You are hereBringing the Bubble to the Bursting Point
Bringing the Bubble to the Bursting Point
by John Evans
In my last article, I offered an analysis of the causes of the current world financial crisis. I suggested that it needs to be understood in the context of a deeper spiritual crisis, but I focused my analysis upon the political and economic factors that have brought it to a head at this particular moment in time. I singled out two of these factors in particular: the determination of politicians affiliated with the Democratic Party to coerce and induce mortgage lenders into lowering their lending standards and the huge growth in the holding of dollar assets by foreign governments, businesses, and individuals. In this article, I expand these themes, with particular emphasis upon the role played by “liberal” politicians and pressure groups who have mastered the art of pursuing their objectives with other peoples’ money. In my last article, I offered an analysis of the causes of the current world financial crisis. I suggested that it needs to be understood in the context of a deeper spiritual crisis, but I focused my analysis upon the political and economic factors that have brought it to a head at this particular moment in time. I singled out two of these factors in particular: the determination of politicians affiliated with the Democratic Party to coerce and induce mortgage lenders into lowering their lending standards and the huge growth in the holding of dollar assets by foreign governments, businesses, and individuals. In this article, I expand these themes, with particular emphasis upon the role played by “liberal” politicians and pressure groups who have mastered the art of pursuing their objectives with other peoples’ money. The excessive lowering of lending standards resulted fundamentally from a misguided approach to the problem of fully integrating the nation’s black citizens into its mainstream culture. The chosen approach has involved the collective decision on the part of the political leadership of the African-American community to ally itself wholeheartedly with the Democratic Party and to rely upon activist government to achieve its objectives. In effect, the black leadership has enthusiastically thrown its support to the Democrats in exchange for the party’s reciprocal support of it and the approach to community development favored by its members. Over the years, this alliance has proven to be mutually profitable for both parties. For many of the people who were supposed to be the alliance’s beneficiaries, however, the outcome has been rather different. They constitute the seemingly permanent members of an underclass attached to the liberal plantation.
Beginning with Lyndon Johnson’s “Great Society,” the federal government undertook to greatly expand its role in dealing with the problems of the African-American community. Not only did it enlarge the government’s expenditures on its own social programs targeted at that community, but also it expanded its grants to state and local governments and to private organizations that were supposed to contribute to its uplift. Unfortunately, the community’s problems proved to be highly resistant to the approaches taken to cope with them. Social indicators such as out-of-wedlock births and educational achievement test results proved highly disappointing, and so too were the results of the government’s job-training programs. Moreover, the deterioration of the nation’s inner cities seemed to continue without a letup, with the consequence that one of their defining characteristics came to be the existence of large chunks of abandoned and dilapidated housing, some of which consisted of recently constructed rental apartment units for low-income tenants.
The lack of demonstrable success in the federal government’s approach to the problem of providing affordable housing for “disadvantaged groups” combined with growing budgetary pressure to induce the leaders of the alliance to give greater attention to the possibilities for “encouraging” private sector mortgage lenders to modify their credit standards in ways that would better serve the interest of social justice. Favoring this course of action was the undeniable fact that would-be borrowers from the African-American community had suffered severely from discrimination in the past. It therefore seemed quite reasonable to apply considerable political pressure on lenders to provide greater equality of treatment. Unfortunately, given the rapid development of the art of victimization politics, which includes, among other things, denigrating the real achievements made in the field of race relations, it did not take long for many politicians to master the technique of continually unearthing fresh evidence of discrimination, with the result that lenders were ultimately induced to lower their credit standards far beyond what was prudent. Paradoxically, as the actual severity of discrimination against blacks diminished, the demands for corrective political action against discrimination multiplied.
Encouraging the growth of home ownership has long been a mainstay of government policy in America. This particular policy finds its economic justification in the immeasurable but very real fruits of home ownership that fall under the category of what economists call “external benefits”; i.e. gains accruing to society at large that are external to market calculations. If home ownership indeed confers such benefits to society at large, it makes economic sense to encourage it. One way this has been done has been through tax policy. For example, by allowing income tax deductions for home mortgage interest and real estate taxes, the federal government has provided a financial inducement to purchase homes.
