How *would* Paul have prevented the subprime crisis?

[Bowie]

I've been asked the question, "What specifically would he have done to prevent the securitization of subprime mortgages and the subsequent credit default swaps from being created and sold, without regulation? What are his proposals?"

And I genuinely don't know how to word the answer, as in, I don't know much about the *specific* proposals Paul would have enacted. Any suggestions? :o

[muh_roads]

I've been asked the question, "What specifically would he have done to prevent the securitization of subprime mortgages and the subsequent credit default swaps from being created and sold, without regulation? What are his proposals?"

And I genuinely don't know how to word the answer, as in, I don't know much about the *specific* proposals Paul would have enacted. Any suggestions? :o

Regulations ARE how we got the subprime mess. Started in '98 with forcing banks to not be so strict and loan to everybody.

Paul's solution isn't fun. It's nasty medicine but it needs to be swallowed. He'd do nothing and let the toxic crap go under. It needs to. The country needs a reboot to get back on the right path. We'd be almost out of this thing if that happened. You would just have a huge drop. Probably 1500-4000 Dow about now. But this would all be over. Instead they are prolonging the agony and this might not end until 2020.

[Bowie]

Yeah I know but I mean, apart from I guess vetoing any regulation bills or whatever, and apart from doing the whole Fed audit thing, are there any specific proposals he would enact? The person I'm responding to is "fed up" with sort of generic ideological answers and I don't really know enough about it to suggest what actual physical steps Paul would take/have taken to prevent the crisis.

(Thanks for the reply.)

[specsaregood]

Yeah I know but I mean, apart from I guess vetoing any regulation bills or whatever, and apart from doing the whole Fed audit thing, are there any specific proposals he would enact? The person I'm responding to is "fed up" with sort of generic ideological answers and I don't really know enough about it to suggest what actual physical steps Paul would take/have taken to prevent the crisis.

(Thanks for the reply.)

Given what start date where he would have been in charge? I mean, you can't prevent something something that has already started.

[anaconda]

No guarantees for home mortgages (FHA, etc.). No help ever committed to Fannie Mae, Freddie Mac, and no Ginnie Mae. No Federal Reserve liquidity. No help to companies that bought crappy mortgage backed securities knowing they would get bailed out if necessary.

I think these would have done the trick nicely.

[jmdrake]

I've been asked the question, "What specifically would he have done to prevent the securitization of subprime mortgages and the subsequent credit default swaps from being created and sold, without regulation? What are his proposals?"

And I genuinely don't know how to word the answer, as in, I don't know much about the *specific* proposals Paul would have enacted. Any suggestions? :o

By not passing this back in 2008 and other similar bills before that:

http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2008/02/03/IN8LUO095.DTL

STIMULUS PLAN A SCAM TO BENEFIT THE RICH
Higher loan limits will lead to Fannie Mae, Freddie Mac bailout

Sean Olender

Congress is about to sell us the biggest fraud in American history.

It's been highly touted as an economic stimulus bill that will help millions of Americans - and has the backing of both President Bush and House Speaker Nancy Pelosi. In the coming year, individuals would receive rebates of up to $600 and families up to $1,200. There are other goodies, too, including tax write-offs for small businesses and an expansion of the child tax credit.
More Opinion

But, as the old adage goes, nothing comes for free. As part of the bill, Congress is set to rush through an increase in the mortgage loan limits for Fannie Mae and Freddie Mac (and Federal Housing Administration insurance, too) - from $417,000 to $729,750 - the first step toward a massive financial disaster in which taxpayers will end up paying through the nose.

Here's how we got to this point. Domestic and international investors hold hundreds of billions of dollars in bad debt, because U.S. investment houses sold them junk securities based on often fraudulent mortgages. Many of these mortgages were sold to unqualified buyers under terms that made widespread foreclosures a certainty once the housing market began to fall.

Investment banks and bond rating agencies sat down and tried to figure out how to describe Americans with insufficient incomes and little for a down payment as great credit risks on loans too big for their incomes. The new rules focused on credit scores, because it was a good excuse to avoid looking at income and down payment, factors that would have restricted this moneymaking fiasco.

Now, thanks to Congress, junk bond investors will be able to pawn off their bad debt to Fannie and Freddie, instead of suing the big investment houses for ripping them off. This shift will certainly doom Fannie Mae and Freddie Mac, so don't be surprised if we, the taxpayers, have to bail out poor Fannie and Freddie - to the tune of more than $1 trillion.

Why more than $1 trillion? If Goldman Sachs is correct in its recent projections that home prices in California are going to drop 35 to 40 percent, the state's losses alone would top $2 trillion, because California has a disproportionate number of jumbo loans. The irony here is that the collapse in housing prices could make Fannie insolvent even without raising the loan limit. Increasing Fannie's limit is like going on a spending spree with your credit cards because you know you are going to file for bankruptcy in a few months. Only here the taxpayer is left holding the bag. Our children will pay interest on this debt in perpetuity. It is our debt. It is inescapable.

