2008 has been defined as the "sub-prime" crisis, the mortgage crisis, the housing bubble "toxic debt" crisis, the everything mortgage related crisis. No one would/should argue that the government's push for "affordable housing" didn't create the foundation for the 2008 global financial crisis. Government sponsored entities, or GSEs, like Fannie Mae and Feddie Mac and government backed entities like Ginnie Mae basically were the entire industry, representing 75% of the mortgage market in 2003. Sure, some will blame unscrupulous mortgage lenders, predatory lenders, and others, but banking is by far one of the most heavily regulated industries in the world, and it was congress that wrote the rules that allowed the securitization of mortgage loans, passed the laws that "encouraged" banks to make sub-prime loans and built the foundation of the 2008 crash. As this article from 2000 proves, the eventual outcome was easy to see for anyone willing/brave enough to look.
The Clinton administration has turned the Community Reinvestment Act, a once-obscure and lightly enforced banking regulation law, into one of the most powerful mandates shaping American cities-and, as Senate Banking Committee chairman Phil Gramm memorably put it, a vast extortion scheme against the nation's banks. Under its provisions, U.S. banks have committed nearly $1 trillion for inner-city and low-income mortgages and real estate development projects, most of it funneled through a nationwide network of left-wing community groups, intent, in some cases, on teaching their low-income clients that the financial system is their enemy and, implicitly, that government, rather than their own striving, is the key to their well-being.
Unfortunately, the mortgage industry was highly politicized, and anyone that would have spoken out would have been demonized, smeared, slandered, fined, fired or worse. It simply was easier to go along and get along than to stand up for what was right. The bullies were successful in silencing critics, so the MBS Titanic kept sailing unhindered into the field of financial icebergs.
Democrats and the media insist the Community Reinvestment Act, the anti-redlining law beefed up by President Clinton, had nothing to do with the subprime mortgage crisis and recession.
But a new study by the respected National Bureau of Economic Research finds, "Yes, it did. We find that adherence to that act led to riskier lending by banks."
The chart above demonstrates how things in the mortgage market changed dramatically in 2003. 3:20 into this linked video, President Obama explains how "the original idea was a good one, let's see if we can distribute risk more broadly." The problem was, if banks were going to be forced into making loans that they knew were of poor quality, they needed a way to shed the risk.
In 1989, President George H.W. Bush signed into law the Financial Institutions Reform Recovery and Enforcement Act that included provisions to increase public oversight of the way the CRA was enforced. Regulators were required to issue public, written performance evaluations of banks, including a system that rated bank compliance as Outstanding, Satisfactory, Needs To Improve or Substantial Non-Compliance. This public scrutiny began to push banks to make more loans to low-income borrowers, a process that often involved putting in place relaxed lending standards.
Shortly afterward, Fannie Mae and Freddie Mac addressed bank fears that the low-income lending with relaxed standards would unduly increase risk by beginning to securitize "affordable" mortgages. This was the beginning of subprime lending. It was the "pull" factor that complimented the "push" factor of the CRA.
Leading up to 2003, Freddie and Fannie had been greatly loosening credit standards. Prior to the securitization of sub-prime loans, if a bank wrote one and it failed, the bank took the loss. That is why most banks didn't write sub-prime loans. Once sub-prime loans were being fully embraced by the GSEs, they went mainstream, and they went big. Banks were no longer required to bare the risk of their actions, they could write a "no doc" mortgage to the worst credit risk on earth and couldn't care less. All the bank cared about was collecting the origination fee, and they then would turn around and sell the mortgage to be packaged into a MBS bond. If and most likely when the mortgage borrower defaulted, the owner of the bond would take the loss, not the bank.
From 2003 to late 2006, conventional loans (including jumbo loans) declined from 78.8 percent to 50.1 percent of all mortgages, while subprime and Alt-A loans increased from 10.1 percent to 32.7 percent. Because GSE purchases are not included in these numbers, in the years just before the collapse of home prices began, about half of all home loans being made in the United States were non-prime loans. Since these mortgages aggregate more than $2 trillion, this accounts for the weakness in bank assets that is the principal underlying cause of the current financial crisis.
In a very real sense, the competition from Fannie and Freddie that began in late 2004 caused both the GSEs and the private-label issuers to scrape the bottom of the mortgage barrel. Fannie and Freddie did so in order to demonstrate to Congress their ability to increase support for affordable housing. The private-label issuers did so to maintain their market share against the GSEs' increased demand for sub-prime and Alt-A products. Thus, the gradual decline in lending standards--beginning with the revised CRA regulations in 1993 and continuing with the GSEs' attempts to show Congress that they were meeting their affordable housing mission--came to dominate mortgage lending in the United States.