Of far greater significance for the promotion of home ownership than tax breaks has been the federal government’s longstanding intervention in the home market to that end. A particularly instructive—and important—illustration of this aspect of the government’s conduct is the history of the federally insured savings and loan associations (S&Ls), a history that illustrates what is becoming an all-too-familiar pattern—the occurrence of a major financial disaster brought on by government intervention in the marketplace that began in promising fashion but ultimately lost its way. This history starts with the Federal Home Loan Bank Act of 1932. Note that this particular legislation slightly predates the Roosevelt administration, which took office in March 1933. Its purpose was to promote the expansion of home ownership by encouraging families of modest means within small defined geographical areas to deposit funds in local savings and loan associations that could be used to make long-term home mortgage loans to their members who could satisfy the relatively strict lending standards of that time. Then, in 1934, following the establishment of the Federal Deposit Insurance Corporation (FDIC) the previous year, the Federal Savings and Loan Insurance Corporation (FSLIC) was established to insure the deposit liabilities of S&Ls up to a specified maximum amount.
In order to limit “unhealthy” competition among commercial banks to attract depositors, the Glass-Steagall Act of 1933 prohibited the payment of interest on bank checking accounts and authorized the Federal Reserve authorities to set the maximum interest rates that banks could pay on their time and savings deposits. Because S&Ls were authorized to offer slightly higher interest rates on time and savings deposits than commercial banks were allowed, they long enjoyed a competitive advantage over banks that helped them attract funds. On the other hand, the S&Ls were not allowed to offer checking accounts. It was anticipated by the architects of the financial legislation of the 1930s that the S&Ls would be able to offset the inherent problem resulting from the fact that their main asset (home loans) had much longer maturities than their deposit liabilities by being achieving steady growth in the volume of those liabilities. To a large degree, this hope was realized in practice for a period of more than forty years. Eventually, however, rising short-term interest rates made the maturity imbalance between assets and liabilities unmanageable.
A popular but wildly distorted image of S&Ls was promoted by the hugely popular movie “It’s a Wonderful Life,” which is set in a mythical town in Ohio in the immediate aftermath of World War II. In it, George Bailey, the heroic head of the local S&L (played by James Stewart) struggles valiantly to save his hometown from being brought to ruin by the villainous machinations of a would-be monopoly banker named Henry Potter (played by Lionel Barrymore). In view of the facts that the United States had over 14,000 commercial banks at that time (ca. 1946), that we can safely presume that quite a few of them were located in Ohio, and that we can also presume that there would have been other S&Ls in nearby Ohio towns, Potter’s near-monopoly position seems quite remarkable. I have long suspected that the romantic image of the unequal struggle between Bailey and Potter played a significant role in causing the S&L crisis of the 1980s to become worse than should have been the case because it helped cloak the S&Ls in a fog of sentimentality that helped forestall needed reforms, but this, of course, is speculation of a non-pecuniary kind.
Be that as it may, by the late 1970s, it was clear to some observers that the S&Ls were in deep trouble caused by various structural problems that I can only touch on lightly here. By focusing its efforts on short-term fixes that failed to correct their fundamental structural flaws, the federal government succeeded in making the cost of correcting them much higher than it should have been. I cannot claim to speak with authority as to what the total cost to the federal government of cleaning up the S&L mess has been, but I gather than an estimate of $200 billion in inflation-adjusted dollars would be a plausible ballpark figure.
