Yes, I am willing to say Sarah Palin is wrong when she is wrong. She told Sean Hannity the reason for the present financial crisis is "Wall Street corruption". That is not true.
Is there "corruption" on Wall Street? Sure there is. There is now, and there was (more?) at the time the dot.com bubble burst. Remember those "internet" company analysts who ADMITTED that they did not believe the companies were worth the numbers they were touting for them?
But what caused the NASDAQ to go down more than HALF when the dot.com "bubble" burst? It was "irrational exuberance" (Greenspan's term). In other words, the "bubble" burst as everyone discovered the emperor had no clothes. Most SHARED the irrational hysteria of the dot.com boom. Thus, most shared responsibility for the bust (by "mos", of course, I mean the people involved at all in either the financial markets or setting up one of those dot.com type companies).
Nevertheless, the dot.com bubble bursting EXPOSED corruption. But corruption did not CAUSE the irrational exuberance or the bubble bursting. That was human nature. But once people start losing money, corruption comes out. Corruption was more a direct cause of the bad stock market in early 2002, when the crooks at Enron and WorldCom discredited the data put out by all companies.
The housing bubble is more like the dot.com bubble than it is like Enron. It is also reminiscent of the savings and loan crisis of the late 1980's. Despite media coverage at the time (Keating 5 and all of that), the failure of massive numbers of savings and loans was NOT "caused" by corruption. It was caused by a change in the tax laws that made all kinds of real estate deals uneconomic that had depended on tax benefits to make sense. This meant that real estate values COLLAPSED (as in this housing bubble). The savings and loans went under. They were then investigated. That EXPOSED corruption that would not otherwise have necessarily been exposed. That is what has happened in this mortgage crisis, although the MAIN corruption exposed has been by the primary LENDNERS (mortgage companies), and NOT by "Wall Street" (Lehman Brothers, Bear Stearns, et. al.).
I have already posted entries showing how we got here. It startedwith Democrats in the Clinton Administration and in Congress who wanted to EXPAND home ownership in this country, and wanted mortgage companies to lend to minorities. So you ended up with Fannie Mae and Freddie Mac, and with continuing expansion of those entities, as a way of facilitating more mortgages for more people. This was the beginning of the "subprime" type of loans. But mortgage companies, and Wall Street, decided they LIKED these kinds of loans. They carried a higher interest rate (more risk), and people started making lots of money--including Obama financial advisors Jim Johnson (formerly of Lehman) and Franklin Raies (not only formerly of Fannie Mae, but accused of INFLATING (lying about) the profits of Fannie Mae by fancy accounting, for purposes of getting more bonuses (90 million total compensation from Fannie Mae from 1999 to 2005, after he was part of the Clinton Administration).
This CENTRAL PLANNING decision to make home ownership available to almost all Americans was perhaps the fundamental "cause" of this "crisis". But, as usual, greed (NOT corruptioin) took over. Mortgage companies kept pushing further and further, coming up with programs like "no paer" loans where income was not verified. There seemed to be NO risk because houses kept going UP in price (big housing BOOM, as you would expect if EVERYOINE gets the idea they can afford a house--BORROWERS were not blameless). Thus, as with Texas bank loans for oil drilling equipment in the first spike in oil prices before the price of oil went to $10.00 a barrel, banks and mortgage companies kept making MORE loans to increase their profits. As long as real estate went up, just as was the case in Texas when oil prices were still going up, everything was fine.
But the "irrational exuberance" went too far, as it always does, and the SUBPRIME "bubble" started to burst. Suddenly real estate prices started to DROP. This meant that even loans which were supposedly NOT "subprime" began to go bad. IMB, for example (the big mortgage bank that went under) was supposedly NOT a "subprime" lender. But its loans still went bad once home prices went sour, and shoddy lending practices were thereby exposed.
What does this have to do with Bear Stearns, Lehman, AIG and the rest on Wall Street? Well, at the same time mortgage companies/banks were making these real estate loans, they were FINANCING them by selling the "paper" to Wall Street investors. Further, Wall Street entities started PACKAGING these mortgage loans into different kinds of financial instruments, such as derivatives. This was NOT "corruption". It was taking risks where the risks were not appreciated. In other words, these Wall Street people did not know what they were doing (nothing new there).
