't feel any obligation to do so.

Dick
Durham, NC

Dick:

I have a question for you. Having lived through the 1930’s, how does the current US economy compare? Also, absent another world war, what will it take to get the economy back to sustained growth?

Thanks in advance for your thoughts.

Steve

Linked In comment:

Nice succinct summary. I think the bulk of the blame, though, should be assigned to those who neglected their responsibility for maintaining an effective banking system. So called professionals neglected their vital roles in due diligence, counter-part surveillance, and appropriate pricing of risk. To the extent that such professionals have not had credentials revokes, jobs terminated, and, in many cases, been prosecuted, we will continue to have a weak, unreliable system. Professionals need to take greater responsibility for appropriately policing their industry and there is a disturbing lack that. Certainly, too many individuals made fraudulent statements to finance inappropriate speculation. They, too, should be held responsible. But, the extreme collateral economic damage is the result of the egregious failures of professionals; it could have been avoided if professionals were...well...actual professionals.

John
Sacramento, CA

Thanks for sharing your thoughts on this topic. Unfortunately, I have to agree with you. Overall, the lenders, investors, rating agencies, and investment banks all suffered from some mixture of blind greed, misjudgment of the risks, and lack of diligence. Of course, the regulators weren’t motivated by greed, but they too misjudged the risk as the bubble was growing bigger.

The lingering question in my mind, though, is how best to avoid such a financial crisis from happening again? There are many that point to the long list of financial bubbles and crisis over hundreds of years and, therefore, argue that they are unavoidable. What do you think?

Steve

Steve,

I agree with many of the assertions you make about the subprime mess that plundered our housing industry and had a domino effect on a number of other ones. However, I have a general disagreement with you concerning its cause and effects. I believe you may have mingled the two.

I believe the housing crises had been building up for a long time, in fact for about 40 plus years. The real problem actually began back in the Carter years under the Community Reinvestment Act of 1977. This was when President Carter decided that the low income population needed a break in home ownership. He wrongly labeled the lack of home ownership among the low income population "discriminatory," when in fact the real problem was elsewhere: inability to own a home and low credit rating. He took a sledge hammer to a nail, so to speak.

This was not a matter of discrimination but of economics. We could discuss how we got to this economic circumstance, but that is for another time. This Act mandated lending to low income uncredit worthy individuals. This was the stirrings of increasing regulations that exacerbated the problem that would eventually bubble up in 2008.

Subsequent congressional leaders and presidents decided to up the ante with the Community Reinvestment Act. Ensuing congressional laws that became federal regulations over banks and financial institutions began creating an entangling web of regulations.

President HW Bush signed the next set of regulation into law in 1989 (FIRREA, 12 USC 2906). This was another sledge hammer hitting a nail and gave license to additional regulatory actions with financial institutions in light of the S&L crisis. Legislation in 1991 and 1992 pressed more regulations on banks and lending institutions. The 1992 acts got Fannie Mae and Freddie Mac involved in mortgage securitization and the allocation of a percentage of lending to support "affordable" housing. Have we heard this recently? These were regulations from law! This also occurred in 2000 and 2001.

Then came Clinton in 1994. His goal was also in line with Carter's for low income lending. Bentsen also put in his two cents worth for a greater loosening of credit to those who could not afford a loan. Niskanen of the CATO Institute was highly critical of the move to loosen credit and saw it as political favoritism. He was one of the early alarmists who warned of an economic collapse of the housing market as a result of the push to take risks in lending to uncredit worthy persons. The balloon began getting bigger.

Subsequent congressional laws that turned into regulations expanded lending risks, and financial institutions either followed suit or were compelled to act accordingly. These were the effects of the real cause - Congressional legislative enactments for loose credit toward uncredit worthy markets in 1999, 2005, 2007, and finally 2008. The bubble had finally had enough of burdensome regulations that forced loose lending to low income markets and it burst just as Niskanen predicted.

The cause? Government laws and regulations. I would not peg it as greed when force engages arm twisting. The results were all the other things you said contributed to it. They simply followed suit and did what free markets naturally do under such conditions - following the regulatory path toward profitable transactions and attempting to protect themselves from such regulations.

Steve, this is my take based on a history of burdensome regulations that eventually strangled the markets until a giant bubble popped.

Respectfully, I disagree. I point the finger directly at Congress and the various regulatory agencies that report to them. It truly does seem that "they" have become more concerned with keeping "their" jobs, and the power, prestige and perks that it affords them, than working to protect the average citizen. So long as they get reelected...it's all good. Remarkably they have managed to pass the bulk of the blame on to others.

Linked in comment...

It was Rush Limbaugh, I believe, who said something like this: People who signed above the dotted line on their mortage application while clearly stating a wrong income are guilty of fraud. If their income was higher than on their tax returns that would be rather suspicious, if their actual income was lower than what was stated on the application that is also fraud. Simple, really.

That is not to say that "loan officers" or whoever coaxed them into these "deals" were any less guilty. But what I really do not understand is this: I saw the crash coming years before it did, lots of others saw it coming, yet the leaders who should have seen it coming did not.

Your system starts with the irresponsible borrower. A poor choice for someone who depends on individuals. The mortgage backed security industry worked very hard to seek out under qualified borrowers and teach them how to cheat. I also believe that individual home owners lost more rather than investors as you suggest. Come on Steve, why the careless disregard for the individual? Does this show where your loyalties are?

Mark

Frankly, I did not start with the borrowers because I place more or less blame on them than the other groups that I mentioned. As I mentioned in the video, there is plenty of blame to go around, including the imprudent lenders.

Politicians and other public officials never blame the borrowers – for obvious reasons. We, however, see that they played a major role in the financial crisis. We have charged off loans to consumers that put little to no money down to buy their house and then took money out (to spend on pools, vacations, etc.) via home equity loans when it appreciated in value. When the home market crashed, they walked away from their obligations. Do you think that these people should be held accountable for their own decisions?

Steve

Linked in comment...

This is an interesting issue.

My sense is that, in general, the degree to which in industry should be regulated relates to it's own ability to sanction those among them who violate trusts and professional practices at the expense of the industry and the broader economy. The starting place is for the industry to dole out what it feels are appropriate sanctions that those outside the industry can regard as effective deterrents to future bad behavior. If there are no changes in behavior and there are no visible sanctions then it is probably appropriate for the external stakeholders to intervene with expanded sanctions and regulation.

AIG makes an interesting case. They are in the business of valuing and managing risk. Their executives and board (should) have a fiduciary responsibility and expertise to manage that risk. The only sanctions I'm aware of is the break up of the company. That was more about liquidation and spreading risk than making a clear statement about failures of leadership. I doubt anything the directors and executives experienced would make a lasting impression on others.

I'm sure there's plenty of smart folks who have more thoughtful ideas about mitigating risk of future melt downs but to a simple guy like me it seems the two effective measures would be (1) break up large banks and block mergers that concentrate risk and reduce competition; (2) bar investment banks from being publicly traded. The more competition there is out there the more innovation at lower risk we will see.

John
Sacramento, CA

Many thanks for your thoughts. I think that you make a great point about the significant role played by laws and regulations over an extended period of time. There is little doubt in my mind that the, perhaps well intentioned, housing policy of expanded home ownership in the US laid the foundation for the housing crisis that we are currently living through. You also may be right that my list of causes of the bubble may actually have been market forces reacting to the opportunities created by our housing policy. Still, how do you explain the gross misjudgment of the risks by many of the market participants?

Steve