This column presents facts regarding the United States Constitution, the Declaration of Independence, the Wisconsin State Constitution, and various other documents in reference to modern topics. Mark hopes to encourage interest in those works so that others can consider whether our government is practicing within its constitutional limits. In the last category, he may indicate his opinion. Mark is a resident of New Berlin. Readers are encouraged to visit the following sites for more information on the United States Constitution and Thomas Jefferson's views on politics and government.
According to the Testimony of Alan Greenspan
Financial Crisis Inquiry Commission
April 7, 2010
(full testimony available on line)
“It was the global proliferation of securitized U.S. sub-prime mortgages that was the
immediate trigger of the current crisis. But its roots reach back, as best I can judge, to
1989, when the fall of the Berlin Wall exposed the economic ruin produced by the Soviet
system. Central planning, in one form or another, was discredited and widely displaced
by competitive markets.
China, in particular, replicated the successful economic export-oriented model of the so-called Asian Tigers, and by 2005, according to the IMF, 800 million members of the world’s labor force were engaged in export-oriented, and therefore competitive, markets, an increase of 500 million workers since 1990. Additional hundreds of millions became subject to domestic competitive forces, especially in Eastern Europe. As a consequence, between 2000 and 2007, the rate of growth in real GDP of the developing world was more than double that of the developed world.
For years, sub-prime mortgages in the United States had been a small but successful appendage to the broader U.S. home mortgage market, comprising less than 2½% of total home mortgages serviced in 2000. The market served a relatively narrow part of the potential U.S. homeowner population that could not meet the 20% down payment requirement of prime mortgages, but could still support the monthly payment amounts and less stringent loan origination requirements of a sub-prime loan. In the 2000 time frame, almost 70% of such loans were fixed-rate mortgages, fewer than half of sub-prime originations had been securitized, and few, if any, were held in portfolios outside the United States. From its origins in the early 1990s to 2003, it was a well functioning market. I supported such lending, which increased access to homeownership for minorities and other traditionally underserved populations, an important goal in a capitalist society.
Of far greater importance to the surge in demand, the major U.S. government sponsored enterprises (GSEs), Fannie Mae and Freddie Mac, pressed by the U.S. Department of Housing and Urban Development1 and the Congress to expand “affordable housing commitments,” chose to meet them in a wholesale fashion by investing heavily in sub-prime mortgage-backed securities. The firms purchased an estimated 40% of all private-label sub-prime mortgage securities (almost all adjustable rate), newly purchased, and retained on investors’ balance sheets during 2003 and 2004. That was an estimated five times their share of newly purchased and retained in 2002, implying that a significant proportion of the increased demand for sub-prime mortgage backed securities during the years 2003-2004 was effectively politically mandated, and hence driven by highly inelastic demand. The enormous size of purchases by the GSEs in 2003-2004 was not revealed until Fannie Mae in September 2009 reclassified a large part of its securities portfolio of prime mortgages as sub-prime.
In 2002, I expressed concerns to the FOMC, noting that “…our extraordinary housing boom…financed by very large increases in mortgage debt – cannot continue indefinitely.” It did continue for longer than I would have forecast at the time, and it did so despite the extensive two-year -long tightening of monetary policy that began in mid- 2004.
Constitution vs. Federal Government
US Constitution, 10th Amendment:
The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people.
We the People:
Sub-prime lending (AKA: The Housing and Community Reinvestment Act of 1977), was the ticking time bomb. Jimmy Carter obviously obliged us to housing charity programs even before Habitat For Humanity. Then coercion under the Clinton administration forced banking companies to accept high-risk business and put taxpayer’s money at greater risk. It is another example of why the government must not use our money as a charitable foundation. Sooner or later, power-hungry officials will abuse it for votes, and it will cause more damage than benefit.
The founders limited the federal government’s authority for good reason. The initial infraction regarding this program was the fault of elected officials. Subsequent offenses were our fault for not replacing those Congressional members who supported it and therefore violated their oaths to uphold the Constitution.