Setting Us Up For The Next Great Recession

The next great recession in the U.S. is going to look surprisingly like the last one. The exact same policies that led to the 2008 recession are being followed - and indeed, in many cases strengthened - by the Obama administration.

One of the great tragedies of the left taking control of the Presidency and both houses of Congress in 2009 was that the nation never learned the reasons for our economic meltdown. That means the real problems haven't been fixed.

If you listen to Obama and the left, the sole causes of the meltdown were Wall St. greed, the derivatives market, and deregulation - though even that which they complained about, the repeal of the Glass Stegall Act, occurred under Bill Clinton in 1999. The true culprits, subprime lending, the disastrous Community Reinvestment Act that was used to eviscerate lending standards, ostensibly to cure racism, and a historic fraud perpetrated by bond rating agencies in collusion with our government, are never mentioned.

As I pointed out when Dodd Frank was first proposed, the terms of that bill actually strengthened the policies that gave rise to the housing bubble. The effects are now being felt. A month ago, AG Eric Holder bragged about strong arming thousands of bankers for imaginary racism in lending. Now this the other day from IBD:

Despite new evidence the Community Reinvestment Act led to riskier lending and played a key role in the subprime mortgage crisis, the Obama administration is broadening the anti-redlining regulation's authority and scope, spooking bankers.

A recent study by the National Bureau of Economic Research, the nation's pre-eminent economic research group, states that the CRA "clearly" had a major impact on the flood of subprime loans made in the late 1990s and 2000s, which directly led to the housing crisis.

By quietly expanding the regulation, analysts say President Obama is picking up where President Clinton left off in April 1995, when he rewrote rules for what had been a largely toothless law as first drafted in 1977. Through executive orders, Clinton set strict numerical lending targets for banks in "underserved" neighborhoods, while ordering regulators to crack down on alleged bank redlining.

The new rules for the first time mandated that banks use "innovative" or "flexible underwriting practices." Compliance required banks to pass a heavily weighted "lending test" or suffer holds on expansion plans.

The CRA overhaul "has been a disaster," said ex-BB&T CEO John Allison in his recent book on the financial crisis. He argued it's forced "banks to participate in making high-risk housing loans to low-income buyers who would not meet traditional bank lending standards."

Added Allison, who now heads the Cato Institute: "The default rates on these low-income loans are extraordinarily high."

Still, the Obama administration wants banks to step up approval of such low-income mortgages. And it's using the CRA to spur more lending, including:

• Forcing banks through threat of prosecution to expand their CRA assessment areas to include inner-city areas blighted by subprime foreclosures, where they are compelled to invest in new brick and mortar.

Many banks, in fact, are under direct federal orders to open new branches or ATMs in high-risk and unprofitable areas of Detroit, St. Louis and other cities hit hardest by the recession. . . .

• Ordering bank defendants accused of lending bias to underwrite riskier CRA loans at discounted rates.

For instance, Justice has ordered First United Security Bank of Alabama to "ensure that residential and CRA small business loan products are made available and marketed in majority African-American census tracts," while offered on terms "more advantageous to the applicant" than normal.

• Toughening CRA enforcement by bank examiners, . . .

• Broadening CRA examination guidelines to include loan "pricing discrimination," and instructing examiners to take a closer look at improper "steering" of minority borrowers into subprime loans with higher interest rates and fees.

• Using the threat of CRA "noncompliance" and denial of expansion plans to pressure bank defendants into settling "fair lending" cases, while scaring other banks into lending in low-income minority areas where the banks aren't located. . . .

• Pressuring banks to fund HUD's new $7 billion Neighborhood Stabilization Program to earn CRA credits under a new "community development" test.

And it is not just banks. The major bond rating agencies are still giving subprime mortgage backed securities AAA ratings. This is just pure fraud being driven by government policy. People should be in jail over this. But that is not the concern of our government when it comes to the bond rating agencies. They are only being punished when they threaten to downgrade U.S. government debt:

. . . when S&P finally downgraded the US one notch in August 2011, the SEC and Justice Department announced that S&P was under investigation, just two weeks later.

