Speaking from the White House on Feb. 9th, Obama, assuming the air of a headmaster of boarding school, wagged his finger and proceeded to upbraid the "abusive" banks for their "irresponsible" and "reckless" policy of duping hapless blacks and other minorities into buying homes they couldn't afford.
Serious analysts of the mortgage/banking/financial meltdown of 2008 have come up with a Byzantium of alternative theories regarding the essential factors involved in the meltdown. One straight-faced theory even has it that the core problem was a faulty mathematical model to evaluate risk. It is not as far-fetched as it may at first seem. Top banks from Goldman Sacks to JP Morgan to Morgan Stanley had quant departments using the model of a Chinese mathematician by the name of David X. Li. His model was called "The Formula from Hell" by Forbes magazine and here is how an excellent an article in Wired magazine put it:
For five years, Li's formula, known as a Gaussian copula function, looked like an unambiguously positive breakthrough, a piece of financial technology that allowed hugely complex risks to be modeled with more ease and accuracy than ever before. With his brilliant spark of mathematical legerdemain, Li made it possible for traders to sell vast quantities of new securities, expanding financial markets to unimaginable levels. His method was adopted by everybody from bond investors and Wall Street banks to ratings agencies and regulators. And it became so deeply entrenched—and was making people so much money—that warnings about its limitations were largely ignored.
The theories are all over the map. Some notable disparate ones include:
1. Greenspan: "The problem is not the lack of regulation, but unrealistic expectations about what regulators are able to anticipate and prevent."
2. Krugman: "What ended the era of U.S. stability was the rise of "shadow banking": institutions that carried out banking functions but operated without a safety net and with minimal regulation."
He referred to this lack of controls as "malign neglect."
3. Economist Joseph Stiglitz singled out (1) the repeal of the Glass-Steagall Act which was enacted after the Great Depression and which had separated commercial banks and investment banks. The repeal led the risk-taking culture of investment banking to dominate the more conservative commercial banking culture, in turn leading to increased levels of risk-taking and leverage during the boom period; (2) the sheer complexity of layers upon layers of debt obligations based on pools of mortgages. "With this complicated intertwining of bets of great magnitude, no one could be sure of the financial position of anyone else-or even of one's own position. Not surprisingly, the credit markets froze."
4. Economist Robert Shiller argued that speculative bubbles are fueled by "contagious optimism, seemingly impervious to facts, that often takes hold when prices are rising. Bubbles are primarily social phenomena; until we understand and address the psychology that fuels them, they're going to keep forming."
5. The Financial Crisis Inquiry Commission (FCIC) reported in January 2011 that: "The three credit rating agencies were key enablers of the financial meltdown. The mortgage-related securities at the heart of the crisis could not have been marketed and sold without their seal of approval. Investors relied on them, often blindly. In some cases, they were obligated to use them, or regulatory capital standards were hinged on them. This crisis could not have happened without the rating agencies. Their ratings helped the market soar and their downgrades through 2007 and 2008 wreaked havoc across markets and firms." [Note while the FCIC's position that credit ratings played a major role still stands, its position that Fannie and Freddie played only a minor role has been shot down by the recent SEC investigation.]
In summary, the theories single out (1) over reliance on regulation, (2) lack of regulation of the shadow banking system, (3) repeal of the Glass-Steagall Act, (4) the inherent nature of socio-economic forces, (5) faulty credit evaluation. In none of the theories are the bankers singled out as the evil malefactors who duped innocents into taking on mortgages they could ill afford.
But Obama, after exhaustive analysis, knows where to point the finger. Not only that, even though none of the analyses above raised the specter that the financial meltdown was the work of if evil malefactors, Obama not only knows it was banks fault he knows the evil bankers did it. The evil bankers deliberately duped hapless blacks and other minorities into taking on mortgages they could ill afford and now they must pay for their misdeeds.
Obama's cosmology is eerily similar to the cosmology of the evil "trickster" common to the folklore many primitive societies. Things go wrong because of the tricksters among us. There is no question that the blame-game mentality is front and center in Obama's thinking. His world is peopled with "bamboozlers" and people who "scam" the system.
It now turns out, however, according to a recent IBD article, that President William Jefferson Clinton had set up a little-known federal body made up of 10 regulatory agencies — the Interagency Task Force on Fair Lending — to force banks to lower their lending standards so that blacks and other minorities could "own" homes. The Task Force apparently threatened lenders either to ease credit for low-income buyers or face investigations for lending discrimination and suffer the related bad publicity. This Task Force also apparently threatened to deny banks expansion plans and access to Fannie Mae and Freddie Mac. And guess who was one of the principle operatives of this government shakedown racket?
According to the IBD article it was the Justice Department, along with HUD, which regulated Fannie and Freddie, that proved to be the most aggressive member of the fair-lending task force. Eric Holder, then acting as deputy AG, ordered lenders actually to "target" African-Americans for home mortgages they couldn't otherwise afford. Obama, as a community organizer, brought law suits against banks to ease credit for home buyers. "In other words, the same two officials now leading the charge to punish "abusive" lenders had egged them on before the crisis."
The intellectual conceit of overriding professional economic analysis with one's own bogeyman theory is breathtaking. To proceed then to blame banks and call them evil for doing what Obama and his sidekick Holder blackmailed banks into doing is beyond the bounds of acceptability.
