Our 2008 Financial Crisis

Was Caused by the Democrats

© O. R. Adams Jr., 2008

BACK TO ARTICLES

Our present financial crisis was primarily caused by two major factors. One is the oil, gasoline, and energy crisis. Two, and even more important, is the mortgage failures and resulting reduction in real estate values, causing the failure of various financial institutions, including the two quasi government institutions, Fannie Mae and Freddie Mac. All is the result of a Democrat controlled congress, and certain actions taken by the Clinton administration.

Oil and Energy Crisis. Radical environmentalists, supported by Democrats who passed laws favorable to them, have prevented drilling in key offshore areas and in our Arctic National Wildlife Refuge (ANWR), although it has been well established that it could be done in an environmentally safe manner. Due to unreasonable environmental regulations, even drilling in many of our other inshore areas has been strongly discouraged. Excessive environmental regulations have also discouraged the building of badly needed oil refineries in this country.

The result has been gasoline prices rising to over $4.00 per gallon, and the greatest transfer of wealth from this country there has ever been, and it is going to Islamic countries that have no love for this country. This unnecessary transfer of our wealth to those countries amounts to about seven hundred billion dollars per year.

"The U.S. is sitting on the world’s largest, untapped oil reserves — reservoirs which energy experts know exist, but which have not yet been tapped and may not be attainable with current technology. In fact, such untapped reserves are estimated at about 2.3 trillion barrels, nearly three times more than the reserves held by Organization of Petroleum Exporting Countries (OPEC) nations and sufficient to meet 300 years of demand — at today’s levels — for auto, truck, aircraft, heating and industrial fuel, without importing a single barrel of oil. ... Those untapped reserves are located in places that either Uncle Sam has put off-limits for environmental reasons or are too costly to get — or a combination of both. ... [I]t is now economically viable to tap some of those reserves. But environmental concerns — ranging from preservation of pristine lands to worries about increasing the use of fossil fuels and accelerating global climate change — remain a hurdle." (Emphasis added)[1] The referenced article, on the Royal Dutch Shell PLC website, goes on to explain that about 10 billion barrels are beneath our Alaska National Wildlife Refuge, and about 90 billion barrels in our offshore areas. But instead of using our own resources, we make the Islamic countries rich, and contribute to our own dire economic crisis.

President George W. Bush has long advocated an environmentally safe drilling program in ANWR, as well as developing our offshore reserves, but the Democrats have always successfully opposed the administration on this.

The United States has the largest oil shale deposits in the world[2] that lie idle because of a Democrat controlled congress. China and many other countries are currently developing their shale oil reserves.

We have huge natural gas resources that also require drilling and development, but those wishing to develop them face the same opposition as those trying to develop our oil reserves. And our natural gas and electric bills go higher and higher. Much of our electricity is generated by natural gas and coal.

The United States has the world's largest coal deposits.[3] Yet we are making little use of them, due to environmental regulations imposed by a Democrat controlled congress. Electricity can now be generated by coal in an environmentally safe and clean manner, but it is not being done because of unreasonable regulation.

There is one thing in particular that shows the deceit of the environmentalists that claim their opposition is due to wanting to protect the environment from "greenhouse gasses." That is their opposition to using nuclear energy to generate electricity. There would be no greenhouse gasses from this source. But the radical environmentalists have apposed this with the same vehemence they have opposed using our other sources of energy. Europe is now far ahead of us in the use of nuclear power to generate electricity and this should not be.

What is really behind such senseless opposition, and the other damage done to this country by these radicals? These are the same people that have always opposed us having a missile defense system that would protect us from nuclear warheads. Could it be that these people just want to do harm to this country in any way that they can?

What is clear is that Democrats, bowing to radical environmentalists, have done great harm to this country in prohibiting the use of our own energy sources, and have thereby contributed greatly to our present very serious financial crisis.