Egan-Jones, a smaller rating agency, has been even more aggressive, downgrading the US credit rating three times in 18 months. And while the federal government may not have imposed Diocletian’s death penalty, they are just as willing to squash dissent.

In a country that churns out thousands of pages of new regulations each week, it’s easy to find a reason to go after someone. As you read this letter, in fact, you are probably in violation of at least a dozen regulatory offenses.

In the case of Egan-Jones, the SEC brought administrative action against the agency within two weeks of their second downgrade. And a few days ago, the case was settled.

I’m sure you have already guessed the ending: Egan-Jones is banned from for the next 18 months from rating US government debt. They’ve effectively been silenced from telling the truth. . . .

We are being set up by the left for our next massive economic meltdown. This is beyond travesty.

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Setting The Record Straight Four Years Later

It has long been leftist dogma that "the failed policies of the Bush administration" caused our economic meltdown.  That statement was usually followed by vague references to "deregulation" and Wall St. greed. It has been the single most destructive lie of my lifetime. And because of it, we now have another four years of Obama

I pointed out over four years ago that the left's social engineering with the Community Reinvestment Act (CRA) caused both the housing bubble and the destruction of credit standards - all leading directly to our economic meltdown. Recently, the IBD published a concurence:

Democrats and the media insist the Community Reinvestment Act, the anti-redlining law beefed up by President Clinton, had nothing to do with the subprime mortgage crisis and recession.

But a new study by the respected National Bureau of Economic Research finds, "Yes, it did. We find that adherence to that act led to riskier lending by banks."

Added NBER: "There is a clear pattern of increased defaults for loans made by these banks in quarters around the (CRA) exam. Moreover, the effects are larger for loans made within CRA tracts," or predominantly low-income and minority areas.

To satisfy CRA examiners, "flexible" lending by large banks rose an average 5% and those loans defaulted about 15% more often, the 43-page study found.

The strongest link between CRA lending and defaults took place in the runup to the crisis — 2004 to 2006 — when banks rapidly sold CRA mortgages for securitization by Fannie Mae and Freddie Mac and Wall Street.

CRA regulations are at the core of Fannie's and Freddie's so-called affordable housing mission. In the early 1990s, a Democrat Congress gave HUD the authority to set and enforce (through fines) CRA-grade loan quotas at Fannie and Freddie.

It passed a law requiring the government-backed agencies to "assist insured depository institutions to meet their obligations under the (CRA)." The goal was to help banks meet lending quotas by buying their CRA loans.

But they had to loosen underwriting standards to do it. And that's what they did. . . .

Read the entire article here. Expect this to get zero play outside of the IBD.

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Scandalous: The Obama Administration Refuses To Prosecute HSBC For Money Laundering

HSBC, Britain's largest bank, knowingly. intentionally, and for years violated U.S. banking laws to launder billions of dollars from drug cartels and from rogue nations under sanctions. This was not simple negligence, this was purely criminal.

There should be a line of HSBC managers and compliance employees being measured now for prison suits, in addition to HSBC itself being prosecuted. Instead, the Obama administration has done precisely what they've done in virtually all high profile white collar criminal cases. They have failed to prosecute. Instead, they have given HSBC a civil fine of $1.9 billlion - a slap on the wrist for an institution that made $16.8 billion in profit in 2011.

For all of his anti-Wall St. and class warfare rhetoric, Obama has been AWOL when it comes to holding actual Wall St. criminals liable. Indeed, under Obama, if you are a criminal, the safest place to be is Wall St., a major bank or a hedge fund operator.