A big problem for the S&Ls was that when Paul Volcker and the Federal Reserve decided to alter monetary policy in 1979 so as to rein in inflation, short-term interest rates soared to unprecedented levels. Although it is my view that the Fed’s action ultimately proved beneficial, it accentuated the S&Ls’ problems. In short order, they found themselves tending to pay higher interest rates to their depositors than they were receiving on their mortgage loans, which were made long-term at fixed rates. The lawmakers sought to rescue them by relaxing the regulations on the assets they could acquire, but these efforts proved insufficient. Among the reasons for their insufficiency was the fact that the deposit insurance provided by FSLIC set up a huge moral hazard problem. With individual deposits being insured up to $100,000 per S&L, depositors had little reason to investigate the soundness of the S&Ls in which they held their funds, and since all S&Ls were charged the same fees for deposit insurance, the cost of that insurance bore no relationship to the risks undertaken. Therefore, if you were running an S&L that was in trouble, you had a strong incentive to roll the financial dice and to try to purchase political support.
Because the S&Ls’ problems became too serious to ignore during the Reagan administration, and because the mainstream media (MSM) strongly favor the Democrats, the cry arose that the S&L crisis was somehow caused by the rampant “deregulation” of the Reagan years. The parallel between the S&L crisis and the current financial meltdown is obvious. It is also obvious, however, that the lessons that should have been learned from the earlier crisis were not taken to heart. The Reagan administration no doubt made policy mistakes that exacerbated the S&L problem, but I am persuaded that if we are going to assign relative blame to our political parties, the Democrats should—for once—receive the lion’s share and that the claim that deregulation caused the problem is utter nonsense.
Another feature of the federal government’s policies on housing whose roots go back to the Great Depression of the 1930s is promotion of mortgage insurance on home loans. In 1934, the Roosevelt administration created the Federal Housing Administration (FHA), which was authorized to sell mortgage insurance to lenders after inspecting homes being offered for sale and satisfying itself that the borrowers measured up to its standards. The insurance premiums were to be charged to the borrowers and added to their monthly payments. Although much criticism can justifiably be leveled against the Roosevelt administration’s economic policy, the FHA compiled a long record of success in the promotion of home ownership. Before it came into being, home mortgages generally had maturities of only a few years. With the FHA leading the way, however, the thirty-year mortgage became a standard feature of home loans, and the agency cleared the path for the development of a large private mortgage insurance industry to serve the more affluent home buyers. And until very recently, the FHA was able to conduct its operations without becoming a drain on the federal budget.
When the FHA began operating, it focused its efforts on helping prospective home buyers with excellent loan repayment prospects. Over time, as conventional home lending expanded and a private insurance market developed that offered coverage for long-term mortgages, the FHA shifted increasingly toward assisting home buyers who could not meet the standards for conventional loans. Fortunately, because the economic situation of the country greatly improved over time, this shift did not cause its standard mortgage insurance program to operate at a net loss. Nevertheless, because the FHA did not place much emphasis on insuring loans to high-risk borrowers—particularly in the inner cities—it came under increasingly severe criticism from the political left, which charged it with contributing substantially to “white flight.” This criticism eventually led to legislative changes in its role that helped to undermine the housing market.
In 1938, the Roosevelt administration chartered the Federal National Mortgage Association, popularly known as Fannie Mae. Its function was to create a secondary market for FHA-insured mortgages. By purchasing such mortgages from the lenders, it made funds available for the issuance of new mortgages. Fannie rapidly expanded its operations, and soon after the Veterans Administration was authorized to develop its mortgage guarantee program toward the end of World War II, it began adding VA loans to its portfolio.
Fannie Mae’s rapid growth sparked concern about having a government agency become too involved as a player in financial markets. Reflecting this concern, in 1954, during the Eisenhower administration, it was converted into a mixed ownership corporation in which mortgage lenders were required to purchase nonvoting common stock in order to be eligible to sell FHA and VA loan paper to it. This move toward turning Fannie into a private company was followed in 1968 by Johnson administration legislation that split the agency into two parts. The larger part continued to operate under the Fannie Mae name, but it was to become a fully privatized corporation charged with the development of the secondary mortgage market. The other part was formed into a government agency named the Government National Mortgage Association—popularly known as Ginnie Mae—which took over what were then some relatively minor operations of Fannie and became responsible for the creation of marketable securities collateralized by mortgages insured or guaranteed by the FHA, the VA, and other federal agencies.