Banks simply no longer had any "skin in the game."... or so they thought. Those same banks that were writing these "toxic loans" were also buying the MBS bonds that held them, as well as Fannie and Freddie preferred stock, assuming the "implicit" government guarantee would protect them. Going into the crash, many community banks held preferred stock in Fannie and Freddie as "Tier-1" bank reserves. Banks also bought "credit default swaps" as insurance against the "toxic debt" they were buying. This politically correct house of cards, built with the best of intentions, put not only the US banking system, but the entire global financial system and economy at catastrophic systematic risk. All it took was for then Treasury Secretary Hank Paulson to make the ill advised decision to allow a "too big to fail" bank to fail, and the entire illusion of safety, stability and security on which banking is dependent vanished. Five years later we are still recovering, but for those who would have dared to look, all the warning signs were easy to spot, and the crisis could have been avoided. Society simply chose to turn a blind eye to the risks and reality, and we paid dearly for it.
Contrary to my initial conclusion, the evidence is overwhelming that the CRA played a significant role in creating lax lending standards that fueled the housing bubble.
The modus operandi, or MO, is virtually the same for other bubble type crises. An agenda is created, oftentimes with the best of intentions, it becomes politicized, people that want to believe turn a blind eye to the risks and truth, the people that dare to speak out get smeared, slandered, censored and marginalized so the bubble can continue on unhindered. The bubble finally bursts and those responsible then focus on deflecting blame, finding scapegoats, denial and persecuting the innocent. One only needs to read one of my bearish articles about gold or the Bitcoin to see how the MO is executed. It seems to be a very ugly characteristic of human nature.
Gold and Bitcoin, however, aren't likely to result in another 2008-like crisis. Those bubbles are relatively well contained, and the damage will be limited to relatively few "true believers." The most likely cause of the next 2008-like crisis will be the "green economy." I've written many articles warning about the dangers of the inherent government dependancy of these industries. The economics are simply pure fantasy. Not only are the economics pure fantasy, the climate "science" that backs this entire political agenda is based upon a theory that the computer models can't even make work. Nearly 100% of climate models over estimated current temperatures, most by statistically significant amounts.
In any real "science" evidence like the above chart would mean game over, checkmate, do not pass go, game set match. Those kinds of results are what you get when you "reject the null." Those numbers mean the theory is rejected. Unfortunately, like the mortgage crisis, global warming/climate change has become politicized, so anyone that challenges the climate orthodoxy is labeled a climate "heretic," a "denier" of the true faith, a "flat earther." Simply read the comments to some of my articles to see the MO in full force. People rarely if ever refute my claims, they just attack me personally.
The audacity of the denier is impressive
The worst atrocities in the history of mankind have occurred as a result of the politicization of science, and the recent global warming movement has simply thrown the scientific community back into the dark ages. I simply choose not to become part of the climate inquisition, and that is why I write these articles.
I wouldn't be writing this article, however, if I didn't have evidence to back up my theory. We have been reading for years about "ghost cities" popping up in China. Communist governments are defined by their legendary ability to misallocate resources on a epic scale. Fear of a Chinese credit bubble has been making the headlines for years, and now they are claiming that it is bursting.
Uncertainty is growing over China's ability to sustain the rapid rates of economic growth it has seen over the past decade amid concern over high-levels of debt among its provincial governments. These concerns have helped to drive sharp falls across emerging markets since the beginning of the year.
What was the trigger that set off the fears? What was the catalyst? China for the first time allowed a default on a bond payment. Not just any bond, a bond of a solar company, and it looks like another solar company will be the next.
China's first corporate debt default in at least 17 years has sparked fear that the country's 'Lehman moment' is fast approaching, and Lombard Street Research says this is just the tip of the iceberg.
Shanghai Chaori Solar Energy Science & Technology failed to make an 89 million yuan ($14.5 million) interest payment on Friday. On Tuesday, another solar company announced a second year of net losses, leading some analysts to pinpoint the firm as the next domino to fall.
China can build ghost cities, but they don't seem able to make solar companies profitable, and yet wind and solar has been a central focus of the climate change agenda. Here in the US, we have had plenty of warnings of the pending disaster, and yet the spending just continued, spurred on by tax incentives, rebates, subsidies and tariffs, all the while ignoring the comercially viable solutions. Like the mortgage crisis, it is a recipe for disaster.