The economic meltdown from the housing bubble should have led to a whole host of criminal prosecutions for fraud. When sub-prime loans were being bundled and resold with a AAA rating, that was not within the realm of reasonable opinion, that was criminal. When Goldman Sachs marketed four sets of complex mortgage securities to banks and other investors without warning of the high risk, or when they "secretly bet against the investors' positions and deceived the investors about its own positions to shift risk from its balance sheet to theirs," that is fraud. Yet the Obama DOJ refused to prosecute Goldman Sachs or anyone else.

As near as I can tell, no one from the economic melt-down of 2007 has been prosecuted by Obama - and its not hard to understand why. That melt-down was caused by Democrat policies over a period of two decades - ones fought by Bush, McCain and most other Republicans. To prosecute anyone for the crimes that occurred in the creation of the melt-down would shine a bright light on the facts - as well as the utter canard that the melt-down was caused by Republican economic policies or de-regulation.

Then there is Jon Corzine, former Democratic governor of NJ, hedge fund manager of MF Global - and the man who oversaw the fraudulent misuse and loss of $1.2 billion in customer funds. He is still walking the streets - and was a major bundler of funds for Obama in the most recent election.

And now HSBC with no criminal prosecutions of either the institution or the individual culprits. As to the institution:

US authorities defended their decision not to prosecute HSBC for accepting the tainted money of rogue states and drug lords on Tuesday, insisting that a $1.9bn fine for a litany of offences was preferable to the “collateral consequences” of taking the bank to court.

Had the US authorities decided to press criminal charges, HSBC would almost certainly have lost its banking licence in the US, the future of the institution would have been under threat and the entire banking system would have been destabilised.

HSBC, Britain’s biggest bank, said it was “profoundly sorry” for what it called “past mistakes” . . .

Breuer was pressed on why the US authorities had agreed to a deferred prosecution deal for the bank. He dismissed accusations that prosecutors had not been hard enough and said that the Justice Department had looked at the “collateral consequences” to prosecuting the HSBC or taking away its US banking licence. Such a move could have cost thousands of jobs, he said.

HSBC has already sacked all the senior staff involved in the scandal, and agreed to stringent monitoring – the first time a foreign bank has agreed to such oversight. “In this day and age we have to evaluate that innocent people will face very big consequences if you make a decision,” said Breuer. “I don’t think anyone is alleging that HSBC was the mastermind of the scheme,” he said. Rather it was their “incredibly lax” monitoring that was to blame. “HSBC was a vital player,” he said. “But they are not the Sinaloa cartel.”

What utter bullshit this is. One, this is a decision that HSBC is large enough that they can avoid criminal sanctions that would be used to crush smaller competitors under this scenario. Two, Breuer's attempt to minimize HSBC's actions as merely "lax monitoriong" is itself a fraud. You had employees being instructed by management to erase identifying information on transactions specifically so the U.S. authorities would not identify them as coming from unlawful sources. That wasn't lax monitoring, it was knowing and intentional money laundering. And a "my bad" from HSBC is not quite sufficient. If the only consequence for the individuals involved is that they got "sacked," that stinks of trying to hide facts that prosecution of these individuals would bring to light.

The Obama administration is utterly lawless. Obama's class warfare rhetoric is nothing but pure window dressing. This really is scandalous.

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IBD's Guide To Debunking Obama's Economic Myths

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IBD, in a recent editorial, explores the five myths on which Obama rests his reelection bid. The thumbnail:

1. The Bush tax cuts and deregulation caused the recession. IBD and I are in agreement on that one - it was almost two decades of left wing social engineering of our credit market that caused the massive housing bubble - and with it, the but for cause of our great recession.

2. Obama stopped a second depression. Not quite. The recession bottomed out before Obama took office. Obama's contribution has been in preventing recovery.

3. Obama's economic policies are working. If by that Obama means his policies have lowered median income, replaced jobs lost in the recession with low wage entry level jobs, caused record long term unemployment, and increased the numbers of Americans in poverty, then yes, Obama's policies have been an epic success.

