ÿþ<html> <head> <meta http-equiv="content-type" content="text/html;charset=iso-8859-1"> <title>OnlineColumnist®.com: Putin Punishes Georgia</title> <meta name="generator" content="Adobe GoLive 4"> <style type="text/css"> .style3 { height: 26px; } .MsoNormal {} h1 {margin-bottom:.0001pt; page-break-after:avoid; font-size:12.0pt; font-family:"Times New Roman"; font-weight:normal; text-decoration:underline; text-underline:single; margin-left: 0in; margin-right: 0in; margin-top: 0in; } .style4 { font-size: large; font-weight: bold; font-family: Arial; } .style6 { text-decoration: underline; } .style7 { font-size: x-large; font-weight: bold; } </style> </head> <body bgcolor="white" vlink="black"> <center> &nbsp;<table cool width="624" height="2719" border="0" cellpadding="0" cellspacing="0" gridx="16" showgridx gridy="16" showgridy> <tr height="79"> <td width="133" height="118" rowspan="2" valign="top" align="left" xpos="0"> <a href="aboutdiscobolos.html"><img height="110" width="62" src="images/discobolos.logo.transp.gif" border="0"></a></td> <td width="7" height="118" rowspan="2"></td> <td width="482" height="79" colspan="2" valign="top" align="left" xpos="140"><img height="75" width="450" src="images/banner.GIF"></td> <td width="1" height="118" rowspan="2"></td> <td width="1" height="79"><spacer type="block" width="1" height="79"></td> </tr> <tr height="39"> <td width="182" height="39"></td> <td width="300" height="39" valign="top" align="left" xpos="322"><a href="aboutdiscobolos.html"><img height="14" width="267" src="images/divisionofNEW.GIF" border="0"></a></td> <td width="1" height="39"><spacer type="block" width="1" height="39"></td> </tr> <tr> <td width="624" colspan="6" valign="top" align="left" xpos="0" class="style3"> <table border="0" width="100%" bgcolor="black" cellspacing="0"> <tr> <td> <table border="0" width="100%" bgcolor="#99ffcc" cellspacing="0" cellpadding="4"> <tr> <td align="center"> <div align="left"> <a href="index.html"><font face="Arial,Helvetica,Geneva,Swiss,SunSans-Regular" size="2"><strong> HOME</strong></font></a><font face="Arial,Helvetica,Geneva,Swiss,SunSans-Regular" size="2"><strong> &#8226; <a href="articlesindex.html">ARTICLES</a> &#8226; <a href="books.html">BOOKS</a> &#8226; <a href="teflon.html"> THE </a><a href="teflon.html">TEFLON</a><a href="teflon.html"> REPORT</a> &#8226; <a href="mailto:letters@onlinecolumnist.com"> REACTIONS</a> &#8226; <a href="aboutdiscobolos.html">ABOUT DISCOBOLOS</a></strong></font></div> </td> </tr> </table> </td> </tr> </table> </td> </tr> <tr height="2"> <td width="133" height="2">&nbsp;</td> <td width="489" height="2576" colspan="3" rowspan="2" align="left" xpos="133" content valign="top" csheight="2573"> <p class="style4">&nbsp;</p> <p class="style4">Bernanke&#39;s Finger Pointing</p> <p><b><font face="Arial,Geneva,Helvetica">by John M. Curtis</font></b><font face="Arial,Helvetica,Geneva,Swiss,SunSans-Regular"><b><a href="books.html"><br> </a></b></font><font face="Arial,Helvetica,Geneva,Swiss,SunSans-Regular"><b> (310) 204-8700</b></font></p> <p><font size="2" face="Arial,Helvetica,Geneva,Swiss,SunSans-Regular"><i>Copyright Jan.. 7, 2010<br>All Rights Reserved. </i></font>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; </p> <bAbout the Author</u> <p class="MsoNormal"> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<span class="style7">B</span>laming the housing bubble on lax regulation, Federal Reserve Board Chairman Ben S. Bernanke pointed at the wrong culprit, insisting that permissive lending practices caused the last housing bubble.<span style="mso-spacerun: yes">&nbsp; </span>Bernanke forgets that Fannie Mae and Freddie Mac, the government-backed agencies commissioned by Congress to make homeownership more affordable, relaxed lending guidelines in 1997.<span style="mso-spacerun: yes">&nbsp; </span> Supported by former President Bill Clinton and passed by Congress, the 1997 Community Reinvestment Act mandated changes to discriminatory lending practices, preventing the poor and minorities from home ownership.<span style="mso-spacerun: yes">&nbsp; </span>When translated to Fannie Mae and Freddie Mac, the agencies relaxed the bias toward W-2 or company-employed borrowers typically requiring income verification.<span style="mso-spacerun: yes">&nbsp; </span>CRA ended discrimination against self-employed borrowers, requiring less employer-based income verification.