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Friday, 2 January 2009

Wall Street 2008: $6.9 trillion Wiped Out - (D)

from Johann @ The Right Perspective

There is no other way to say this. It was a disastrous year for Wall Street. The worst since the Great Depression. Shareholders have been left $6.9 trillion poorer. Nasdaq had its worst year since the exchange was created in 1971, losing 41%. The S&P lost 38% and the Dow Jones index was down 34%.

Global markets closed 2008 with an equally dismal performance. Stocks on average across the globe lost 48% of their value. In Japan and Germany they were down 42% and 40% respectively.

If the collapse of Lehman Brothers, one of the oldest establishments of the financial industry, with the largest Chapter 11 bankruptcy filing in US history did not send shivers down your spine, the news that one Bernard Madoff unkindly relieved his investors of $50 billion of their funds must at least have caused a tingle somewhere.

Would there be any point to remind ourselves of the warning signs? Is there anything to be said without sounding very patronizing? Isn’t it all too late now anyway?

I think back to some of the passionate remarks by John of Staten Island regarding the whole fiasco in the markets during 2008. It’s almost as if I can hear him now, saying the Republicans should have pointed out where the problem started. They should have said who was responsible! I remember thinking that he made some very valid points. It was only later that I started pondering over this issue. Why exactly did the Republicans not make more of this opportunity? It just did not seem to make sense.

Let’s take one step back though. I want to provide some support to my belief that John had it right when he called on the Republicans to place the blame squarely at the feet of the Democrats.

In the 1980’s, groups such as Acorn started pushing claims that banks were discriminating against minorities in mortgage lending. Congress amends the Home Mortgage Disclosure Act in 1989, forcing banks to collect racial data on mortgage applicants. Various studies followed which seemed to support the accusation. Even though minority mortgage applications were rejected more frequently than other applications, the reason is not racial discrimination. However, a seriously flawed study by the Boston Fed concludes in 1992 that mortgage lending discrimination is systemic.

Stan Liebowitz, the Ashbel Smith professor of Economics at the University of Texas, later showed that the data used in the Boston Fed study contained thousands of flagrant typos, including loans with negative interest rates. Liebowitz can’t find any evidence of discrimination.

However, the president of the Boston Fed concludes that no new study is required, seconded by the Comptroller General, and the Fed produces a manual for mortgage lending which states that “discrimination may be observed when a lender’s underwriting policies contain arbitrary or outdated criteria that effectively disqualify many urban or lower-income minority applicants.” The “outdated” criteria includes ratio of mortgage payment to income, credit and savings history and income verification. The Fed reasons that participation in credit-counseling programs is sufficient evidence of the ability of applicants to service debts. Banks are required to find ways to provide mortgages to poorer communities with the change in Community Reinvestment Act in 1995. It allows community activists to intervene at annual bank reviews. Poor reviews lead to punishment for banks, from resistance against merger plans to legal challenges by the Justice department. Political agenda triumphs over common sense and proven, established regulations.

Higher default rates don’t curb flexible lending programs. Countrywide’s commitment to low-income loans grows from $1 billion in 1992 to $80 billion in 1999 and $600 billion in 2003. Its Chief Executive brags that “lenders have had to stretch the rules a bit” to approve minority applications.

Rising house prices hid default problems for years as refinancing could be arranged at the blink of an eye. The damage caused by relaxed lending standards became evident the moment the property market reached its plateau.

Stan Liebowitz and Ted Day predicted the problem in 1998.

I am going to summarize in one sentence. The sub-prime mortgage fiasco was caused by political correctness. It is as plain and simple as that.

Let’s get back to John’s frustration. And my conclusion. Why have the Republicans not held the Democrats accountable? Why, the answer is so blatantly obvious and in our face that we have to step back to recognize it. And upon recognizing it I think we are still too flabbergasted to believe it.

POLITICAL CORRECTNESS. The same ghastly cause of this terrible mess in the markets is also the reason the Republicans can’t hold accountable those responsible for it. It wouldn’t be politically correct to do so. At least not for us on the right side of the fence.

Frank from Queens said it best when he told us that we live in parallel worlds. We have to be careful of the words we use, we cannot use the terminology invented by the liberal, the marxist and the socialist. Because our mere use of it gives legitimacy to it.

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