We should be using all of our resources and keeping our economy strong, and at the same time working toward renewable clean energy sources. We could then save our petroleum for lubrication and plastics, and knock out the power over us of the OPEC countries. My own personal view for many years has been that our ultimate source of energy is hydrogen. It is the hottest burning gas there is, and is the most plentiful energy source there is. Water is two parts hydrogen and one part oxygen. When used in a combustion engine, we get water vapor as an exhaust substance, with no greenhouse gasses. Any source that can be used to generate electricity can also be used to separate hydrogen and oxygen from water, as the most common way to separate the two is with electricity. We already have rockets and the space shuttles running on hydrogen. Greece has a hydrogen fuel cell submarine.[4] There are also automobiles presently running very well with hydrogen fuel cells using hydrogen as the sole source of fuel. But I am sure that when it appears that this source is going to be beneficial to America , these radicals will find some ground to oppose it, too.

Mortgage Company and Bank Failures. In summary, the history of this crisis puts the primary blame on the Democrats. Many of their acts in this regard are really culpable. The history goes clear back to the Carter administration and its push for "affordable housing for the poor." The first boondoggles were the apartment houses built for mainly black tenants. These were terribly trashed and were a complete failure. Later, the ideas developed on having the "poor" be able to buy their own homes. This could have been a good idea had it been handled right. Fannie Mae and Freddie Mac were brought into play. These two ended up guaranteeing or owning "about half of the U.S.'s $12 trillion mortgage market."[5] (Write down the numbers for $12 trillion, and see what they look like. It will indicate the size of just this part of the economic crisis.) The Democrats pushed and encouraged lending institutions into making loans for people to buy houses that they actually could not afford. This brought about a boom in the housing market, which resulted in highly inflated real estate prices. When the people who could not afford the mortgages on the houses they bought began defaulting, it had a snowballing effect in the other direction. Real estate values took a big drop and home building was seriously curtailed. The situation was exasperated by the fact that money was so easy to borrow that many speculators had bought homes for investment, and not to live in, thinking that real estate and home values would continue to rise. When they saw the values of their investments go below what they owed on them, they just defaulted on the mortgages and walked off from them.

Although the seeds of our lending institution financial crisis go back to the Carter Administration, the major damage was done during the Clinton Administration.

The New York Times had a comprehensive article, in 1999, on the actions of the Clinton Administration in its efforts "to help increase home ownership among minorities and low income consumers." The Department of Housing and Urban Development "proposed that by the year 2001 50% of Fannie Mae's and Freddie Mac's portfolios be made up of loans to low and moderate income borrowers." "The pilot program involved 24 banks and 15 markets." Over three times as many loans went to "black borrowers" with these "subprime" loans than by conventional loans [where borrowers are required to show an ability to repay]. The article recognized that with this "significantly more risk" the organizations "may run into trouble in an economic downturn." Home ownership "exploded."[6]

Home prices also exploded. Loans were made for homes the borrowers could not afford, with mortgages they could not reasonably be expected to repay – all because of this pressure of the government.

It appears that there was also some serious misbehavior and "book cooking" in both Fannie Mae and Freddy Mac, and the Democrats fought against the efforts of President Bush and others, including in particular, Senator John McCain, for reforms to get their accounting methods straightened out, and to get oversight that would prohibit their reckless loaning of money to people that could not be reasonably expected to repay it. The Democrats fought this at every turn. This "helping the poor" was one of the ways they were buying votes to keep themselves in power. Also, both Fannie Mae and Freddie Mac were "contributing" large sums of money to our congressmen – mostly Democrats.