In the coming months, Fannie and Freddie will buy up mortgages based on old, fraudulent appraisals and on loans with bogus inflated incomes. Unfortunately, many of these loans will still default.

But that's just the start. Brace yourself for another wave of faxes, phone calls and junk mail urging you to refinance at only 1 percent. With zero new regulation, the same bad actors that caused this crisis can once again inflate property appraisals and begin a new cycle of fraud.

There are firms that rent assets to people to help them fraudulently qualify for a mortgage - like loaning them money to keep in their bank account for a couple months so they can fool the lender with documented savings that evaporate the day after the mortgage is signed. Another popular ruse: The borrower pays an employer to pay him a lot of money in a fake job for a month or two so he can show a fat paycheck in his loan docs. Some real estate agents and mortgage brokers actually refer buyers to these services.

Contrary to popular myth, Fannie holds a lot of subprime debt, option ARM debt and other dodgy securities. Fannie and Freddie owned or guaranteed almost 45 percent of all mortgages in America last year. BusinessWeek noted in 2007 that Fannie and Freddie have "moved more prominently into low-documentation loans, which require little or no proof of the borrower's income." Expansion of Fannie and Freddie's reckless lending is exactly what Congress wants because it's plausibly deniable. Teary-eyed lawmakers can take to the airwaves a year from now and declare: "We had no idea Fannie could go under, but we can't cut and run now. We have to bail out Fannie and Freddie for the good of America! It's going to be a tough slog, but you're getting used to those, no?"

Those same lawmakers won't mention the fact that they get paid far more by real estate lobbyists than they do from our Treasury.

I've spoken with borrowers who stopped making mortgage payments seven or more months ago. None has received a default notice. Defaults may be much higher than banks are letting on. The data lags are growing suspiciously long. Nobody knows what's going on. Seven months without making a single payment! Will Fannie guarantee those loans because they aren't in formal default yet? Nobody wants to know, because if they know, they might be called to testify next year. That's why lawmakers want to raise the limits now and ask questions later.

This shortsighted plan poses a terrible risk to every American taxpayer, especially retirees, because Social Security money will be needed to bail out Fannie and Freddie. And even if you live in high-priced San Francisco, Los Angeles or New York - and stand to benefit from the increased loan limit - this is a horrible fraud on you, too, because raising the limit to $730,000 risks a systemic crisis that will cost far more than any temporary rebate check.

In support of the economic stimulus bill, Bush will have to face "working American families" and explain that some of their tax money is going to be spent guaranteeing $730,000 mortgages on $1 million homes. It's like some sort of upside-down communism where the poor pay the rich welfare. Why should taxes from families earning $48,000 a year be used to support expensive mortgages in New York, Los Angeles and San Francisco? Welfare for the hungry and homeless is evil, but welfare for million-dollar homeowners facing a tough refi ... well, that's called "helping the economy."

I can imagine the president's radio address playing in the heartland: "We have some families with million-dollar homes on the coasts who are really hurting and so we need you, the working families of America, to stand together with them and help them avoid the kind of home price depreciation that might leave them without a new Lexus for years."

I guess Congress' hope is that median-income families will be too busy using their rebates to buy much-needed groceries to notice that the rich folk are getting way with a new scam.

Several months ago, economist Nouriel Roubini of New York University's Stern School of Business suggested that the housing market has been effectively nationalized. At first it seemed crazy, but now it's fairly obvious. In August alone, Fannie and Freddie increased their loan portfolios by $62 billion, and the Federal Home Loan Bank by $110 billion. That total of $172 billion would come to just over $2 trillion annually - not much less than the entire federal budget.

Everyone seeking a loan, securitizing a mortgage, and buying or selling a mortgage security will now be dealing, in one way or another, with the U.S. government. This type of intervention is very expensive and will eat everything in its path, including Social Security.

If we're going to have a government-financed intervention, it should be to make sure that Social Security benefits go to those who paid for them, that the poor are fed and housed, or that the army of uninsured receive health benefits. If, as they say, we don't have enough money for those important things, then I think we don't have enough money to bail out banks and bond investors.

Don't let me down, my fellow Americans. Let's vote out anyone0 who dares to vote for this scam.

Read more: http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2008/02/03/IN8LUO095.DTL#ixzz0NNk2705D

[Matt Collins]

He would've not let the Fed lower interest rates. Or he wouldn't have allowed the Fed to exist at all!

[free.alive]

As president, it would have obviously been too late. If he was elected in '88, maybe he could have worked to overturn the Community Reinvestment Act.

If he was GOP speaker prior to 2006, when he (along with Peter Schiff) was giving speeches calling what was coming, he could have driven policy to wipe out regulations everywhere that encouraged people pushing bad paper around. He would have pushed for the Fed Audit then, and eventually its abolishment.

There's a start!

[Optatron]

Regulations ARE how we got the subprime mess. Started in '98 with forcing banks to not be so strict and loan to everybody.


Come again? How do you force banks to loan?