This brings us to BILL O'REILLY, PINHEAD. O'Reilly has said that Wall Street started "trafficking" in "bad loans". HOGWASH. Wall Street did not KNOW they were bad, and really had little way of knowing they were bad. Wall Street did not DLIEBERATELY trade bad loans (for the most part). It is absurd to say what O'Reilly has said. It serves no purpose, either. At the same time private companies, including insurance companies like AIG, were purchasing these mortgages that would start going bad (in hindsight), the "government sponsored entities" were guaranteeing a lot of these mortgages as they (with the ecouragement of Democrats like Chris Dodd and Barney Frank) pushed for more and more people to be able to buy a house (adding to reported profits, and expanding the bonuses of Franklin Raines). Freddie Mac and Fannie Mae were not capitalized enough to handle the amunt of loans they were financing, once the loans started going bad.
Remember, this is all NO problem if houses kept going UP in price. In general, house loans do NOT "go bad" if the house goes UP in prcie, because the house can be sold. The real problem is the SAME as in the savings and loan crisis in the 1980's. Once real estate prices start to drop, people are STUCK. If they can't afford the house, they can't get out of it.
Wall Street had another problem, and here is where both central planning regulation and private controls FAILED. The government started to allow more LEVERAGE, based on the idea that computer information made it less risky than it used to be to have leverage. Leverage was ALWAYS allowed, and this bubble bursting was ALWAYS gong to be a problem, but the additional leverage made it difficult to handle this bursting of the bubble. At the same time, these new financial instruments were more dangerous than appreciated, and more leveraged than appreciated. You can call this "corruption" if you want, but it was more a matter of people NOT KNOWING WHAT THEY WERE DOING. If you really expect Federal bureaucrats to EVER keep on top of all of this stuff, you need more help than I can give you. There was also some relaxation of "short selling" rules. That put all of the elements in place for a financial crisis, although the fundamental CAUSE was the bursting of the housing bubble that was NOT "secret", but was making everyone (including homeowners) so much money that no one cared. This time was supposed to be "different" (it never is). There were people actually saying that the housing boom could go on essentially forever. I might sympathize with SHOOTING those people on Darwinian principles, but they were not really "corrupt".
There was one final element in the collapse. That was a government REFORM meant to give investors more information (with people like pinhead O'Reilly wanting to know why they were not told of developing problems). I am talking about the "mark to market" rule. That was a somewhat ridiculous rule that required public companies to evaluate their assets each quarter, and MARK DOWN any assets which had dropped in market value.
Well, say you are Lehman Brothers, and have these billions of dollars of mortgage securities. NO ONE WILL BUTY THEM, because they don't know what they are worth (how many will go bad). What does Lehman do (and it has to do this every QUARTER). Does it say that all of these mortgages are WORTHLESS, even though most clearly have substantial value? If Lehman officers are going to avoid JAIL, they have to mark these assets WAY DOWN (probably below their "real" worth). Then the RATING COMPANIES (those who provide credit ratings for business, like the credit agencies provide for you) DOWNGRADE Lehman for no longer looking as financially solvent. This quickly puts Lehman in a DEATH SPIRAL. Note that this all happens partially because of a REFORM regulation that was supposed to HELP investors know what is happening inside these companies.
There you have it (omitting a few other bells and whistles): a recipe for financial disaster.
Hoever, bottom line: This is NOT primarily a story of "corruption", especially on Wall Street, but a story of theBURSTING OF THE HOUSING BUBBLE. As with all financial "bubbles", this bubble was a shared addiction of almost all of us--including lenders, borrowers, Wall Street insurers and financing investment companies, the Bush Administration, and everyone else. People like me tried to tell everyone there was a "bubble" that could not last, but too many people were making too much money. When the bubble burst, the rest was pretty much inevitable. The "hotter" the boom, the WORSE the collapse. The housing boom ws pretty darn HOT. It happened to Texas banks, and other banks in the 70's and 80's. It happened to the savings and loans. It happened to the dot.com companies, and people who invested in them (or in the tech companies who went to ridiculous levels based on the dot.com boom. There is nothing NEW about the housing "bubble".
To look at this as a problem of CORRUPTION is to look at it WRONG.