President George W. Bush was sworn in as our forty-third president in January, 2001. Beginning in 2001, and in every year since, President Bush and members of his cabinet and staff warned Congress of the problems and the wrongful and unlawful actions of Fannie Mae and Freddie Mac, and continually recommended legislation to reform them. The President called for reform legislation 17 times in 2008, alone.[7]

In 2005, Fannie Mae and Freddie Mac were involved in accounting scandals. Peter Wallison, chief accountant of the Securities and Exchange Commission, told disgraced Fannie Mae chief, Franklin Raines, that Fannie's position on the relevant accounting issue was not even ``on the page'' of allowable interpretations. In 2005, Allen Greenspan, Chairman of the Federal Reserve, told Congress how important it was to act on a proposed bill to reform Fannie Mae and Freddie Mac. He warned: "We are placing the total financial system of the future at a substantial risk."[8]

In 2005, a bill to reform these organizations, and protect the country against the predictable financial crisis that would otherwise result from their activities was introduced in the Senate by Republicans. Senator John McCain joined as a co-sponsor of the bill. It was fought at every turn by the Democrats. Still trying to get the bill passed, Senator McCain said on the Senate floor on May 26, 2006:

Mr. President, this week Fannie Mae's regulator reported that the company's quarterly reports of profit growth over the past few years were "illusions deliberately and systematically created" by the company's senior management, which resulted in a $10.6 billion accounting scandal.

The Office of Federal Housing Enterprise Oversight's report goes on to say that Fannie Mae employees deliberately and intentionally manipulated financial reports to hit earnings targets in order to trigger bonuses for senior executives. In the case of Franklin Raines, Fannie Mae's former chief executive officer, OFHEO's report shows that over half of Mr. Raines' compensation for the 6 years through 2003 was directly tied to meeting earnings targets. The report of financial misconduct at Fannie Mae echoes the deeply troubling $5 billion profit restatement at Freddie Mac.

The OFHEO report also states that Fannie Mae used its political power to lobby Congress in an effort to interfere with the regulator's examination of the company's accounting problems. This report comes some weeks after Freddie Mac paid a record $3.8 million fine in a settlement with the Federal Election Commission and restated lobbying disclosure reports from 2004 to 2005. These are entities that have demonstrated over and over again that they are deeply in need of reform.

For years I have been concerned about the regulatory structure that governs Fannie Mae and Freddie Mac--known as Government-sponsored entities or GSEs--and the sheer magnitude of these companies and the role they play in the housing market. OFHEO's report this week does nothing to ease these concerns. In fact, the report does quite the contrary. OFHEO's report solidifies my view that the GSEs need to be reformed without delay.

I join as a cosponsor of the Federal Housing Enterprise Regulatory Reform Act of 2005, S. 190, to underscore my support for quick passage of GSE regulatory reform legislation. If Congress does not act, American taxpayers will continue to be exposed to the enormous risk that Fannie Mae and Freddie Mac pose to the housing market, the overall financial system, and the economy as a whole. [Emphasis added][9]

It could not have been more clear than Senator McCain's warning of the financial crisis likely to occur if the recommended action was not taken, and which has now occurred.

At this time the Senate was controlled by Republicans, and Senator Richard Shelby was Chairman of the Senate Committee on Banking, Housing, and Urban Reform.[10] The bill passed and was reported out to the Senate on a straight party line vote – all of the Republicans voting for the reform bill, and all Democrats voting against it.

On the fate of the bill, Kevin Hassett, American Enterprises Institute, stated:

But the bill didn't become law, for a simple reason: Democrats opposed it on a party-line vote in the committee, signaling that this would be a partisan issue. Republicans, tied in knots by the tight Democratic opposition, couldn't even get the Senate to vote on the matter.[11]

An article by Charles Winioski, on the All Business website, agrees with the above-quoted statement.[12]

In the 2006 election, the Democrats regained control of the Senate. On January 4, 2007, Senator Christopher Dodd ( Dem. Conn. ) became Chairman of the Senate Committee on Banking, Housing, and Urban Affairs,[13] knocking out all chances for reform of Fannie Mae and Freddie Mac. Dodd opposed reform – even in 2008, until it became clear that the organizations were hopefully insolvent. (Read the Wikipedia accounts of the many times Dodd opposed reform of these organizations, and his connections with the failed lending institution, Countrywide Financial, where it was claimed he got favorable loans.)[14]

