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Financial Crisis–Part III

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Parts one and two gave a historical perspective about government actions that paved the way for the crises that brought the economic system to the brink of collapse in 2008. In the spirit of “never let a crisis go to waste,” Congress reacted by passing the Dodd-Frank law after accusations such as, “See what happens when businesses aren’t adequately regulated.” The Dodd-Frank law requires 387 rules to be developed by 20 different regulatory agencies. The regulators have finalized 24 rules and have missed deadlines on 28. An article in ProPublica by Jesse Eisinger and Jake Bernstein details what the law was intended to accomplish and the problems that are being faced in developing the regulations. A few things the law was intended to accomplish have been at least partially put in place. A Consumer Financial Protection Bureau has been created, although the Obama administration hasn’t appoint a person to head the agency.  Outrage over executives being rewarded for taking risks that pushed their companies near or to failure resulted in rules that give shareholders a say on executive pay. The larger problem is in the 363 rules that remain to be developed and imposed.

Baring “proprietary trading” was central to the passage of the Dodd-Frank law. Banks leveraged heavily to speculate in bundled packages of subprime mortgage-backed securities and derivatives. The collapse of the value of those securities was central to the crisis. However, the rulemaking process for regulating derivatives has generated wide opposition. The Treasury Department has proposed some to be exempted from the regulations and the Securities and Exchange Commission (SEC) has issued an initial rule that will allow derivative trades under certain conditions. The rulemaking process has been so flawed that it “…has sparked a barrage of opposition, even from previously supportive legislators.”

Some believe that erroneous credit ratings given to mortgage-backed securities by the rating agencies was the root cause of the crisis, and losses from investments that had been given high ratings resulted in billions of dollars in losses. The Dodd-Frank law created a new regulatory structure for credit rating agencies, but the SEC has not fully staffed the new office. They also have indefinitely tabled a provision that holds the credit rating agencies legally liable for their ratings.

Regulators are dealing with complex issues while facing severe budget constraints, and many are saying they may not be able to carry out some key provisions. Wall Street is lobbying to blunt provisions it failed to defeat in the legislature. “Some wonder if Congress ordered regulators to do more than they could feasibly and legally accomplish.”

It is tempting to hope that the budget problems of the regulators and the intensity of lobbying will succeed at blunting the effects of the law, since there is a growing chorus of warnings that the law could damage American competitiveness. I would argue with the phrase “could damage.” I would replace it with “has damaged.” To fully appreciate how effective the government is, I only need to quote Milton Friedman, “If you put the federal government in charge of the Sahara Desert, in five years there will be a shortage of sand.”

The Financial Crisis–Part II

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Eamon R. Moran has written a comprehensive and well-referenced, 97-page article for the University of North Carolina School of Law’s North Carolina Banking Institute Journal about the causes of the crisis.  In Part I of this blog I focused on the role of the Community Reinvestment Act (CRA) of 1977.  This entry will focus on other regulations and acts that contributed to the mortgage meltdown.

Congress enacted many measures between 1980 and 2003 to make home ownership more attainable for moderate and low income borrowers.  Some of those measures included:

  • An act that preempted state ceilings on home mortgage loans and encouraged subprime loans
  • Another act that allowed adjustable rate mortgages, the loan of choice for subprime loans
  • Tax law was revised to made interest on home loans the only consumer loan that is tax deductible
  • HUD changed regulations so that borrowers no longer had to prove their incomes would remain stable
  • CRA was strengthened to impose fines and business penalties on banks that refused home loans to low income borrowers
  • Tax law was revised again to exempt most home sales from capital gains taxes

The outcome of these actions was that a borrower in California with an annual income of $14,000 was approved for a $720,000 home loan.  An investor in Minneapolis borrowed $2.4 million to buy ten properties, and all would go into foreclosure.  Financial institutions began bundling loans into complex packages, the rating agencies gave the packages AAA ratings, and the packages were sold around the world.  Millions of other examples such as these led to the eventual collapse of home values and created the crisis.

