WHAT CAUSED THE CRISIS? There’s plenty of blame to go around.

    Three contributing factors caused the failure of Wall Street banks.

#1 “Shady” accounting practices that were overlooked by lawmakers.
#2 Government mandated sub-prime lending.
#3 The use of credit default swaps to insure or hedge against default.

    Let’s take a closer look at each of these contributors.

#1 “Shady” accounting practices that were overlooked by lawmakers.
    The regulatory agency, OFHEO, which provided oversight for Fannie Mae and Freddie Mac, reported illegal accounting activities to Congress. They found that the GSEs (Government Sponsored Entities) improperly applied accounting rules and improperly managed earnings, making themselves look stronger fiscally than they were. Fannie Mae’s Chairman and CEO Frank Raines (now Obama’s financial advisor) was asked in the congressional hearings why it’s OK for his company to have so much less capital set aside than regular banks. Raines responded, “Because there aren’t any banks that only have multi-family and single-family loans. These assets are so risk-less that capital needed to hold them should be under 2%.” Obviously, the risk was far greater than he let on.

Video: Watch Congress turn a blind eye and deny there is any risk:
http://www.breitbart.tv/?p=184743

#2 Government mandated sub-prime lending.
    This is one of the ways the US Government has rigged our economy in favor of debt.  When you see “subprime” read “unqualified” or “high risk.” Subprime mortgages are simply risky mortgages given to low-income borrowers with poor credit. Gee, who would have thought that could fail?

    The Community Reinvestment Act kick-started the growth of subprime lending in 1977 but it wasn’t really very successful until 1995 when the changes ordered by President Clinton took effect. Among other things, these changes mandated increased access to mortgage credit for inner-city and distressed, rural communities.

    There are consequences any time the government monkeys with the market. The government’s role is solely to make sure the market remains fair and un-manipulated.

#3 The use of credit default swaps to insure or hedge against default.
    Credit default swaps (CDS) are highly complex financial instruments; a type of derivative for the financial sector. In simple terms they allow investors to speculate on the future value of loans without taking any financial responsibility for them.

    As an analogy, let’s say your neighbor offers to replace your insurance company by stating he might buy your car if it becomes damaged. He’s not planning to set aside any money to pay for your car and he isn’t obligated to buy it but you are obligated to sell it to them if he chooses to exercise he option. You would probably laugh at him for suggesting such a ridiculous scam. The same principle was swallowed hook, line and sinker by Wall Street. They embraced the idea and a new industry was born.

    CDS were seen as easy money with little risk during the real estate boom. Unlike banks and insurance companies, the CDS market isn't regulated; anyone could get involved, whether they had the resources to cover the losses from a default or not. So everyone got involved, even the Wall Street banks. Lately, investors have become jittery, making the CDS hard to sell. AIG reported the biggest loss in their history largely due to an $11 billion writedown on its own CDS holdings.
 
    Warren Buffett described derivatives like CDS as “financial weapons of mass destruction." In an annual report to shareholders in 2002, he said, "Unless derivatives contracts [such as credit default swaps] are collateralized or guaranteed, their ultimate value also depends on the creditworthiness of the counterparties to them. In the meantime, though, before a contract is settled, the counterparties record profits and losses--often huge in amount--in their current earnings statements without so much as a penny changing hands. The range of derivatives contracts is limited only by the imagination of man (or sometimes, so it seems, madmen)."

    Derivatives also provide a dangerous and perverse incentive for creative accounting; either from sincere optimism or blatant fraud (remember Enron?).

What didn’t cause the Crisis:
    Wild rumors of other culprits abound, so let’s list a few of the things that didn’t cause the crisis.

• Lack of regulation didn’t cause the crisis. Congress refused to act on the reports of fraud from the established regulators.
• Capitalism didn’t cause the crisis. The market itself didn’t create the problems, irresponsibility did.
• Bundling loans didn’t cause the crisis … it just exacerbated the problem.
• Neither the Democrat party nor the Republican party created the crisis alone. Both contributed significantly by what they did and what they failed to do.
  

So how should we fix it?
    In short, we can’t really “fix it.” The purpose of the bailout, which would only put a band-aid on the problem, is to discourage wide-spread panic in the stock market. No one knows how bad the long-term consequences will be from such massive manipulation of the market. In principle, I’m against bailouts.

    Having said that, I think we should follow through with this one. Why? Because, for the last several years, we said we would. It’s that simple. No matter how foolish a promise, we have to stand by our word.

    Of course, any language promising to continue the risky subprime loans has to be removed from the final bailout. We must stop treating home ownership like it’s a constitutional right! The American Dream is for us to earn our property and prosperity, not to have it given to us. 

Additional notes:
    For a comparison of the original Paulson bailout, Barney Franks proposals and the final proposal defeated on 9/29, visit:
http://www.dcexaminer.com/opinion/blogs/TapscottsCopyDesk/Comparison_of_original_
Paulson_bailout_to_compromise_proposal.html

    Here’s a great video that further details the issue.
Burning Down The House: What Caused Our Economic Crisis? (with links to information in video)
http://themountainsage.wordpress.com/2008/09/26/video-burning-down-the-house-what-caused-our-economic-crisis/

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Dan Young is a citizen-turned-online-journalist who is fed up with the media's blatant bias, the Democrats' double-speak, and the Republicans' fiscal recklessness.