Of course the officials of Fannie Mae and Freddie Mac, who were milking large sums of money from them, did not want reform. Johnson earned $21 million in just his last year serving as Fannie Mae CEO from 1991 to 1998; Raines earned $90 million in his five years as Fannie Mae CEO, from 1999 to 2004; and Gorelick earned an estimated $26 million serving as vice chair of Fannie Mae from 1998 to 2003.[15]

What did Senator Christopher Dodd, a primary opponent of reform, get? He led the pack in "contributions" from these organizations' PACs and employees, getting a total of $165,400 from 1989 to 2008.[16] Do you really believe that this kind of money is passed out for nothing? 

Apparently Barack Obama learned his Chicago type politics well. He quickly developed connections with the above named company officials, and in the short time that he was a Senator, he received a total of $126,349 from the same sources. This was the second highest received by any Congressman. Obama became a Senator in 2004, and he was a Senator when McCain made his speech on the Senate floor trying to get these organizations reformed. Certainly he personally bears a considerable responsibility for the failure to reform these organizations, and the resulting economic crisis.

"In the aftermath of the [recent] U.S. government takeover [of Fannie Mae and Freddie Mac], attention has focused on three Democrats with close ties to Obama who served as Fannie Mae executives: Franklin Raines, former Clinton administration budget director; James Johnson, former aide to Democratic Vice President Walter Mondale; and Jamie Gorelick, former Clinton administration deputy attorney general. ... Raines currently advises Obama on housing policy. ... Johnson was appointed to head Obama's vice presidential selection committee, until a controversy concerning an alleged $7 millions in questionable real estate loans he received on favorable terms from failed sub-prime mortgage lender Countrywide Financial surfaced and forced him to step down. ... [A] panel chaired by Elena Kagan, dean and professor of law at Harvard Law School, speculated at the June two-day meeting of the American Constitution Society that Gorelick was a possible attorney general cabinet appointment if Obama should be elected president."[17]

On September 26, 2008 , in the presidential debate with Senator John McCain, Barack Obama told a vicious bald-faced lie to the people of this country, saying that our current economic crisis is the "final verdict on eight years of failed economic policies promoted by President Bush and supported by John McCain." A country that would elect a person like Obama as its president would deserve what it gets. It would be a terrible page in the history of this country.

Even former President Bill Clinton recognized where the blame lay for our economic crisis. On September 25, 2008 , he said: "I think the responsibility the Democrats have may rest more in resisting any efforts by Republicans in the Congress or by me when I was President to put some standards and tighten up a little on Fannie Mae and Freddie Mac."[18]

Two other prominent Democrat leaders who continually resisted reform of Fannie Mae and Freddie Mac were Senator Charles Schumer, member of the Committee on Banking, Housing, and Urban Affairs, and Representative Barney Frank, Chairman of the House Financial Services Committee.[19] For the periods from 1989 to 2008, Schumer got $24,250 and Frank got $42,350 from the PACs and employees of these organizations.[20]

After it was too late, and all of the damage had been done, Congress finally heeded President Bush's continued and strenuous warnings and passed the Housing and Economic Recovery Act of 2008 which President Bush signed on July 30, 2008 . Even then, although the effective date of the reforms was immediate, the loan limits, an important part, does not take effect until after the end of 2008.[21] Also, The FBI is now investigating possible criminal violations in connection with the activities of Fannie Mae and Freddie Mac. It would seem to me that there was plenty of criminal activity going on.

As stated, the legislation was too late. These insolvent entities, both Fannie Mae and Freddie Mac, have now been taken over by the federal government, to try to help prevent the total collapse of our financial system. This is something that need never have happened, and the blame lies squarely with the Democrats. It will be interesting to see if they can now lie their way out of it, and elect Barack Hussein Obama as our President.