That many Americans do not understand the current financial crisis and the bailout plan, is perhaps best evidenced by this caller into James Brown's radio talk show today:Listen HERE
Where Jack misses the boat is by fixing the primary blame for the crisis upon homeowners, and not Wall Street, and by assuming that the bailout is for consumers. It is not, however, as the bailout only applies, based upon what we know at the present time, to Wall Street and will do nothing to help consumers with foreclosures.
The crisis came about directly due to pie-in-the-sky wishes of the federal government that as many people as possible become homeowners, even those that could not afford it. No money down and sub-prime lending rates were used, along with not checking the prospective borrowers' ability to pay or credit histories.
The Community Reinvestment Act was the chief tool by which the federal government accomplished this.
"The Community Reinvestment Act is intended to encourage depository institutions to help meet the credit needs of the communities in which they operate, including low- and moderate-income neighborhoods, consistent with safe and sound operations. It was enacted by the Congress in 1977 (12 U.S.C. 2901) and is implemented by Regulation BB (12 CFR 228). The regulation was substantially revised in May 1995, and was most recently amended in August 2005. (See: The Federal Reserve Board's "Community Reinvestment Act").
Those years, by the way, were under the administrations of Presidents Carter, Clinton and Bush, so it was brought on us by both political parties. I would be willing to bet that, although the end result was the same, their motives differed, however, with the Democrats desiring to get more poor into homes, who really could not afford it, and the Republicans desiring to aid Wall Street make larger profits.
"Broad-based initiatives are equally crucial to the success of any strategy to preserve affordable rental housing. For example, the MacArthur Foundation has launched a long-term, $150-million campaign to call attention to the importance of affordable rental housing..." (See: John C. Dugan, Comptroller of the Currency "Preservation of Affordable Multifamily Housing; A Place I Can Afford to Call Home: How Banks Help Preserve the Nation's Supply of Affordable Rental Housing"). The plan can be seen by the following statement:
"As a general rule of thumb, lower income households can afford to pay no more than 30 percent of their income for housing ($400 per month for a family earning $16,000). That’s well below median rents for decent housing today. Historically, a significant share of the rental housing available to lower income households has been made affordable through federal subsidy programs. Over the past 40 years, subsidies have supported the development of more than 3 million rental housing units." id.
Additionally,:
"Congress at the same time limited banks’ opportunities to invest in affordable multifamily rental housing by cutting back national banks’ authority to make direct investments in mixed income projects in middle-income areas. The unintended consequence has been to discourage bank investments in areas eligible for CRA credit – economically distressed middle income rural communities, disaster-stricken areas, and neighborhoods targeted by government agencies for revitalization.
Fortunately the House of Representatives has addressed this problem by passing the Depository Institution Community Development Investments Enhancement Act (H.R. 1066). This legislation would restore the broader, long-standing authority for national banks and state-chartered banks that are members of the Federal Reserve System and would provide the same investment authority to federal savings associations. The Senate Committee on Banking, Housing, and Urban Affairs is now considering the legislation S.2487. Enactment of this change would help banks and thrifts to participate more broadly in the affordable rental market and assist in preserving the declining inventory of multifamily rental housing. id.
Thus, as can be seen from the above, the federal government set forth on an orchestrated program of putting more people into homes and rental property, especially in lower middle class and poor neighborhoods. They did it through incentives to large banks, from whom the money trickled down to the local levels.
BusinessWeek Magazine wrote that:
"Big banks will get to unload their worst loans on us taxpayers. Stock prices will recover. Credit will flow again. But what does this really mean for home owners?
Some have suggested that the wave of foreclosures will end. Housing prices will bottom out. Don’t bet on it. A little historical perspective is warranted.
A previous Bush president—I’m not trying to infer anything here—created a similar government bailout mechanism in 1989. The Resolution Trust Corp. was in business for six years. Some $300 billion worth of bank assets were taken over. Tens of thousands of distressed properties were sold. It took years to work these through the system. It wasn’t until about 1995 that housing prices in the U.S. bottomed out.
Homeowners are in for a long, bumpy ride. That’s what history tells us." (See: "What Does the Bailout Mean for Homeowners?").
So no Jack, the financial crisis and the expected bailout was brought on by the federal government itself and the greed of Wall Street. The individual homeowner is left with only bankruptcy, just has he always had, to escape the foreclosure race. And Pres. Bush made it more difficult for him or her to do that. Wall Street firms, on the contrary, will not have to file bankruptcy like any other failed business. They will get a bailout.
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