Congress leapt into action and passed a massive financial regulation while studiously ignoring the history of government’s role in creating the crisis.  The new laws will undoubtedly impede an economic recovery, and Congress will be given the opportunity to pass even more laws.


The Financial Crisis–Part I

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There are those who advocate there weren’t enough regulations (read Barney Frank) to prevent the financial meltdown in 2008.   My contention is that the crisis began with numerous government regulations that encouraged home ownership for people who couldn’t afford homes. The regulators decided encouraging wasn’t a strong enough approach and began demanding that lenders make loans to people who couldn’t afford to repay them.  Greedy speculators noticed opportunities for profits by creating packages of  “subprime” (read “risky”) loans and selling them to other speculators.  The real estate bubble grew because of the artificial increase in demand. The collapse probably began when the first home couldn’t sell for the original purchase price.

The march to the crisis began when the Community Reinvestment Act (CRA) was signed by President Carter in 1977.  That Act was the beginning of numerous actions by the government to encourage, or force, home loan agencies to make loans to borrowers in low income neighborhoods.  The intent was to open up the American Dream of home ownership to people who couldn’t previously convince their bankers they could repay the loans.  The Act was reinforced during the Clinton era by imposing penalties on loan agencies that didn’t meet requirements for loans in inner cities.  The CATO Institute warned in 1993 that the changes would be costly to the economy, and the warning was studiously ignored.

The push to make home ownership available to everyone continued into 2000.  The Government Sponsored Enterprises (GSEs) Fannie Mae and Freddie Mac were directed to devote a significant percentage of their lending to support “affordable housing.” Fannie Mae announced in 2001 it had a goal to finance $500 billion in CRA loans by 2010.  The Federal Reserve joined the party by lowering interest rates, which encouraged new borrowers to initiate loans and others to refinance their loans and use the proceeds to buy new luxury items.

There have been charges that racism is involved in deciding who is given home loans.  A Princeton study confirms the validity of that charge.  African-Americans were more likely to be offered subprime loans compared to whites who had similar financial backgrounds.

Records of Past Climate Change

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The Supreme Court in 2007 declared that carbon dioxide and other “heat-trapping gases to be pollutants that endanger public health and welfare.” That ruling set the Environmental Protection Agency (EPA) in motion to establish regulations to control the gases. A New York Times article quoted the EPA as saying the science supporting the endangerment finding “compelling and overwhelming.” They proposed a law under the Clean Air Act to regulate “heat-trapping gases” (which includes methane, nitrous oxide, and hydroflurocarbons in addition to carbon dioxide). It is odd that the EPA has a paper that presents a solid argument that much of the carbon dioxide in the atmosphere is the result of natural conditions separate from the activities of man. The paper first observes that the climate of the earth has changed throughout history preceding and following the arrival of man. Various scientific studies show that temperatures and carbon dioxide levels have been higher than present levels for about two-thirds of the last 400 million years. The causes of climate change are listed as:

  • Changes in the Earth’s orbit and tilt affect the amount of sunlight received on the surface of the planet
  • Changes in the intensity of the sun is an obvious cause of changes in temperature, and the NASA believes reduced solar activity was the cause of the “Little Ice Age” from the 1400s to 1700s
  • Volcanic aerosols block sunlight; the Tambora Volcano in Indonesia in 1815 lowered global temperatures by as much as five degrees Fahrenheit and caused 1816 to be “the year without a summer in New England 1816
  • Volcanic eruptions release carbon dioxide

I find the most interesting part of the paper to be a discussion under the bullet titled “Changes in greenhouse gas concentrations.” “The heating or cooling of the Earth’s surface can cause changes in greenhouse gas concentrations. For example, when global temperatures become warmer, carbon dioxide is released from the oceans. When changes in the Earth’s orbit trigger a warm (or interglacial) period, increasing concentrations may amplify the warming by enhancing the greenhouse effect. When temperatures become cooler, CO2 enters the ocean and contributes to additional cooling. During at least the last 650,000 years…during warm interglacial periods CO2 levels have been high and during cool glacial periods, CO2 levels have been low.” (Emphasis added) It is thus quite clear that those who blame changes in temperature on changes in carbon dioxide concentrations have ignored that the reverse is true.

