Elizabeth Warren is a complete idiot

Here's her deep analysis of the financial crisis of 2008 on the Colbert Show:

WARREN: I grew up in an America that was investing in kids. It was investing in public universities. It had a higher minimum wage. It was an America that said every kid would get a fighting chance. And that's how we built America’s great middle class. Then starting in about the 1980s, we turned in a different direction.

COLBERT: You mean when Reagan came in and it was morning in America ...

WARREN: Yes, that is the right time, when this happened. ... And what happened is that he had a couple of ideas. The first one was that they would fire the cops. Not the ones on Main Street but the ones on Wall Street, [the ones] making sure the biggest financial institutions actually followed the law. Those were the cops they got rid of. ... See if we don't have some basic rules, then what happens is exactly what happened then. And that is the big financial institutions made billions of dollars by cheating people on credit cards, mortgages.

So, according to Pocahontas' interpretation, we can blame it all on Reagan; he fired the regulators, and the evil, greedy bankers on Wall Street ran amok.

This is just nonsense.

In an earlier blog post, I mentioned that I have been reading Charles Calomiris' book Fragile by Design. According to Calomiris, there was no lack of regulators. Rather, regulators, policy makers, and politicians on both sides of the aisle knew exactly what was going on. In fact, they had planned it and actively promoted it: the massive expansion of easy credit, which turned out to have such disastrous effects on low- and middle-income individuals, was precisely what they intended all along:

The subprime crisis was, first and foremost, the outcome of a political bargain. Since the 1980s, and accelerating through the 1990s and 2000s, banks, along with GSEs, were allowed to grow into enormous enterprises. This expansion afforded them increased economies of scale, economies of scope, potential for market power, and levels of too-big-to-fail protection. In exchange, they had to share some of the resulting rents with activist groups — a move that policy makers saw as a politically easy way to address the serious social and economic problems that affected America’s urban poor. This situation created an opportunity for activist groups to leverage the rules so that they could garner a share of the rents being earned by banks for themselves and their members.

Banks would not engage in this kind of rent sharing without limit, however. They knew that they would be able to do more at lower cost to themselves if they could either sell the resulting high-risk mortgages to Fannie or Freddie or support them with low levels of prudential capital, which meant securitizing them. Thus activists used their influence in Congress in the banks’ favor to impose HUD mandates on Fannie and Freddie mortgage purchases and to force Fannie and Freddie to loosen their underwriting standards. Fannie and Freddie went along, but only on condition that they were granted the right to finance their mortgages and mortgage-backed securities with money that they borrowed, with an implicit guarantee of their debts coming from taxpayers.

Once the basic rules of this game were laid down in the early 1990s, the game unfolded in a predictable manner. ... Policy makers and regulators fully understood what was happening. They could have stopped the subprime mortgage risk machine by changing the rules about HUD mandates or prudential capital requirements, but they chose not to do so. Instead, regulators stood by and watched: in essence, they subcontracted the regulation of banking to private firms [Moodys and S&P] that sold ratings and whose incentives were therefore aligned with those of issuers and purchasers of securities, who wanted those products to have inflated ratings. Politicians and regulators from both sides of the political aisle were involved in actively supporting this game and in passively permitting it to unfold. [emphasis added]

The subprime crisis did not occur because the banks and Fannie and Freddie were not following the law, but precisely because they were following the law all too well. Populist groups like ACORN lobbied politicians to force the banks to create more subprime credit. They also lobbied politicians to use their influence to force Fannie and Freddie to weaken their underwriting standards so they could purchase and securitize more subprime loans. The politicians, seeing that subprime lending was an easy way for them to funnel resources to low-income households, readily acquiesced. The banks originated the loans and Fannie and Freddie packaged up the toxic stuff and transmitted the poison throughout the global financial system. And the regulators did nothing to stop this because they knew easy credit for the un-creditworthy was precisely what the politicians wanted. This was the so-called "Let them eat credit" strategy that Raghuram Rajan, former Chief Economist at the IMF, has so eloquently described in his book Fault Lines. Writes Rajan:

[T]he government’s response to rising inequality—whether carefully planned or the path of least resistance—has been to encourage lending to households, especially but not exclusively low-income ones (the government push for housing credit was just the most egregious example). ... As I argue in my recent book Fault Lines, “let them eat credit” could well summarize the mantra of the political establishment in the go-go years before the crisis.

Consider the worst possible interpretation of the banks' actions. That is, assume for a moment that it all started with the banks; assume they were greedy and wanted to grow to enormous size so they could make money hand over fist; assume the banks were the first ones to loosen underwriting standards. Even if this scenario were correct (which, according to Calomiris, it is not), politicians on both sides of the aisle, persuaded by activist groups on the Left, went along with the expansion of subprime credit because it was politically expedient; and the regulators, though fully aware of what was happening, did nothing to stop it.

In sum, Warren's characterization of the 2008 panic as somehow Ronald Reagan's fault is completely bogus. (Apparently, the statute of limitations for The Gipper is even longer than it is for Dubya.) Senator Warren is held up by the Left and its supporters in the mainstream media as their new champion. In reality, she is just another simple-minded Democratic political hack who thinks she can gain power by repeating the mantra "Reagan, Bush, Koch Brothers" over and over again.