</p> <p class="MsoNormal"> <![if !supportEmptyParas]>&nbsp;<![endif]><span style="mso-tab-count:1">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; </span>U.S. lenders selling mortgages to Freddie Mac and Fannie Mae in the so-called secondary market, no longer required the old rigorous income verification documentation, instead relying on property appraisals measuring home equity and FICO or credit scores.<span style="mso-spacerun: yes">&nbsp; </span>When the housing bubble burst two years ago, some experts blamed former Fed Chairman Alan Greenspan for loosening monetary policy, namely, lowering short-term interest rates, causing real estate inflation.<span style="mso-spacerun: yes">&nbsp; </span> All efforts should be made to strengthen our regulatory system to prevent a recurrence of the crisis, and to cushion the effects, if another crisis occurs, said Bernanke, asking Congress to expand the Fed s regulatory powers.<span style="mso-spacerun: yes">&nbsp; </span>What Bernanke forgets is that only two years after passing CRA, the Congress passed the 1999 Gramm-Leach-Bliley Act, essentially repealing the 1933 Depression Era Glass-Steagall Act.</p> <p class="MsoNormal"> <![if !supportEmptyParas]>&nbsp;<![endif]><span style="mso-tab-count:1">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; </span>After the stock market Crash of 1929, the 1933 Glass-Steagall Act protected bank depositors by restricting banks from risky stock market investments.<span style="mso-spacerun: yes">&nbsp;&nbsp; </span>In exchange for regulating banks, Congress funded the Federal Deposit Insurance Corporation, insuring bank deposits against a future stock market crash or economic calamity.<span style="mso-spacerun: yes">&nbsp; </span>While Bernanke blames loose lending practices and unqualified borrowers, he forgets that Clinton and the Congress permitted banks under Gramm-Leach Bliley to restart risky stock market investing.<span style="mso-spacerun: yes">&nbsp; </span>That s when investment banks like Goldman Sachs created abstract mortgage-backed securities known as  derivatives to trade like stocks in domestic and foreign exchanges.<span style="mso-spacerun: yes">&nbsp; </span>With more people qualifying under CRA for mortgages, it caused real estate prices to rise, escalating derivative prices.<span style="mso-spacerun: yes">&nbsp; </span>By the end 2000, the Dow hit 12,500 and Nasdaq 5,000, generating massive profits for financial institutions trading mortgage- backed.securities.</p> <p class="MsoNormal"> <![if !supportEmptyParas]>&nbsp;<![endif]><span style="mso-tab-count:1">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; </span>Unlike the stock market where few investments get insurance, banks insured derivatives through  credit-default-swaps, complex insurance policies primarily sold by American International Group [AIG] to insure derivative investments.<span style="mso-spacerun: yes">&nbsp; </span>When defaults and foreclosures began to rise, the derivative market collapsed, causing AIG to go broke, unable to reimburse banks for failed investments.<span style="mso-spacerun: yes">&nbsp; </span>Credit markets began to seize, causing a<span style="mso-spacerun: yes">&nbsp; </span>liquidity crisis, prompting the Bush Administration, Fed and Congress to pass the $687 billion Toxic Assets Relief Program [TARP] to provide emergency capital to banks on the threshold of insolvency.<span style="mso-spacerun: yes">&nbsp; </span> Blaming the collapse on unqualified borrowers only tells part of the story, where banks abandoned all common sense and invested heavily in the risky derivative market.<span style="mso-spacerun: yes">&nbsp; </span>Bernanke s finger-pointing at residential mortgage borrowers misses the point.</p> <p class="MsoNormal"> <![if !supportEmptyParas]>&nbsp;<![endif]><span style="mso-tab-count:1">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; </span>When Bernanke talks of reforms, he s not talking about repealing Gramm-Leach-Bliley, restoring Glass-Steagall and restricting banks from the risky stock market investing that seized up credit markets.<span style="mso-spacerun: yes">&nbsp; </span>He s referring to restricting specific kinds of mortgage products known in the lending business as negative-amortization loans, allowing borrowers to pay interest only or a small fraction of the principle-and-interest.