Being a fully privatized corporation meant that the obligations of the new Fannie Mae were not technically guaranteed by the federal government, but its close association with the government led most market participants to assume that those obligations were backed by an implied federal guarantee. This fact has proven to be an enormous advantage for Fannie because it has enabled it to borrow at interest rates that are closely linked to U.S. Treasury borrowing rates. Investors have tended to assume that should Fannie ever get into serious financial trouble, the federal government would step in to prevent it from going under. The validity of this expectation was confirmed in September 2008, when the U.S. Department of the Treasury essentially intervened to take over control of both Fannie Mae and Freddie Mac. The latter entity, incidentally, had been created by the government in 1970 as a competitor for Fannie.
The legislation creating the Federal Home Loan Mortgage Corporation, popularly known as Freddie Mac, was called the Emergency Home Finance Act of 1970. It provided that Freddie was to exist as another private corporation that would compete with Fannie Mae in the secondary mortgage market, and it authorized both companies to buy conventional mortgages as well. This legislation set the stage for a long period of spectacular growth in both companies. They not only bought mortgage paper that they held for their own account, but they also guaranteed the payment of mortgages that were used to collateralize issues of securities. By 2007, when it became clear that there was a crisis in the subprime mortgage market, Fannie and Freddie together either owned or guaranteed about half of all the home loans in the United States.
That the federal government’s policy of promoting the expansion of home ownership was socially and economically successful for many years seems to me to be a warranted conclusion. Unfortunately, there can be no doubt now that the government pushed this policy far beyond the boundary of proper prudence. The motivations of those who led the way down the road to disaster may well have been quite honorable, for the most part; but as someone has said, “The road to hell is paved with good intentions.” And for some, no doubt, that road was paved with gold.
Given the lack of success in the Johnson administration’s efforts to solve the problems of lower-income Americans in general and the inner cities in particular, it is readily understandable that the election of Jimmy Carter to the presidency in 1976 signaled that a fresh attempt would be made to expand the government’s role in providing “affordable housing.” What emerged was the Community Reinvestment Act (CRA) of 1977, which provided that federal agencies involved in the regulation of banks would evaluate most banks every two years in terms of their service to the communities in which they were located. Banks that were deemed to have a poor record in this regard could be denied the opportunity to open new branches or to expand through mergers and acquisitions. Community groups, such as ACORN (Association of Community Organizations for Reform Now), were authorized to provide comments on banks’ performance that would be made available to regulators.
Like Barack Obama, ACORN has a close association with Chicago, the city that has long been America’s premier hotbed of community activism that promotes the left’s agenda for improving the lot of “disadvantaged groups” in urban America. It was Chicago, of course, that was home to Saul Alinsky (“Rules for Radicals”) and is home to Bill Ayers, the education “reformer.” And it was from Chicago and its ACORN branch (led by Madeline Talbot) that a great deal of pressure came to insert language into the CRA aimed at reducing the practice of “redlining,” a term referring to the lines that lending institutions drew on city maps to delineate areas that were off limits for loan-making because of their high risks. It was argued by its critics that redlining was discriminatory against minorities and that the proposed legislation should put heavy pressure on lenders to eliminate it. Lending institutions opposed language that would compel them to increase their loans to borrowers in high-risk areas, and they were generally supported in this opposition—for a while—by Fannie and Freddie. As a consequence, the CRA did not force banks to seriously alter their lending practices, but it provided a legislative foot-in-the-door that opened the way for the taking of steps that would ultimately accomplish much of what the activists sought.