[Optatron]

Given what start date where he would have been in charge? I mean, you can't prevent something something that has already started.

exactly, given how stupid people are, you can't force them to be responsible, some people (if not most Americans) deserve to suffer from the economic contraction because they let themselves be fixated from the beginning.

[Original_Intent]

Come again? How do you force banks to loan?

By setting quotas that a certain percentage of their loans must be to underprivileged people that no bank in their right mind would lend to.

By making qualified borrows pay for mortgage insurance if their LTV is below 80% but NOT requiring it on loans to poor people, who by definition represent the greatest risk, but legislating that mortgage insurance NOT be required of poor people.

You don't think the gubmint can thru legislation completely force banks (or any other industry for that matter) to do exactly what they want?

And then aside from force, there is the carrot - "Make loans to anyone who can fog a mirror, and if they default we will cover your play." That is exactly what happened with Freddie and Fannie. In that case force wasn;t the operative word, but who the hell wouldn't make a loan under those conditions?

[CUnknown]

One President can't stop the subprime mess all by himself. But, Paul's policies, if they were implemented, would have stopped it. If there was no Fed and if we had honest money, clearly banks would never loan their limited resources to people who most likely cannot pay it back. But, as it stands now, they can print money out of thin air, so they loan it to whoever wants it. (At least before the bubble bursting they did.)

[tremendoustie]

I've been asked the question, "What specifically would he have done to prevent the securitization of subprime mortgages and the subsequent credit default swaps from being created and sold, without regulation? What are his proposals?"

And I genuinely don't know how to word the answer, as in, I don't know much about the *specific* proposals Paul would have enacted. Any suggestions? :o

Most importantly, don't directly create the credit bubble and housing crisis by maintaining artificially low interest rates, which is what the Fed did.

Secondly, don't promise to bail out banks, and no FDIC, so banks are responsible for their own acts. If they are still irresponsible let them go bankrupt, so more responsible players can take their place.

[Bryan]

By setting quotas that a certain percentage of their loans must be to underprivileged people that no bank in their right mind would lend to.

Right, and if the banks do not meet the quotas of loans to totally unqualified people then they could not deal with Freddie and Fannie at all, which would ultimately make them uncompetitive in segments of the banking / loan market.

In a way, the power of the Fed's ability to create money via printing and by fractional reserve banking makes it impossible to compete against- so as a bank you either go with the program or get left in the dust.

Dr. Paul would have prevented the subprime crisis by just allowing the free market to do its own bidding at which point, as said, no one in their right mind would have made these subprime loans such as the"ninja loans" (no income, no job, no assets). It may be better said that he wouldn't necessary prevent it, it's that he just wouldn't have made it happen- if the free market wanted to make big loans to people who have no income, no job and no assets then let them, and let them suffer the obvious consequences.

[Elwar]

He would've not let the Fed lower interest rates. Or he wouldn't have allowed the Fed to exist at all!

+1

[ashura]

Like others have said, it depends on the start time. Speaking in terms of recent governance and assuming Paul were in charge of the Fed, the answer would be to have let the Dot-com bubble burst completely without any monetary or government intervention. By using some of the Fed's "tough medicine" and keeping interest rates high as Volker did during his Fed tenure, money and credit would have been tight and the Fed would've avoided enabling much of the malinvestment in higher order goods that took place during the 2000s, a time when saving and not investment should've been the priority. Your friend has to remember that securitization and credit default swaps are not bad in and of themselves. We would have suffered a tough but relatively short recession. Afterwards (assuming Paul wasn't fired for not "fixing" the recession :p), he would've prevented interest rates from falling to where they'd be inflationary and began a comprehensive End-the-Fed campaign.

[Bossobass]

This one's a no-brainer.

All 50 states' attorney generals and bank regulators were in concert to move against the false advertising, bait-and-switch, ninja loans, etc., when Bush released the hounds on them through the OCC.

The OCC was used to stop all 50 states' legal actions against the sales of these bullshit loans by forcing all 50 states to halt their investigations, saying that the states had no legal right to supersede federal laws.


Spitzer states that in 2003, during the height of the predatory lending crisis, the OCC invoked a clause from the 1863 National Bank Act to issue formal opinions preempting all state predatory lending laws, thereby rendering them inoperative. The OCC also promulgated new rules that prevented states from enforcing any of their own consumer protection laws against national banks. The federal government’s actions were so egregious and so unprecedented that all 50 state attorneys general, and all 50 state banking superintendents, actively fought the new rules.
But the unanimous opposition of the 50 states did not deter, or even slow, the Bush administration in its goal of protecting the banks. In fact, when my office opened an investigation of possible discrimination in mortgage lending by a number of banks, the OCC filed a federal lawsuit to stop the investigation.

Had it been President Paul, not only would he not have done such a ridiculous thing, he would have called the US AG to make sure he cleared the path for the states to enforce their existing banking and fraud laws, as well as federal laws.

No sub prime loans would have been written, offenders would have had their existing fraudulent sub prime loans rescinded and the criminal offenders would have been prosecuted by the 50 states.

Problem solved. No sub prime meltdown.

Bosso