Credit crisis philosophical response - new era of regulation coming

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The Great Depression brought about a philosophical shift in the role of government. The great financial crisis of 2007 - 2008 is having the same result. The conservative call to deregulation, which suits my personal leanings, may have produced the global economic circumstances that bring about an era of massive government regulation and even ownership.

A new socialism as a response to market abuses.

I am not qualified to speak of this subject, but it is the direction that my reading is taking me. Here are my thoughts so far. Looking forward to your comments.

Glass Steagall was passed in response to the bank runs in the early 1930's. The Act established the FDIC, gave more power to the Federal Reserve, and separated investment banking from depository banking.

From the Federal Reserve website:

"In reaction to the Great Depression, Congress passed the Banking Act of 1933, better known as the Glass-Steagall Act, calling for the separation of commercial and investment banking and requiring use of government securities as collateral for Federal Reserve notes. The Act also established the Federal Deposit Insurance Corporation (FDIC), placed open market operations under the Fed and required bank holding companies to be examined by the Fed, a practice that was to have profound future implications, as holding companies became a prevalent structure for banks over time."

The legislation addressed rampant stock market speculation, speculative lending, and inadequate monetary controls. It brought about many of the controls that helped moderate economic cycles over 50 years.

Lesson learned.

In 1982 the Garn-St. Germain Depository Institutions Act led to deregulation of the savings and loan industry. The result was rapid growth in speculative high rish lending. Regulators and congressional oversight was influenced by large lobbying money.

The result was the savings and loan crisis and over 700 bank failures.

Lesson learned again?

In 1999 the Gramm-Leach-Bliley Act was passed. This act basically repealed Glass-Steagall Act of 1933 and opened the door to mixing investment and depository banking. Further deregulation came from the Commodity Futures Modernization Act of 2000. An interesting take on the two global economic issues of this decade - oil price destabilization and the mortgage/credit crisis - was given in an NPR interview of Antonia Juhasz, author of 'Tyranny of Oil'. She attributes Enron, the rise in oil prices, and the mortgage and credit crisis to the deregulation brought about with the Commodity Futures Modernization Act.

This act opened the door to credit default swaps, the unfunded insurance sold as a credit enhancement to guard against mortgage defaults in risky mortgage backed security.

Speculative lending - stated income, weak credit, no income, high LTV, investor lending, no employment, negative amortization.

The lack of regulation even enabled the losses to be hidden from regulators.

Lesson learned again?

Plenty of attempts have been made, especially by self serving politicians, to blame greedy mortgage brokers. The fact is, loan originators sold mortgage products that were available. Investment banks created loan programs and presented to the market that these loans were performing, when they were not.

These programs were made possible by the purchase of congressional influence through lobby money. Both political parties are guilty.

 We are going to face a strong tidal wave of regulation. Politicians will attempt to restrict the efforts of mortgage originators, especially mortgage brokers. They will focus on limiting lender paid yield spread premiums.

Lesson to learn.

Real reform must begin with restrictions on lobbying money. Oil and financial institutions should be restricted from making campaign contributions.

One of the most publicized issues with the Fannie and Freddie bailout, which seems so long ago, was the excessive amount of campaign contributions.

Real reform must continue with term restrictions for members of congress - 2 terms for Senators and 3 terms for Representatives. After that they must get back to a real job.

After the real problem, which is the influence of money on political decisions, is fixed, then some reasonable regulatory controls can be restored.

It seems obvious that investment and depository banking must be separate, speculative lending must be restricted, regulators must have oversight of all aspects of trading. There cannot be a major market that is outside of regulatory oversight.

The market abuses have caused the failure of all private investment banks, threatening the stability of the banking industry, forced Fannie and Freddie into a conservatorship controlled by the US Treasury, made it necessary for the Federal Reserve and other central banks to infuse 100's of billions of dollars, forced unprecedented action to bailout large banks, an insurance company, and our investment banking industry, forced the Federal Reserve to exercise its powers under the systemic risk exception , brought about a 40% drop in stock market value, created the need to use Treasury funds to purchase up to $700 billion in bad mortgage debt, crashed the US housing market, forced millions of families into foreclosure, is threatening the standing of the US as the leader of the world financial markets and is bringing the major proponents of deregulation to consider nationalizing several of our national banks.

Philosophy of regulation

The philosophical question is well described in a blog by Linda M Beale, Director of Graduate Studies and Associate Professor, Wayne State University Law School.