The opportunity to take those steps came with the Clinton administration, which assumed power in January 1993. In the interim, the S&L crisis came to a head during the first Bush administration and led to the Financial Institutions Reform and Enforcement Act of 1989 (FIRREA). Thanks to the efforts of ACORN and other liberal pressure groups, FIRREA required the public release of information about the performance reviews of lending institutions made by the various federal regulatory agencies charged with their oversight. The release of such information provided these groups with material that could be used to support claims of discriminatory treatment. In addition, the Federal Reserve Bank of Boston produced a highly controversial study in 1992 that asserted that substantial discrimination existed against black and Hispanic applicants for home loans. The head of the Boston Fed at this time was Richard Syron, who was to become the head of Freddie Mac during the Clinton administration.
Also during the interim between the Carter and the Clinton administrations, Fannie and Freddie brought about a great expansion in the secondary mortgage market. Not only did they buy large quantities of mortgages to be held for their own account, but also they promoted a huge expansion in the market for mortgage-backed securities (MBS). They did this by packaging different collections of mortgages into the security for debt obligations of their own and selling these obligations to investors with guarantees for the principal and interest payments. Thanks in considerable part to their ability to borrow at low interest rates because of their special relationship with the U.S. government, Fannie and Freddie proved quite profitable once the U.S. economy recovered from the high short-term interest rates of 1979 and the early 1980s. The foreign holders of claims on these two government sponsored enterprises (GSEs) included governments, banks, and other investors. In due course, the growth of foreign claims on these GSEs contributed considerably to the seriousness of the financial crisis that was to come to a head in September 2008.
The growth of Fannie and Freddie’s foreign indebtedness was an important part of a huge buildup in foreign claims on the United States that was clearly underway by 1983 and has continued to the present. Beginning with 1983, the U.S. balance of international payments (BOP) has had a large current account deficit in every year; i.e. its imports of goods and services have consistently exceeded its exports of goods and services. Moreover, the magnitude of this deficit has tended to grow enormously over time. The all-time record deficit (in current dollars) occurred in 2006, when it totaled $788.1 billion. It has diminished slightly since then. Included in the flows of international payments classified as services are the income payments associated with international investments.
The factors behind the chronic current account deficit in the BOP are poorly understood by the American public. Their ignorance can be attributed in large part to the proliferation of protectionist demagoguery that has accompanied the growth of the deficit and the lack of understanding of basic economics in the MSM. Strongly reinforcing these factors has been the inherent tendency for the members of a particular nationality to attribute their problems to foreigners. Generally speaking, Americans are not as inclined to play the international blame game as most other nations are, but many of them are eager participants in it nevertheless.
Herein I present a simplified explanation of the chronic deficit in the BOP of the United States, which I view as the product of a kind of circular process in which the causal factors strongly reinforce each other. Because a circular process is involved, determining its starting point is a challenge. I suggest that this point is the fact that since 1983, the U.S. economy has generally performed quite well relative to most of the world. Consequently, assets denominated in U.S. dollars have tended to attract a net inflow of funds from other nations. Moreover, because the dollar has served as the world’s primary vehicle currency; i.e. the national currency in which most international transactions are denominated, foreign governments, banks, and non-bank firms have found it convenient to hold their foreign currency reserves as dollar claims in U.S. banks.
The strong demand for dollars has tended to keep the exchange value of the dollar against other currencies higher than would have been expected solely on the basis of changes over time in nations’ relative price levels. As a result, America’s merchandise imports have tended to exceed its merchandise exports, thereby producing a trade deficit that has been so large that it has led to a large current account deficit as well. The current account deficit has been financed by turning over dollar deposits in U.S. banks to foreigners, thereby allowing the circular process to continue. The continuous flow of foreign-owned funds into the U.S. economy has helped to keep bank credit readily available to American borrowers at attractive interest rates, and this, of course, has reinforced the already strong American inclination to opt for consumption spending and home purchases over increasing their personal saving. Until very recently, rising home values that have increased owners’ equity have provided an important offset to the low level of saving from current income.
