So, after researching a lot more sources for the failures of Fannie Mae and Freddie Mac, it's becoming clear that the government had a direct role in the shaping of the sub-prime mortgage market, the creation of the real estate bubble and the crisis in the financial markets today.
First, a Carter-era law known as the Community Redevelopment Act was created to allow low income families to buy their own homes. During the Clinton Administration, Clinton redefined the act and gave it some teeth by imposing financial penalties if banks did not loan money to low income home buyers. Along with the practically free money in terms of real interest rates along with the threat of penalties, banks relaxed many of their lending requirements and loaned money to virtually everyone who wanted it. Robert B. Reich, Clinton's Labor Secretary, verified on television that this information was correct.
Then there's Fannie Mae. Two recent CEO's of Fannie Mae were prominent Democrats, Franklin Raines (Clinton's Director of the Office of Management and the Budget) and Jim Johnson. Both are now primary economic advisors to Barack Obama. Both are under investigation for Enron-style accounting where the profits of Fannie Mae were drastically inflated in order to generate additional bonuses for their CEO's only to revise those profits after the bonuses were awarded. Franklin Raines alone collected $100 million in bonuses. Another prominent Democrat who also advises the Obama campaign, Jamie Gorelick, famous for writing the memo that created the "wall of separation" between the nation's law enforcement and intelligence services, pocketed millions as well.
In addition, Fannie Mae, along with Freddie Mac, offered incredible financing deals on sub-prime mortgages for home buyers who would not qualify at any bank due to credit risk. Since those two quasi-governmental entities have such a dominant presence in the mortgage market, banks had to match those deals in order to compete.
All of these factors helped to create the real estate bubble where people who could not afford to buy homes did buy homes. The Clinton Administration was directly responsible for the creation of the sub-prime mortgage market. With that result, a minor increase in interest rates burst the bubble as those risky home buyers defaulted on their adjustable rate mortgages and has resulted in the disasters at Bear Stearns, Lehman Brothers, AIG, and so many other banks.
In 2003, the Bush Administration proposed a law to add a new agency to oversee and regulate Fannie Mae and Freddie Mac because of fears of insufficient oversight and signs of corruption. In addition, the administration was afraid insufficient reserve funds were being maintained at these quasi-governmental companies in case interest rates were to rise. Democrats like Barney Frank and Christopher Dodd stopped the administration in its tracks, claiming that Fannie Mae and Freddie Mac were not in trouble and any additional oversight and regulations were an attack on the poor, preventing the poor from buying homes. The Bush Administration got nowhere on new regulations.
In 2005, John McCain gave a speech on the floor of the Senate decrying insufficient oversight over the two mortgage agencies and sponsored a bill to regulate the two companies and add additional oversight, making similar arguments the administration had done two years earlier. Once again, Democrats stopped the bill, again accusing Republicans of wanting to keep poor people from buying homes.
Fast forward to 2008. Fannie Mae and Freddie Mac go into bankruptcy and the government has to bail them out at a cost of $200-300 billion of taxpayer money. And instead of being quasi-government agencies, they are now fully government agencies.
There is a lot of evidence that it was Fannie Mae and Freddie Mac, along with the Clinton Administration, that helped to create the real estate bubble that has now burst and is sending the economy into the tank and financial markets into turmoil.
Yet here's Obama blaming it on Republicans when the finger can be pointed straight at two men who are part of the Obama campaign who were intimately involved in the fall of Fannie Mae. Any time markets are distorted by government intervention, bubbles form and must eventually burst.
Obama wants more of the same and wants even more direct government involvement in the financial and mortgage markets.
Oh, and since 1989, guess who are the people who have gotten more political contributions from Fannie Mae than anyone else? Number one is Christopher Dodd, who along with Jim Johnson were embroiled in the Countrywide Mortgage scandal. Number two, despite having been in the US Senate for less than four years is... Barack Obama. Number three is Hillary Clinton. John McCain is so far down the list of 325 that he barely registers.
John McCain has called for a criminal investigation into Fannie Mae/Freddie Mac's fall and a commission to study new regulations. Guess who opposes such an investigation? Yep, Barack Obama, knowing that the ties to Franklin Raines, Jim Johnson, and Jamie Gorelick will come to the foreground.
P.S. It occurred to me I never really identified what a bubble was in terms of economics. A bubble occurs under artificial circumstances that are not tied to market forces (supply/demand). In the case of a real estate bubble, artificially low interest rates promoted by Fannie Mae/Freddie Mac plus the threat of government penalties caused lenders to loan money they otherwise would not have to people who couldn't actually afford a home.