4. A slow recovery was inevitable. This is an excuse Obama only trotted out after his economic policies failed.

5. Nobody could have done any better. History teaches that deep recessions are followed by faster recoveries - at least until Obama. As IBD notes:

Since World War II, there have been 10 recoveries before Obama's. Had Obama's merely performed as well the average of all those recoveries, the nation's GDP would be a staggering $1.2 trillion bigger than it is today, and 7.9 million more people would have jobs.

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A Primer On The Euro Crisis

The Euro is the official currency of the "eurozone," adopted as the national currency by 17 of 27 of the member states of the European Union. It is the world's second largest reserve currency as well as the second most traded currency behind the dollar. All monetary policy for the Euro is set by the European Central Bank (ECB).

The Euro officially became an "accounting currency" subject to ECB control in 1992, with members of the Eurozone normalizing the value of their currency to a "Euro" standard. The euro as an actual physical currency didn't occur until 2002.

Nominally, the adoption of a single currency was sold on several theoretical benefits. It would eliminate the currency exchange fees from the cost of doing business between the European states. It would encourage competition by allowing quick comparison of prices. And by encouraging stability and efficiency, the hope was that the euro would stimulate economic growth, reduce the unemployment rates in the eurozone, and encourage international investment.

The reality has proven that the downsides were not sufficiently examined. Because all monetary power, including the power to set EU wide interest rates, resides with the ECB, this poses a huge problem for nations with weaker economies during times of economic downturn. One way in which weak nations have been able to survive such problems is to intentionally devalue their currency by speeding up the printing presses. While such a move brings inflation, it gives the nation a window in which to pay off its debts. The flip side of such a drastic action is that, if there is not enough discipline in the government to carefully limit the presses and pay off the debts, you end up with Zimbabwe.

It also poses a problem for nations that need to stimulate growth. Normally, a sovereign nation that wants to stimulate growth will lower its prime interest rate. But again, that is not something that the individual member states of the EU can do. They are stuck with whatever ECB decides for the eurozone as a whole - and the ECB is avoiding inflation like the plague. That leaves only tax policy to stimulate growth among the troubled eurozone members, but at this point, each is being pressured - and indeed, has agreed - to raise taxes in an effort to lower its sovereign debt.

Several people, such as Robert Samuelson, have painted the Eurozone crisis as simply a failure of the European welfare state model. Others, on the left, such as Paul Krugman, have claimed that the crisis has nothing to do with the welfare state model. Setting that argument aside for a separate post, it seems clear that the high cost of the welfare state has played a role. But there are also systemic issues, mentioned above, that are combining with a host of issues unique to individual countries such that at least five Eurozone member countries sit on the brink of fiscal ruin. Greece, Italy, Spain, Portugal and Ireland are all in danger of defaulting on their sovereign debt. The general rule of thumb is that, when a country cannot sell 10 yr. bonds with a rate of return below 7%, the likelihood of an eventual default becomes real. With the exception of Spain, all of the troubled EU nations have crossed the 7% level. Spain is flirting with it.

In the cases of Greece and Italy, deficit spending on a bloated public sector and overgenerous welfare state drove their national debt significantly above 100% of GDP (Greece - 142%; Italy 119%). Ultimately, this drove their cost of borrowing above the magic line - 7% on 10 year bonds.

Portugal is Greece without the international press. It has a debt to GDP ratio of 93%, much of it coming from deficit spending over the past decade on the welfare state. Their cost of borrowing reached a high this month of 13.47% on ten year bonds. That said, Portugal is in the midst of cutting public sector benefits and increasing taxes.

Italy, unlike Greece and Portugal, has a strong manufacturing base and a relatively frugal population. Nonetheless, Italy "suffers from an overall failure to implement reforms needed to boost productivity and growth," which, when combined with the size of their national debt, is proving toxic.

Ireland is also in dire straights. Ireland's welfare state was not overlarge, and indeed, Ireland was running a budget surplus through 2005. But today, Ireland has a debt to GDP ratio of 94.9% and is having to borrow over 40% of every Euro to finance its government spending. What drove Ireland into its hole was an ill advised easing of credit standards and a housing bubble that burst in 2007. The Irish government than stepped in and nationalized the bad debts being held by the banks, causing a massive increase in publicly held debt. Ireland's cost of borrowing is today 7.74% on ten year bonds.