I often read that Arctic sea ice coverage is continuing to shrink. I frequently look at the National Snow and Ice Data Center graphs of Arctic sea ice extent, and it is true that current coverage is less than the 1979-2000 average. However, the 2011 data is virtually tracking the 2007 levels (The amounts in April 2011 were higher than April 2007, but June 2011 levels are slightly lower than June 2007). How is it possible for no ice loss since 2007 translate to “continuing to shrink?” Current news reports are once again talking about severe and hot weather are being caused by global warming. The EPA paper describing the causes of past climate change would say that man has little influence on what may or may not happen.

Church Ranch and Rocky Flats Part I

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I recently met with Charles (Charlie) Church McKay to discuss his family’s history and  relationship with Rocky Flats. He was quite candid in discussing some of the past conflicts between his family and the Rocky Flats bureaucrats. He told me that Len Ackand’s book, “Making a Real Killing” is an excellent source of information, and he traded me a copy of that for a copy of my book, “An Insider’s View of Rocky Flats, Urban Myths Debunked” (free on this web site or at Amazon as either a paperback or Kindle).  He also gave me a compendium titled, “Snapshots of History, Church Ranch and the Church Ranch Family.” That compendium and the summary history of his family on the Church Ranch web site on the heritage link were the sources for this posting. I intend to focus on the family history in this posting, and will detail some of the conflicts with Rocky Flats in Part II.

George Henry Church and Sarah Henderson Miller were married in 1861 in Iowa and departed for Colorado in what they called their honeymoon in a wagon pulled by an ox team. They began this venture despite the fact that most people who had attempted to make the trip with signs such as “Pikes Peak or Bust” had eventually turned around after making a new sign that said something such as “Busted.” Some Indians offered to buy Sarah for nine ponies and $100, and Sarah told George, “You will never have a better offer and better close the sale.” (To give an idea of what $100 was worth in those days, there is mention of buying half a bushel of potatoes and five dozen eggs for fifteen cents.)  A man arrived who told them the Indians weren’t joking, and the discussions ended. The Churches made it to Denver in nine weeks, and Sarah estimated the population at 3,000 to 4,000. They travelled on into the mountains to buy several mining claims. The mining didn’t work out, so they returned to Iowa, bought 50 head of cattle, and made the return trip to homestead. They eventually homesteaded in Jefferson County three and a half miles from the nearest neighbor, and eventually owned land where Rocky Flats was built after the Atomic Energy Commission offered the Church family a low price “under the threat of condemnation.”

The first mention of “Rocky Flat” or “Rocky Flats” I located was in an article titled “Snow Storm of 1913 at Church’s Ranch” by Marcus Church. The storm must have been one of those epic upslope storms where all the moisture is the air is dropped as snow on the Front Range. There was 3 1/2 to 4 feet of snow at the Church ranch, and up to 7 feet in Golden. Snow and wind continued off and on until a “Chinook” warm wind finally began melting some of the drifts on January 3rd. The ranchers battled to keep the horses and cattle dug out of the drifts, watered, and fed.

The Churches were ardent entrepreneurs, and had several firsts in the settlement and development of Colorado. George was the first farmer in to successfully harvest a crop of winter wheat, although he recognized early that farming would be much more successful with irrigation. He constructed a ditch from the mouth of Coal Creek Canyon and built the first irrigation reservoir, Church’s Upper Lake,  in 1870-1871 and Church’s Lower Lake a bit later. A contract was made with Golden and Ralston Creek Ditch Company to acquire rights of way and extend the ditch to cover the Church lands. The ditch takes water from Clear Creek and continues to operate today. Water rights were of premium importance when the system was being built and began to operate. An article in the compendium titled “George Henry Church” describes how his decision to build the first irrigation ditches and lakes “…brought enmity of neighbors on Coal Creek, from which he drew the water supply. So high ran the felling that it resulted in threats on his life and it seemed at times that serious trouble would ensue.”