Her point in the philosophical debate:

"In talking about sustainable democracy, I have often asserted that capitalism cannot operate appropriately without the state's actions that create a more balanced market, one that serves the public good and not just the private greed.  This is but one aspect of the broader democratic requirement that government function for the good of the people and not for the protection of a few special interests."

We are entering into a new world. There will be a move toward greater regulation. Let's learn the lessons, and apply them. Do not leave it to the politicians to be swayed by the lobbyist with the most money.


Richard Smith
American Acceptance Mortgage, Inc
Toll Free 888-474-9920 Cell 423-280-0345
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This blog represents the opinions of Richard Smith. The posts and comments written on the blog do not represent the opinions or positions of Fairway Independent Mortgage Corporation.


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Tim and Pam Cash
Crye-Leike (Sango) - Clarksville, TN
Real Estate Professionals - Clarksville TN

Richard, I share your thoughts and opinions on what is yet to be learned.  I thank you for putting a historical spin on this latest crisis.

Oct 09, 2008 02:58 PM #1
Rick Fitzgerald
AAM Capital - Chattanooga, TN
The MultiFamily Expert

Excellant post! This crisis is a result of a Congress out of control looking out for special interests and generally ignorant of the potential.  Passing laws that very can understand or read.

Oct 09, 2008 03:09 PM #2
Richard Smith
Fairway Independent Mortgage Corporation - Chattanooga, TN
FHA VA Rural Development in TN GA


Researching for this post, I found that the Enron debacle should have forced a repeal that might have been in time to prevent this crisis. Also the Federal Reserve warned of the potential in 2005.

It is angering. There probably should be some jail time for some powerful people.


Oct 09, 2008 03:16 PM #3
Richard Smith
Fairway Independent Mortgage Corporation - Chattanooga, TN
FHA VA Rural Development in TN GA

Tim and Pam,

I am very concerned that the wrong regulations will come out of this crisis. HUD is focused on revising the good faith estimate and worried that someone might charge $25 for a credit bureau that actually cost $18.50.

They are OK that investors can pool bad loans with good loans and mask the risk with unfunded credit swaps.

Banks have very strong and well funded lobbying efforts. Enough to change the regulatory focus away from real problems.


Oct 09, 2008 03:33 PM #4
Bo Hussung
Bell Title /Triserv LLC - Nashvle, TN

Richard, this is the best post you have done to date. It elevates the discussion and I can not wait to see who responds. The philisophical debate is one that could go on for decades and most definitely will be dissected and discussed for years. Democracy, our founding fathers and the constitution made it impossible to evenly distribute social issues. The system was designed to constantly push an pull societal interests in order to maintain balance for the majority and greater good. It is the reason we have survived for so long and it is the reason we will continue. Acheiving perfect balance is impossible and frnakly it has to remain that way. Simply having the ability to put social issues out front for public debate is by itself the greatest accomplishment of our system.

Today, we have transparency in everything and the reasons for why we are here are not as important as the reason for tying to correct. Rest assured, we will correct it. Americans have faced much greater problems and have always come out okay. It is a legacy that will be able to pass to the next generations.



Oct 10, 2008 07:16 AM #5
Richard Smith
Fairway Independent Mortgage Corporation - Chattanooga, TN
FHA VA Rural Development in TN GA


Thanks for the compliment, though not sure whether it speaks to the qualify of this post or to the lack of quality in my other posts.

I like your reference to transparency. The trades that brought this crash were not transparent. The politicking that created the loophole legislation was not transparent. The institutions that are choking the credit markets are not transparent. Investors do not know the risk.

The rating agencies are obviously not reliable.

With the access provided via the internet, full transparency is a standard. Free press, free idea exchange, openness.

As far as waiting for the responses to this post, so far comments have been sparse. But I do  appreciate yours.

And congratulations at passing the 50k point total.


Oct 10, 2008 09:54 AM #6
Jim Crawford
RE/MAX Paramount Properties - Atlanta, GA
Jim Crawford Atlanta Best Listing Agents & REALTOR

Great post. I agree on all points.  Too bad Congress did not enforce the regulations, or oversee the laws on the books already.  They were too busy lining their pockets with loot.  Congress caused all of this for their own gain.  They truly will have their cake and eat it too!

Oct 12, 2008 12:42 PM #7
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