Notice that the flow of funds from the rest of the world to the United States means that the wealthiest nation in the world is absorbing much of the world’s saving. This may seem rather paradoxical. One might think, perhaps, that in a wealthy nation like the United States, the expected rate of return on capital would be relatively low by comparison with most of the rest of the world and that the flow of investment funds should, therefore, be outward. So much for relatively simple models of traditional economic analysis based on the assumption that there are three (implicitly homogenous) factors of production, namely land, labor, and capital! Those who think in such terms are likely to assume that since the United States is relatively abundantly supplied with capital and some types of “land” (natural resources), the expected rates of return on capital should be relatively high in most of the rest of the world by comparison with the United States and that there should be a net flow of savings internationally from the United States to the rest of the world. That, however, is NOT how the world works.
In the real world, the expected return on dollar-denominated assets has tended to be relatively high. One reason for this fact is that the personal saving rate of the United States has tended to be remarkably low. Another is that in much of the rest of the world, the personal saving rate has tended to be relatively high. Also tending to produce a net flow of funds toward the United States is the efficiency of American financial markets, including their relative freedom from regulatory burdens and corruption and their openness to entrepreneurial activity. In short, the United States has generally enjoyed a very favorable investment climate by comparison with most other nations.
That the United States has a low personal saving rate can readily be attributed to various social and psychological factors in its culture that induce its residents to favor consumption spending over saving. Included among these factors is the role played by its high level of home ownership. Thus, while purchases of new homes are counted as investment expenditures rather than consumption in our economic statistics, the fact that home purchases tend to lead to large complementary consumer purchases helps explain the association between the great housing boom and the low personal saving level in the years since the beginning of the eighties decade.
Among the factors that have contributed to the flow of funds from the rest of the world to the United States has been the remarkable decline in fertility rates below the population replacement level that is now evident in much of the world, including Europe, Japan, and a few other locations. Although this decline has also been felt in the United States, it stands out by comparison with most of the rest of “the industrialized world” in having a fertility rate that remains close to the replacement level. And, of course, the United States is a large recipient of immigrants in the age groups that participate heavily in its labor force. As has been pointed out convincingly by the talented blogger “Spengler,” who posts at atimes.com, the flow of funds across international boundaries has been greatly influenced by these demographic trends, and I readily acknowledge my indebtedness to him for bringing their significance to my attention.
In his writings, “Spengler” emphasizes the importance of recognizing that most saving is performed by older people and that younger adults overwhelmingly tend to be net borrowers. As the populations of most of the higher-income nations have aged and their population projections have pointed to declining populations in the absence of immigration, the personal savings of their older citizens have tended increasingly to be to funneled through financial institutions into foreign lands offering more attractive earnings prospects. Among those foreign lands, the United States has stood out since the early 1980s.
In the brief interval between the election of Bill Clinton in 1992 and the Republican victory in the Congressional elections two years later, there were important developments that played a major role in setting the stage for the financial debacle that was to emerge in 2007 as the subprime mortgage crisis. In particular, ACORN and other activist organizations induced the Clinton administration to make a firm commitment to use its administrative authority to induce and force the banking system to lower its financial standards in the field of home mortgage lending. Although the Republicans attempted to rein in the operations of the GSEs that affected the housing market after they gained control of Congress at the beginning of 1995, the Clinton administration and its Department of Housing and Urban Development (HUD) were able to use their administrative power to effect a general relaxation of credit standards by Fannie and Freddie and the agencies directly under their control that dealt with housing matters. This power extended to the selection of Fannie and Freddie’s executives. And after the Republicans regained the White House in the election of 2000, the Democrats retained enough power in Congress to frustrate their efforts to impose stricter standards. It took about fourteen years for the reckless consequences of the course of action adopted by the Clinton administration and its Congressional allies to develop into a disastrous economic explosion, and when the bubble finally burst, the fact that it did so during a Republican administration allowed the masters of the blame game on the political left to display their ample talent with the cooperation of a sympathetic and compliant mass media.