The innovation and ventures didn’t end there. The Churches were the first to bring Hereford cattle to Colorado, built and operated a stage coach stop, and mined gravel. (The gravel business would eventually create significant conflict with Rocky Flats, but that will be covered in Part II.) As is the case for most families, there were also tragedies and failures. Perry Church, younger brother of Marcus, died at the age of 29. The Great Depression hit the family hard, and they were forced to sell 3,000 acres of Front Range properties, including much of the irrigated land. They were able to hold on to about 4,000 acres, which included part of what would become the site of the Rocky Flats nuclear weapons plant. The Churches were hard working and independent people, and they were forced to begin dealing with a bureaucracy that strives to make certain all the rules imposed by the bureaucracy are followed. As a self-described “part time libertarian,” it isn’t difficult to judge which side I would take.

Rocky Flats National Wildlife Refuge

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There was a recent article in the Denver Post announcing the opening of a new visitor center at the Rocky Mountain Arsenal National Wildlife Refuge by the U.S. Fish and Wildlife Service. I have mixed feelings about that announcement. I’m pleased that the Arsenal was able to open that facility, but I would be more pleased if I would hear there is staff and money to develop a similar facility at the Rocky Flats site. There is some irony that the Rocky Mountain Arsenal refuge has opened, because Rocky Flats workers often had to listen to stories about the Arsenal when they told someone they worked at Rocky Flats. I recently told a man I had retired from Rocky Flats, and he told me about armed guards showing up when he was a child playing in a field near the Arsenal. For those who are confused, Rocky Flats was west of Denver and made components for nuclear weapons for the Department of Energy and the Rocky Mountain Arsenal was 10 miles east of downtown Denver and was a chemical weapons plant managed by U.S. Army.

There undoubtedly will be similarities between the Rocky Mountain Arsenal refuge and what hopefully becomes available at the Rocky Flats site. I don’t know whether the Aresenal was pressured to put up signs warning that the area had been used for manufacture and storage of various chemical warfare agents, but there was and is controversy about the planned refuge for Rocky Flats. The first link on a July 2007 press release from the Fish and Wildlife Service is “Rocky Flats Signage,” which explains in detail that public use was a controversial issue in preparation of plans for the refuge. The document explains, “…due to the site’s former use as a nuclear weapons production facility and the contamination that resulted from that use, many members of the public expressed concern regarding the cleanup of the site and the safety of future visitors. Based on the best currently available scientific data and unequivocal determinations by the EPA and Colorado Department of Public Health and Environment (CDPHE), that the extensive cleanup program resulted in a landscape that is safe for refuge workers and visitors, (the plan) provides for future public use of the site…”

The health risk of “low levels” of plutonium is what creates the controversy. The term “low levels” is in quotes because I’ve been taken to task for using the term with the admonition that all levels create health risks. As I explain in Chapter 25 of my book, “An Insider’s View of Rocky Flats, Urban Myths Debunked,” (available free on this site and at Amazon as a paperback or as a Kindle version)  the entire earth is contaminated with plutonium and every person has many billions to trillions of plutonium atoms in their bodies resulting from atmospheric nuclear weapons testing. There are posts in the archives of this site dated January 18 and 25 that discuss the controversy. People worked in the industrial area of Rocky Flats for years, decades in many cases, and generally their health is as good as people who never worked there. (Some would argue with me about that statement, but I’m going to let them make their own arguments.) My belief is that a visit to areas outside the closed former industrial area won’t create a health risk to my family if I’m ever able to invite them to go there with me. I hope to recreate there early and often. Those who disagree can elect to not visit.