Very few of these "alternative" energy sources have any real chance of surviving without government subsidies, and like a sub-prime mortgage, will likely never be able to pay back the loans that built them. If China can't do it in a totalitarian "state capitalism" economy where economics are secondary, these industries have zero chance of surviving in a truly free market. In the US, government regulations intended to kill the competition are the main source of what little success these "green" industries do have.
"As coal-fired power plants are set to retire and EPA uses every regulatory trick in the book to make sure no new plants are built, we are going to see increased uncertainty in energy prices, reliability, capacity and reserves," Louisiana Republican Sen. David Vitter told The Daily Caller News Foundation in an emailed statement.
This news comes as China approved 100 million metric tons of new coal production capacity in 2013, despite air widespread air pollution concerns in the country. This is part of the Chinese government's plan to bring 860 million metric tons of coal production online by 2015 - more than the entire annual coal output of India.
Unlike the US however, China doesn't seem willing to destroy one domestic industry to prop up another. It simply doesn't make any sense to build 4 coal powered power plants a week, only to bankrupt them with taxes and regulations.
A carbon tax is increasingly controversial among lawmakers, said Zhu, adding that an environment tax would be easier to push through without carbon in the mix.
The carbon and air pollution taxes would target mostly the same sources, and in difficult economic times China is wary of hitting companies with too many costly regulations.
To make matters worse, not only have these "green energy" programs threatened the global financial markets, they have created a huge national security risk as well. Today Russia's main tool of leverage over the EU is its ability to cut off 40% of its natural gas. While the Don Quixotesque EU was tilting at windmills and solar farms, Russia was methodically and systematically strengthening its position, while the EU was deliberately weakening its own.
Geopolitical risks are changing the dynamics for the "green energy" revolution as well. Germany and the UK have started to turn away from their Don Quixotesque efforts, and it appears just in time. Germany, the UK and the rest of the EU have just been rudely awakened to discover that wind and solar are no match for diesel powered Russian tanks, and they have no easy energy solution if Russia decides to play hardball.
While most of the damage done by the Chinese "green economy" defaults, and Russia's energy blackmail will be contained overseas, the US "green economy" threatens the domestic economy. A global recession will likely cause energy prices to collapse. If energy prices collapse, ethanol will no longer be commercially viable. If the "green economy" does trigger a financial collapse, the likelihood of the EPA's RFS2 program getting repealed increases, and if that happens, farmland prices will likely be the next bubble to burst.
Ironically, fuel prices are likely to be what triggers the bursting of the farmland bubble, only high energy problems aren't the threat, low energy prices are. The reason low energy prices are the greatest threat is because low energy prices threaten ethanol margins, on which the entire farmland bubble is based.
The world has become a greenhouse of cards. If the "green economy" does trigger the next major financial collapse, the real tragedy will be that it was so avoidable. The economics for wind and solar are years away, when real solutions exist right now. Coal and natural gas are abundant in the US. Infrastructure projects like the Keystone XL pipeline could create real jobs and transport commercially viable energy sources. Coal-to-liquid and gas-to-liquid technology exists right now and is being used elsewhere in the world. Unfortunately, the politics have prevented true solutions from being developed, and the "solutions" chosen by the misguided "central planners" have now put us all at risk. Our well-intentioned efforts to save the earth may end up destroying civilization, or at least make it much poorer.
Unfortunately, trying to quantify the potential damage from "green economy" crisis would be like trying to quantify the eventual damage from mortgage before the Lehman Brothers failure. There are known knowns, known unknowns and unknown unknowns, and with any global systemic catastrophic crisis there are a lot of unknown unknowns.
That being said, what are the known knowns?
1) We know the "green economy" has severely weakened the EU, especially countries like Spain.
2) We know that the EU's "green economy" efforts have made them highly subject to energy blackmail by Russia, an event that is going on right now as I write this article.
3) We know that the recent default of a Chinese solar company, and likely default of another have already spooked the Chinese markets and cost investors fortunes. China has a $4.2 trillion bond market, and the telltale signs of widening credit default swaps are starting to develop.
4) We know the US farming industry has been extremely distorted by programs like the EPA's RFS2, with over 40% of corn being used in ethanol production.
5) We know that the vast majority of the "green economy" is completely dependent upon government support, and are far from being commercially viable. Even after the huge push for wind and solar, they barely register when compared to total energy consumption.
6) We know that over the winter natural gas shortages developed, putting at risk lives huge numbers of people. During the shortage, society didn't turn to wind and solar, they turned to coal, natural gas and diesel to heat their homes and power their generators. Wind and solar simply don't provide reliable energy when it is needed most.
