| Lesson 16: Anatomy of a Recession Part 1: The Seeds |
The story of the current recession is one that involves 6 presidencies, cronies in government and Wall
Street, the American people and one bad U.S. Treasurer. It is a story of big greed, little greed,
overregulation and underregulation. It starts during the Great Depression, in 1938. Banks weren't lending
and so President Roosevelt started a government agency to provide cheap mortgage money to banks. It
was called the Federal National Mortgage Association, or FNMA, also known as Fannie Mae; and for 30
years it was a monopoly. In 1968, President Johnson attempted to save money by privatizing FNMA.
Actually, he partly privatized it. It became a private corporation, but any losses were protected by
guaranteed government bail-out. It was crony capitalism at its finest: monopoly, unlimited profit and no
risk. Two years later, President Nixon saw the problem and created a second, similar enterprise so there
would be some competition. It was called Freddie Mac.
Seven years later in 1977, President Carter signed a law called the Community Reinvestment Act
(CRA). It sounded fair and logical: People should get loans based on how much they can pay, not based
on where they live. The law said banks should provide loan service within a certain range of the branch,
not black-list entire, poor neighborhoods as they commonly did. I say "should" because the law didn't
really have much teeth. Banks that complied with the requirements were simply given some extra credit if
they applied to the government for something such as a merger or acquisition.
However, by the 1990's, deregulation had led to mergers becoming a central part of the growth
prospects of any bank. President Clinton passed several regulations which made the CRA stricter and
more important to any merger application. He also required Fannie Mae and Freddie Mac to increase
their portion of loans devoted to low-income, affordable housing. In 1999, he also signed the bipartisan
Gramm-Leach-Bliley Act, which allowed banks, investment firms and insurance companies to mingle and
merge. Such mixed banking had been outlawed for decades before. This act paved the way for many
new, creative, investment products that would flourish in the next decade.
Next Lesson: Anatomy of a Recession Part 2, The Housing Bubble
References:
Rob Alford, History News Network
Terry Easton, Human Events.com
Street, the American people and one bad U.S. Treasurer. It is a story of big greed, little greed,
overregulation and underregulation. It starts during the Great Depression, in 1938. Banks weren't lending
and so President Roosevelt started a government agency to provide cheap mortgage money to banks. It
was called the Federal National Mortgage Association, or FNMA, also known as Fannie Mae; and for 30
years it was a monopoly. In 1968, President Johnson attempted to save money by privatizing FNMA.
Actually, he partly privatized it. It became a private corporation, but any losses were protected by
guaranteed government bail-out. It was crony capitalism at its finest: monopoly, unlimited profit and no
risk. Two years later, President Nixon saw the problem and created a second, similar enterprise so there
would be some competition. It was called Freddie Mac.
Seven years later in 1977, President Carter signed a law called the Community Reinvestment Act
(CRA). It sounded fair and logical: People should get loans based on how much they can pay, not based
on where they live. The law said banks should provide loan service within a certain range of the branch,
not black-list entire, poor neighborhoods as they commonly did. I say "should" because the law didn't
really have much teeth. Banks that complied with the requirements were simply given some extra credit if
they applied to the government for something such as a merger or acquisition.
However, by the 1990's, deregulation had led to mergers becoming a central part of the growth
prospects of any bank. President Clinton passed several regulations which made the CRA stricter and
more important to any merger application. He also required Fannie Mae and Freddie Mac to increase
their portion of loans devoted to low-income, affordable housing. In 1999, he also signed the bipartisan
Gramm-Leach-Bliley Act, which allowed banks, investment firms and insurance companies to mingle and
merge. Such mixed banking had been outlawed for decades before. This act paved the way for many
new, creative, investment products that would flourish in the next decade.
Next Lesson: Anatomy of a Recession Part 2, The Housing Bubble
References:
Rob Alford, History News Network
Terry Easton, Human Events.com