You can take it to the bank

Byline: | Category: Economy | Posted at: Friday, 20 February 2009

Jonathan Jarvis brings us an easy to understand primer in the source of the credit “crisis”.  I strongly recommend you watch it

However, it lacks one significant element:  the political causes of the problem.  For that, I recommend you read this WSJ op-ed.

Fannie and Freddie faced three quotas. The first was for mortgages to individuals with below-average income, set at 56% of their overall mortgage holdings. . .

Think about that.  The bottom half of income earners were required to make up more than half of all new loans.  It’s as mathematically nonsensical as Lake Wobegon where “all the children are above average.” 

Not surprisingly, between 1994 and 2006, subprime loans went from being 4.5% of the total to 20.1% of the total.  To put it into Jarvis’ terms, the law required that the ”Risky” tray be placed on top and that it had to be filled first before “Safe” and “Okay” loans were made.

“How galactically stupid,” you say.  Of course it is, but here is why it was done.

Banks Get 258,000 Percent Return from Investments in D.C. Pols

Campaign contributions and investments in lobbying are the best investments a business can make, and that’s been true for a long time.  It was why Fred Raines and all his GSE cronies were able to get such favorable legislation that protected Fannie and Freddie with taxpayer bailouts in the event of a massive default in mortgage payments. 

Or, as Glenn Reynolds succinctly puts it:

[A]n economy in which political payoffs earn a much higher rate of return than real investments is not a healthy thing

But it’s still happening:

This weekend, donors to a political action committee run by Rep. Jeb Hensarling are invited to the Snake River Lodge & Spa near Jackson Hole, Wyo., for a ski outing hosted by the Texas Republican. The minimum donation: $2,500, according to the invitation, which touts opportunities to take sleigh rides to an elk refuge and snowmobile excursions to the Continental Divide.

Skiing also is on the agenda at a fundraiser this weekend in Vail, Colo., for Democrat Ed Perlmutter. Donations range from $2,400 for an individual to $5,000 for a political action committee.

Many, especially on the Left, have wrung their hands about the influence of money in politics.  It’s a valid concern, however, as George Will reminded us three years ago:

People serious about reducing the role of money in politics should be serious about reducing the role of politics in distributing money. 

But the Left, as epitomized by the bloated bailout just passed (along with TARP and the auto bailouts), are moving in the opposite direction.  As Washington distributes more and more money, more and more money will go to Washington to influence where that money is distributed.  (Now that’s one bubble I’d love to see burst.)  Is it any wonder that the three wealthiest counties in American (and five of the top ten) are suburbs of Washington, where, except for a tech belt, the only industry is government?

If past is prologue, the stimulus package is going to stimulate little except the interests of those who had the best lobbyists.  Unfortunately, that’s the only thing you can bank on these days.

Watch the video, but remember the missing governmental component:

The Crisis of Credit Visualized from Jonathan Jarvis on Vimeo.

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