7) The US and EU have been undermining the coal and oil industry. One only needs to study the history of WWII to understand how infinitely dangerous that is. Japan bombed Pearl Harbor largely to gain access to Indonesian oil, and Germany used coal to made diesel fuel and power their factories. Tanks don't drive on solar, especially at night, and jets will never fly on wind power. It is worth noting that the bankrupt state-of-the-art solar company Solyndra relied on conventional power to run its factories, so even if tanks can run on solar, society had better have coal burning power plants to power the factories that make the solar panels.
8) We know dependence on Russian energy sources weakens historical bonds between allies. Today Germany and the EU are failing to take a tough stance against Russian aggression, threatening to repeat the mistakes of the past.
Part of the problem is that Western Europeans are assuming their usual quisling positions by resisting any meaningful financial and economic penalties. The scenario proves how corrosive the lack of American leadership can be to a stable world. Appeasement is contagious.
9) In a nutshell, we know the movement towards unreliable "green energy" sources has weakened our global economy, threatens the Chinese bond and equity markets, puts our citizens at risk if an extended "little ice age" develops and has allowed some very bad people in the world to exploit the West's energy dependence.
What are the known unknowns?
1) We don't know how far Putin will push the EU, and we don't know much the EU will give. Putin, don't forget, is an ally of Syria, and protected its leader when it was proven that Syrian forces had gassed its own people. Human life and rights don't rank at the top of Putin's priority list, global domination and restoration of the Russian empire does. Weakness inspires and invites aggression from tyrants.
2) We don't know how many more "green" companies will default in China and the rest of the world. We do know one single solar bankruptcy in the US, Solyndra, cost tax payers around half a billion dollars, and "green" companies in general don't have a very high success rate. We do know a single Chinese solar bankruptcy already has the markets on edge.
3) We don't know if Congress will repeal the ethanol mandate and continue to support the EPA's RFS2. A repeal of the ethanol mandate combined with a collapse in fuel prices due to a Chinese financial crisis could be the catalyst to burst the farmland bubble.
4) We don't know which direction the climate will "change" in the future. When the environmental crisis du jour was global warming, it made sense to turn to wind and solar. By shifting the focus to climate "change," that focus no longer makes sense. If global warming can cause the next ice age, far more effort should be put towards preparing for the next ice age, and that means conventional sources of energy. The problem is, we have only been preparing for continued warming, and that isn't what is happening. Temperatures have been basically flat for 15 years, defying almost every climate model. To make matters worse, historical records show that global climates can turn cold rather quick, even when CO2 levels were 10x the current level.
5) We don't know how current events like the recent winter, natural gas shortage, Russian aggression and Chinese default of a solar company will impact the 2014 elections. A landslide election for the Republicans could be just the catalyst to repeal the ethanol mandate just at the wrong time. Republicans were the ones that thought it would be consistent with free market principles to let Lehman Brothers fail, so I wouldn't put it past them to allow the ethanol and farming industry to fail as well. I thought 1929 would have taught them some lessons, but apparently some lessons failed to register.
6) We don't know the path of future energy prices. With tremendous gains being made in the fracking industry, fuel prices may fall on their own to levels that make ethanol unprofitable. If that happens, that farmland bubble could burst without any help from a Chinese crisis or Russia.
What are the unknown unknowns?
We don't know, that is what makes them unknown unknowns. The spider-web of interrelationships outlined above demonstrates how complex analyzing the impact of the "green economy" truly is. There are economics, fiscal, geopolitical, societal, national security and geopolitical risks that have to be considered. While it is impossible to define and understand all the risks, like the 2008 crash, the important aspect is to be aware of the potential. Investors didn't need to know how far the markets would fall due to the 2008 crisis; they just needed to understand the risks, follow them as they unfolded, know the markets were headed down and make adjustments accordingly. That is the best way to handle the unfolding of the current crisis as well.
Lastly, just because I write a bearish article on the "green economy" does not make me an enemy of the "green economy." I've invested heavily in some "green economy" stocks. I have also lost a lot of money in "green economy" stocks by not fully understanding the risks involved, and many other people have as well. I write these articles to help people understand the risks so they can learn from my mistakes and avoid them in the future. When governments become involved in industries, there is a whole new level of analysis that must be applied. The mortgage industry should have taught us all that lesson very well, and investors would be wise to learn from it.
Disclaimer: This article is not an investment recommendation or solicitation. Any analysis presented in this article is illustrative in nature, is based on an incomplete set of information and has limitations to its accuracy, and is not meant to be relied upon for investment decisions. Please consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author's best judgment as of the date of publication, and are subject to change without notice. Past performance is no guarantee of future results. For my full disclaimer and disclosure, click here.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.