ProgressOhio

Some of the current economic difficulties in the US have much to do with the permissive attitude of the Reagan-Bush through Clinton years, and then Bush II. The more or less unregulated market originates with the economic philosophy inherited from Reagan/Thatcher years. It was continued with gusto by the Bush I, Clinton and Bush II administrations.

In this permissive environment we saw capital markets move money across boundaries at unprecedented levels, and by the mid-1990s the daily turnover in foreign exchange markets was over $2 trillion, well over the needs for international trade and other legitimate activities.

This money was for a good measure flowing speculatively between the various financial institutions, including those within the hedge funds. The Reagan-Bush years were continued in the Clinton years in this vein. However, the permissive money movements eventually began to hurt real economies, and we saw the Asian Financial Crisis, and the periodic financial crises the world has seen in the past decade.

What underlies this Casino version of Capitalism is the poor regulation by states. In addition, the risk assessing agents (such as Moody's) were also reliant on the major financial firms for their fees, and there were clear conflicts of interest. Beyond this with the increasingly sophisticated technology that made it hard to oversee financial activities, state power over the market had also waned.

In this light we could say that what politicians promise in the areas of managing economies, cannot be easily met.

However, there are areas of the economy that still can be overseen with some effect by the state, and crises prevented. One such area is the housing market, where most Americans of the middle class count on as their major asset. Unfortunately, the permissiveness of the financial sector had been extended to the housing market as well.


That is why even the UK has now experienced problems, as the Labour Party there continued with Thatcher's legacy. In February 2008 Gordon Brown, the UK Prime Minister, had to nationalise Britain's first failed bank in about 100 years.

In the US the sub-prime crisis has led to loss of home values and a systemic collapse of the housing market. For those in the middle class this comes at time when well paying jobs are not available further compounding the problem.

One source suggests, "Biggest Culprit: The Lenders" Most of the blame should be pointed at the mortgage originators (lenders) for creating these problems. It was the lenders who ultimately lent funds to people with poor credit and a high risk of default. http://www.investopedia.com/articles/07/subprime-blame.asp

How could the lenders do this? This has to do with Reagan-Bush-Clinton-Bush years when regulation was removed from the economy and that status maintained. Their combined economic mantra was laissez faire (or let it be) referring to the ideological pride of place they give to the market.
The reason for lack of regulation of the economy has much to philosophy, yes.

However, the fact that this philosophy prevailed over left leaning parties such as "New" Labour in the UK and the Democrats in the US is the crucial question for all thinking democrats in this election, and of course the independents, and fiscally conservative Republicans, who are interested.

In contrast to the US and UK, in Canada, where the housing loans are more regulated, the sub-prime loans are not a problem. Perhaps the Canadians up there have more on offer than hockey, music and comedians!

Now to the elections, and to the Democratic Party's choices. You have two candidates, and this is what I found about their legislative records pertaining to the subprime crisis last year.


SENATOR CLINTON
Senator Clinton proposed a bill that would impact the housing crisis.

S.947 Title: A bill to modernize the Federal Housing Administration to meet the housing needs of the American people.
Sponsor: Sen Clinton, Hillary Rodham [NY] (introduced 3/21/2007)

Senator Clinton would amend the National Housing Act to:
(1) extend the maturity term for insured mortgages;
(2) revise mortgage insurance eligibility criteria and requirements for premium charges;
(3) authorize waiver of certain requirements for new product initiatives;
(4) increase the maximum mortgage amount limit for multifamily housing in high-cost areas;
(5) increase the FHA single family housing maximum mortgage limit; and
(6) increase the capital ratio for the Mutual Mortgage Insurance Fund

My Comments:
(1) Would hook the buyers in for the life (from the current 35 to 50 years), driving down the quality of life of people over the period of the mortgage, and as home owners know, extending the life of a loan means paying much, much more for the loan.
(2) The revised criteria for mortgages allows more and more persons without the necessary financial means to get hooked into a housing loan they cannot afford. Essentially, this type of change in law pushes people to keep dumping all their savings in the house when interest rates rise, and then they lose everything.
(3) Lifts certain restrictions, and allow banks to create new products, often those that induce people to take loans they cannot afford.
(4) & (5) Lift the maximum amount and hence the risk people would take as a result.

Now likely, in 2007 Senator Clinton and the other sponsors of the Bill would have wished that more American share in the American dream. However well meaning that sentiment, it still displays poor judgment, as exposing people to risk would not be in their interests either.
As the subprime loan crisis shows, the worst affected are those who could least afford it.


SENATOR OBAMA
Senator Obama initiated a bill that seems reverse of Senator Clinton.

S.1222 Title: A bill to stop mortgage transactions which operate to promote fraud, risk, abuse, and under-development, and for other purposes.
Sponsor: Sen Obama, Barack [IL] (introduced 4/25/2007)
Stopping Mortgage Transactions which Operate to Promote Fraud, Risk, Abuse and Underdevelopment Act, or the STOP FRAUD Act - Amends federal criminal law to make it unlawful for any mortgage professional to: (1) defraud any natural person or financial institution regarding an offer of consumer credit secured by an interest either in real property or in personal property used as a principal dwelling; or (2) falsely obtain money or property from a natural person in connection with an extension of consumer credit secured by an interest in such property.
Subjects violations of this Act to civil and criminal penalties.
Directs the Attorney General to establish: (1) a system for authorized mortgage professionals to receive updates from federal law enforcement agencies on suspicious activity trends in the mortgage industry and mortgage fraud-related convictions; (2) a Debarred or Censured Mortgage Professional Database that may be accessed to determine the federal and state bar status of mortgage professionals; and (3) grants to assist law enforcement agencies establish and improve mortgage fraud task forces.
Grants whistleblower protection to personnel of a widely accepted private certification board.
Amends the Housing and Urban Development Act of 1968 to authorize the Secretary of Housing and Urban Development (HUD) to provide tenants, homeowners, and other consumers with mortgage fraud counseling.
Directs the Secretary to provide grants to state appraisal agencies to improve the monitoring and enforcement of housing appraisal regulations.
Sets forth additional rights of borrowers in foreclosure proceedings.

My Comments:
It seems that Senator Obama understood and responded to the current mortgage crisis in April 2007, while Senator Clinton seemed unaware of the problems in March 2001, a month earlier. Obama seeks to outlaw predatory mortgage practices, while Clinton's bill would encourage practices that would exacerbate the crisis.

LESSONS
The lesson in this one single bill is that in the housing sector, Senator Obama is seems more aware of the issues that affect home owners in this cycle of the market. He was looking to tighten the regulations, while Senator Clinton was seeking to loosen the regulations.

In beginning of my blog, I mentioned the differences in philosophy with respect to the state-market relation. I am inclined to believe that this policy difference between the two excellent Democratic Senators does stem also from the differences in philosophy. Senator Obama is more inclined to use the state to regulate areas of the economy to safeguard the people, while Senator Clinton seems inclined to let the market be.

This is just one case, over a small time span. In the weeks ahead, time permitting, I will try to add more cases, over longer time periods.