Despite the smokescreen laid down by the MSM, the existence of the alternative media that we now have makes it a fairly simple matter to get to the truth behind the world financial crisis if one is willing to do some work on his or her own. Unfortunately, most voters lack the time or the willingness to inform themselves on the matter. And so it is that with national elections almost at hand, it would appear that the nation is poised to give more power to the very people who led the way into the economic abyss. This seems to me to akin to having the blind leading the blind. I can only hope that the vision impairment is not total and that some light will be seen by those who are chosen to lead the way out of the depths into which we have fallen.
Thanks to the federal government’s intervention in the housing market and the market manipulation that the government fostered, it appeared for a while that subprime lending was inherently very profitable and that the government’s intervention was fully justified. And if lending to lower-income home buyers was profitable, this suggested that greater risks could be taken in home loans to other buyers. In due course, high-risk lending became standard practice in the home market, extending far beyond the banks that had originally been targeted by the CRA. Exotic financial instruments were developed that supposedly provided hedges against risk, and both Fannie and Freddie and the banking institutions with which they worked became very highly leveraged—meaning that their capital or equity base was very small in relation to their total assets. High leverage worked beautifully as long as their asset values remained high and the income derived from their assets exceeded their costs, but it made them highly vulnerable to declines in asset values and increases in costs.
Incidentally, as private corporations, Fannie and Freddie have been permitted to engage in political lobbying like other private corporations are permitted to do, and they have done so on a large scale. They have made substantial contributions to various members of Congress, and Freddie was fined $3.8 million in 2006 by the Federal Election Commission for illegal campaign contributions. Fannie and Freddie have also contributed generously to community organizations, including ACORN. And, of course, politically connected Fannie and Freddie executives were happy to participate in the boom in generous executive bonuses that accompanied the growth of the great housing bubble.
Of course, liberal politicians and their “willing accomplices” in the MSM have eagerly blasted Wall Street greed, “deregulation,” and “predatory lending” as the causes of the housing bubble and its collapse. I do not defend greed on Wall Street or anywhere else, and I have been saying for many years that excessive executive compensation is a serious problem with American capitalism. But Wall Street traders and executives respond to the incentives that are placed before them, and the behavior that the Democrats are now so eager to criticize is largely a response to the environment that they helped create. One feature of that environment was pressure to reduce executive salaries, and corporations have tended to respond to the pressure by placing greater emphasis on bonuses and stock options that have the effect of shortening the time horizons that are relevant to executives’ planning. This problem of short-term focus is particularly acute in the field of financial services.
I have no doubt that in the not-very-distant future, a Hollywood move or two will emerge that will deal with the great housing bubble about as realistically as “It’s a Wonderful Life” portrayed the financial services firms of the 1940s. Making Hollywood actors who portray the equivalents of such people as Barney Frank, Chris Dodd, Maxine Waters, Bill Clinton, Barack Obama, Jim Johnson, Franklin Raines, and Madeline Talbot into salt-of-the-earth characters like George Bailey and his friends will be a big challenge, but I suspect that Hollywood is up to the task. The trick is to turn them into friends of the “little guy.”
In a post-election article, I shall make some predications about things to come.
John S. Evans
Much of the information for this paragraph and in the remainder of this article comes from M. Jay Wells, “Why the Mortgage Crisis Happened,” americanthinker.com, October 26, 2008. This article provides a detailed summary of the legislative history that relates directly to the development of the domestic mortgage loan crisis that led directly to the world financial crisis that erupted in September 2008.
On the role of ACORN in this matter see Stanley Kurtz, “Spreading the Virus,” frontpage.com, October 14, 2008.
Kenneth Levin, “The Economic Meltdown and Obama’s Bounce: An American Paradox,” americanthinker.com, October 26, 2008.
On this point, I must note that when Boone Pickens emerged as a corporate raider, around 1980, I wrote him a letter congratulating him on calling attention to the problem of corporate executives being handsomely rewarded when they mismanaged their companies. Pickens was a graduate of Amarillo High School in 1947. I graduated from that school in 1948.