Thursday, June 18, 2009


President Obama’s financial regulation proposals have some areas of merit but mostly miss the point.
He continues to misidentify a key component of the causes of the situation. Obama blamed the financial crisis on "a culture of irresponsibility" from Wall Street… exotic mortgages that hide exploding costs… (confusing) home mortgage disclosures… and complex financial instruments

The missing piece is that all of these things had their source in Congressional action.

The basis of the problem was a complete disregard of prudent lending practices. That was a result of the desire of Congress to see that everyone owned their own home. Since that was impossible under the historic lending rules, Congress, through Fannie Mae, changed the rules. Income, down payment and credit history requirements were abolished and the government guaranteed the loans. So Banks made them. When that wasn’t enough, the same Agencies began to guarantee Adjustable rate and Balloon mortgages that postponed the true payments needed. And Banks made them with the encouragement of the government agencies.

Second, those confusing disclosures are all based upon Congressional requirements. Some Congressional staffer thought up the APR calculation and all the other fine print that is an entrench part of the process. Does anyone really think that the financial institutions would want to do all that stuff if it wasn't required by Congress?

And all of those complex financial instruments were developed based upon federal guaranteed loans. In hindsight, a bad idea but they were guaranteed loans. Where was the guarantee when it was needed?

The thing that the President is missing is that the entity that needs regulation is Congress

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