As to Spain, it's national debt was a comparatively paltry 61% as of last year, though much of that has come with recent increase in deficit spending. Spain's true problems are massive privately held debt and a horrendous economic outlook. Unemployment at or near 20% combined with both a housing bubble that makes the U.S.'s look small by comparison and a country that, because it does not produce any domestic energy, is subject to extreme shock when the price of oil jumps as it did in 2008, have all combined to make Spain's economy look extremely weak. All that has driven Spain's cost of borrowing rising, recently to a high of 6.7%:

In many ways, the economic situation in Spain is now even worse than the economic situation in Greece. Spain's unemployment was already above 20 percent even before this recent crisis. There are now 4.6 million people without jobs in Spain. There are 1.6 million unsold properties in Spain, six times the level per capita in the United States. Total public/private debt in Spain has reached 270 percent of GDP.

The BBC has a very good article on Spain's deep economic troubles and how its problems do not fit the mold of profligate welfare state spending.

It is safe to say that, in each of these countries, the fact that they cannot manipulate their currency or make monetary policy has removed the traditional tools of the sovereign for saving their countries from economic disaster. To explain in greater detail, this from Edward Harrison:

Now that crisis is upon us, the currency trilemma of a currency union that is the Impossible Trinity of fixed exchange rates, independent monetary policy and free movement of capital has reared its head. Hands are tied; in a currency union, there is no devaluation to recoup competitiveness, no room for fiscal freedom, and no control over monetary policy. This leaves so-called internal devaluation and/or sovereign default as the remaining ways to escape crisis. The political will to go through this is impaired because internal devaluation (across the board wage and price cuts) leads to a long and arduous depression . . . And default leads to massive creditor losses – not just in Ireland but also in Germany. So the Eurozone is trying to figure out how to keep its union together while minimizing costs – with the ECB and IMF integrally involved.

On the flip side of the coin, there is no central authority overseeing individual nation's budgets or taxes, as if the EU were a true sovereign. So, essentially, the Eurozone presents the worst of all worlds.

In an effort to save the Euro, those five nations in trouble are being forced to adopt significant "austerity" measures. Those measures, across the board, mean a significant reduction in the size of government and their welfare programs. For example, in Greece, the public sector is set to be reduced in size by and all public sector wages are being cut by almost a third. Collective bargaining is limited. The pensions of public sector workers are being sliced by 20% to 40%.

Further, all nations in the EU, led by Germany (the rise of the Fifth Reich), are meeting to consider systemic changes to the eurozone in an effort to save the Euro. This from Reuters:

Germany - Europe's biggest economy - was intent on changing the European Union's treaty to enshrine stricter budget discipline and penalties for countries that failed to adhere to them, to ensure there could be no repeat of the current crisis. From the German perspective, only by reforming economies, cutting social benefits and working longer would the indebted members of the euro zone and the single currency project itself emerge from the turmoil. Printing money would buy only a temporary respite and would remove the incentive to reform.

As to whether the Euro can be saved, the general consensus seems to be that it cannot. That said, a detailed analysis from Goldman Sachs concludes that the Euro may be salvagable, but that all ways forward are problematic. Ultimately, the eurozone countries must either come together in a much tighter economic union with a structure much like the U.S., or Germany and other core nations are going to have to weaken their economies in favor of the "peripheral" nations. In any event, Goldman Sachs paints the consquences of the failure of the Euro as dire - with the seizing up of credit and equity markets as the first step.

But the Euro crisis is also having another, much more insidious impact. The European Union is anti-democratic, and that this monetary crisis has been the springboard for actions that are direct assaults by the EU on democracy in the European states. Indeed, both Italy and Greece have been subject to coups at the direction of the EU.

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