<span style="mso-spacerun: yes">&nbsp; </span>Instead of butting into the lending business, Bernanke would be better served working on more regulations for banks to prevent reckless derivative investing.<span style="mso-spacerun: yes">&nbsp; </span>Bernanke knows that raising short-term interest rates, namely, the Federal Funds rate, has only minimal effect on long-term rates like T-bills and 30-year mortgages.<span style="mso-spacerun: yes">&nbsp; </span>Bernanke warned that if the Fed didn t get more regulatory authority, he d have to use monetary policy to prevent future bubbles.</p> <p class="MsoNormal"> <![if !supportEmptyParas]>&nbsp;<![endif]><span style="mso-tab-count:1">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; </span>Bernanke should focus his efforts on repealing Gramm-Leach-Bliley, restoring elements of Glass-Steagall and assuring optimal monetary policy designed to maintain a strong dollar and stable money supply.<span style="mso-spacerun: yes">&nbsp; </span>Today s cheap dollar policy has eroded faith in the U.S. economy and driven foreign T-bill investors like China to have reservations about making more investments.<span style="mso-spacerun: yes">&nbsp; </span>Instead of pointing fingers at residential mortgage borrowers, the Fed should look at current reckless bank investing policies that caused credit markets to seize and lending to stop.<span style="mso-spacerun: yes">&nbsp; </span>Banning banks from investing in derivatives would be a good first step in restoring fiscal sanity in an otherwise speculative investment bubble.<span style="mso-spacerun: yes">&nbsp; </span>Bernanke must reconsider the necessity of the 1997 Community Reinvestment Act to assure the American Dream of homeownership.<span style="mso-spacerun: yes">&nbsp;&nbsp; </span>Today s harsh lending standards hurt real estate and the overall economy.</p> <p class="MsoNormal"> <![if !supportEmptyParas]>&nbsp;<![endif]><span class="style6">About the Author </span> </p> <p class="MsoNormal"> <b>John M. Curtis</b> writes politically neutral commentary analyzing spin in national and global news.<span style="mso-spacerun: yes">&nbsp; </span>He s editor of OnlineColumnist.com and author <i>of <a href="books.html">Dodging The Bullet</a></i> and <i><a href="books.html">Operation Charisma</a></i>.</p> <p class="MsoNormal"> &nbsp;</p> </td> <td width="1" height="2576" rowspan="2"></td> <td width="1" height="2"><spacer type="block" width="1" height="2"></td> </tr> <tr height="2574"> <td width="133" height="2574" valign="top" align="left" xpos="0"><img height="172" width="111" src="images/johninframe3.jpg"></td> <td width="1" height="2574"><spacer type="block" width="1" height="2574"></td> </tr> <tr height="1" cntrlrow> <td width="133" height="1"><spacer type="block" width="133" height="1"></td> <td width="7" height="1"><spacer type="block" width="7" height="1"></td> <td width="182" height="1"><spacer type="block" width="182" height="1"></td> <td width="300" height="1"><spacer type="block" width="300" height="1"></td> <td width="1" height="1"><spacer type="block" width="1" height="1"></td> <td width="1" height="1"></td> </tr> </table> <table border="0" cellpadding="0" cellspacing="2" width="597"> <tr> <td><font size="1" face="Arial,Geneva,Helvetica"> <hr noshade size="1"> </font><a href="index.html"><font face="Arial,Helvetica,Geneva,Swiss,SunSans-Regular" size="2"><strong> Home</strong></font></a><font face="Arial,Helvetica,Geneva,Swiss,SunSans-Regular" size="2"><strong> || <a href="articlesindex.html">Articles</a> || <a href="books.html">Books</a> || <a href="teflon.html">The Teflon Report</a> || <a href="mailto:letters@onlinecolumnist.com"> Reactions</a> || <a href="aboutdiscobolos.html">About Discobolos</a></strong></font> <div align="left"> <p><font size="1" face="Arial,Helvetica,Geneva,Swiss,SunSans-Regular">This site designed, developed and hosted by the experts at</font><font size="2" face="Arial,Helvetica,Geneva,Swiss,SunSans-Regular"> <a href="http://www.cmeonline.net" target="_blank"><img height="30" width="138" src="images/cmelogoANIM.gif" border="0" align="absmiddle"></a></font></p> </div> <p><font size="2" face="Arial,Helvetica,Geneva,Swiss,SunSans-Regular">©1999-2005 <a href="aboutdiscobolos.html"> Discobolos Consulting Services, Inc.</a><br> (310) 204-8300<br> All Rights Reserved. </font></td> </tr> </table> </center> </body> </html>