Instead of enforcing these guidelines the regulators ignored them. Even as the subprime mortgage problems began to surface, these regulators shrugged them off saying that subprime issues would be contained and not spread to the rest of the economy. Unfortunately they were wrong.
The regulators could have let the economic forces of capitalism work their way through the resulting Great Credit Crunch, but instead there was an alphabet soup of bailout programs that included TARP, the Troubled Asset Relief Program. The Federal Reserve pushed the federal funds rate down to zero on Dec. 16, 2008, and shortly thereafter came quantitative easing programs that continue today in QE3 and QE4.
Today's post begins a series that explains how the housing market and banking crisis evolved and how the housing market and banking system are doing today in an environment of a failed Federal Reserve monetary policy and the ongoing Great Credit Crunch.
As a backdrop to my analysis I believe that the FDIC QBP is the balance sheet of the U.S. economy, as the assets on the books of FDIC-insured financial institutions are the loans to corporate America and individuals. The borrowers have these loans as liabilities on their balance sheets.
An important component of the economy is the real estate market including bank exposures to construction and development loans (C&D), nonfarm-nonresidential real estate loans, mortgages on the books of the FDIC-insured banks, home equity loans and other real estate owned. Combined C&D and the nonfarm-nonresidential real estate loans are known as commercial real estate loans.
The FDIC QBP also tracks the banking system exposures to the notional amounts of derivative contracts, noncurrent loans and reserves for losses.
Community and regional banks that do not adequately manage their assets and liabilities become vulnerable for failure and the FDIC states the number of banks on their Problem List, but does not name names.
The lifeblood of the housing market is C&D loans for community developers and homebuilders, and mortgages for homeowners and home buyers.
In my opinion the speculative juices that kindled the housing bubble began in 1996 when President Clinton signed the bill that gave sellers of homes significant tax incentives. If a married couple sells their home and the property was their primary residency for two of the last five years, the capital gain of up to $500,000 is exempt from federal taxes. The benefit is $250,000 for individuals. There is no limit on the number of times that homeowners can take advantage of this law. The only stipulation is that the home was the primary residence for two of the last five years.