2008 Meltdown - ...abuse of the...System...by political class

[WhiskeyGirl]

Basel's Capital Illusions

The 2008 meltdown was not the result of lax regulation but of abuse of the U.S. financial system by the political class in Washington.

There's something to be said for holding banks to higher capital standards, even at the cost of more constrained lending and slower economic growth. But the much-bruited idea that Basel rules will make the world freer of financial crises is highly doubtful, given current political circumstances. The 2008 financial meltdown was not primarily the result of lax regulation but of co-option and abuse of the U.S. financial system by the political class in Washington.

The federal government's "affordable housing" endeavors, beginning in the 1990s, allowed and even forced banks to make highly risky mortgage loans. Those loans were folded into mortgage-backed securities (MBS) sold in vast numbers throughout the world, most promiscuously by two government-sponsored enterprises, Fannie Mae and Freddie Mac.

The Federal Reserve contributed a credit bubble that caused house prices to soar, a classic asset inflation. When the bubble began to deflate in 2007, the bad loans in mortgage securities became poisonous. The MBS market seized up, and financial institutions holding them became illiquid and began to crash. The Lehman Brothers collapse was the biggest shock.

The only way Basel standards might have helped prevent this would have been if they had been applied to Fannie and Freddie as well as to banks. They weren't. President Bill Clinton exempted the two giants from Basel capitalization rules because they were the primary instruments of a federal policy aimed at helping more lower-income people become homeowners. This was a laudable goal that ultimately wrecked the housing and banking industries.

...Meanwhile, instead of backing off from such dangerous welfare-state initiatives, the new Obama administration and Pelosi-Reid Congress last year doubled down. Futile "stimulus" spending and union bailouts swelled the deficit, as will ObamaCare. The U.S. Treasury's gross borrowing has been running as high as $1.9 trillion a year to finance a $1.5 trillion federal deficit. Very few economists think the U.S. government can continue to borrow 42% of its vast spending budget, much of it from abroad, without running into trouble.

read more here - http://online.wsj.com/article/SB10001424052748703466704575489592929851132.html