Anyone who has seriously looked into the cause of the financial crisis of 2008 knows this already, but given the persistent misunderstanding by a large chunk of the American public that our economic woes are due to George W. Bush, Wall Street, or the generic “1%” it is worth reviewing again.
Back in 1977, Jimmy Carter signed into law the Community Reinvestment Act (CRA), which was intended to reduce discriminatory credit practices against low-income neighborhoods. In other words, it would force banks to be less stringent with people from poor areas on things like income, credit history, and ability to repay a loan. You know, things that any sane lender should be pretty keen on before laying out tens or hundreds of thousands of dollars for a home loan. The notion that people should have to be held accountable for their own livelihood is pretty antithetical to the liberal Democrat world view, and the simple reality that poor people can’t afford bigger and nicer houses because they lack the financial wherewithal and responsibility to pay for them is irrelevant. Thus, the CRA was born, and the bubble was created.
Fast forward a few years to Bill Clinton, who really put teeth – it might be more accurate to say fangs – into the CRA and accelerated the bubble’s growth. Investor’s Business Daily has a great recap from that point forward that is worth reading in its entirety:
Newly released memos from the Clinton presidential library reveal evidence the government had a big hand in the housing crisis. The worst actors were in the White House, not on Wall Street.
During the 1990s, former Clinton aides bragged that more aggressive enforcement of the Community Reinvestment Act pressured banks to issue riskier mortgages, lending more proof the anti-redlining law fueled the crisis.
A 2012 National Bureau of Economic Research study found “that adherence to that act led to riskier lending by banks,” with “a clear pattern of increased defaults for loans made by these banks in quarters around the (CRA) exam, (and) the effects are larger for loans made within CRA tracts,” or low-income and minority areas.
To satisfy CRA examiners, Clinton mandated “flexible” lending by large banks. As a result, CRA-approved loans defaulted about 15% more often, the NBER found.
Exhibit A in the 7,000-page Clinton Library document dump is a 1999 memo to him from his treasury secretary, Robert Rubin.
“Public disclosure of CRA ratings, together with the changes made by the regulators under your leadership, have significantly contributed to … financial institutions … meeting the needs of low- and moderate-income communities and minorities,” Rubin gushed. “Since 1993, the number of home mortgage loans to African Americans increased by 58%, to Hispanics by 62% and to low- and moderate-income borrowers by 38%, well above the overall market increase.
“Since 1992, nonprofit community organizations estimate that the private sector has pledged over $1 trillion in loans and investment under CRA.”
Other documents reveal how the community-activist group ACORN and other organizations met with Rubin and other top Clinton aides on “improving credit availability for minorities.”
Clinton’s changes to the CRA let ACORN use the act’s ratings to “target merging firms with less-than-stellar records and to get the banks to agree to greater community investment as a condition of regulatory approval for the merger,” White House aide Ellen Seidman wrote in 1997 to Clinton chief economist Gene Sperling.
“Community groups have come to recognize how terribly powerful CRA has been as a tool for making credit available in previously underserved communities,” Seidman added.
Seidman later boasted that Clinton’s 1995 CRA revisions created not only the subprime mortgage market but also the subprime securities market. Of course, subprime loans and their high default rates ruined minority neighborhoods when the market crashed.
Memos also reveal how Clinton aides held repeal of the Glass-Steagall Act hostage to strengthening the CRA. They gave Republicans deregulation of banking activities in exchange for over-regulating how those banking activities applied to low-income communities.
Clinton aides viewed ending the Glass-Steagall Act as a way to “extend the CRA to Wall Street firms” and wanted to extend it to insurers, mutual funds and mortgage bankers. But due to GOP opposition, that was “not politically feasible,” Rubin told Clinton in a 1997 memo.
In 2000, HUD Secretary Andrew Cuomo lit the fuse on the subprime bomb by requiring Fannie Mae and Freddie Mac to purchase subprime, CRA and other risky mortgages totaling half their portfolios.
A 1993 memo, “Racism in Home Lending,” captured the tone of Clinton’s affordable-housing crusade. It proposed coordinating with the Washington Post and Congressional Black Caucus on bank investigations.
These White House papers are smoking-gun evidence of Clinton’s culpability in creating the subprime bubble. The mainstream media’s silence is deafening.
This is an excellent example of the deliberate warping of a free market for political purposes. While it is a fine and honorable thing to provide aid to underserved and underfunded markets, it is simply not possible to ignore the fundamentals of economics and expect everything to work out. Someone earning $35,000 a year cannot afford a $300,000 house, and they should not be given a loan to purchase one. Banks and lenders used certain metrics to determine the level of risk in loaning their money to applicants, and if the level of risk was too high they were rejected. It was simply a matter of numbers. Only a government bureaucrat would look at the process and call it unfair or discriminatory, but that is exactly what they did.
It may have helped a few people in the short term who were able to bear up under the responsibility and financial requirements, but look at how many more were damaged in the long term. Not only were CRA-enforced loans much more likely to default, causing damage to the lenders, but when the entire system was infected with these subprime loans and the bubble finally burst in 2008, the effect on the entire nation was devastating, and severe ripples were felt around the world. Even now, six years later, home values are still in the sewer and new construction is sluggish at best. If you want to factor in the cost of lost savings and investments during the crash, you’re talking about trillions of dollars in economic damage caused by forcing the market to artificially advance a certain political cause over fundamentally sound economics. Like so many liberal policies, it was the creation of a house of cards that might have looked pretty on the outside but had a structure inadequate to holding up the weight of its own construction. It was simply a matter of time until the whole thing collapsed.
And we have liberal Democrats to thank for it, start to finish.
This raises the question: why do we keep putting liberal Democrats in charge of the economic policy of this nation? Either the American people want that kind of economic leadership, or the American people don’t understand the causes and effects of that kind of economic leadership. I’m betting it’s the latter much more than the former. Thus, we review…again.
There’s my two cents.