Much has been written and said about why the American economy collapsed like a cardiac patient eating a table full of Baconators, in the fall of 2008. My biggest problem with the examination of this event is that it has been marred by political loyalty and the cynicism of an emotional election cycle. The Left has one narrative that was replayed on TV ad nauseum that makes the Right and the banks the ones who did the deed. On the other hand, you have the Rightâ€™s narrative, written in books such as, â€œArchitects of Ruin,â€ by Peter Schweizer, which says that it was the Left and their Community Reinvestment Act that brought down the mighty behemoth that was the American Economy.
So we are here to solve a basic whodunit and dispel some of these myths along the way.
Weâ€™ll start with the Rights theory, which is as follows: The Democrats including but not limited to Bill Clinton, Barney Frank, Jesse Jackson, Barack Obama and many others were responsible for creating and promoting legislation that coerced bankers to give low-income folks home loans for which they were grossly unqualified. This was done in the name of equality and the idea that it is a human right for every US citizen to own a home of his own. After years of doling out mortgages that were repackaged as ever more complex securities /derivatives, the US banking system found itself leveraged to the hilt and rushing headlong towards a tipping point between money lent and money paid back. Once we went crashing through the tipping point a chain reaction of defaults occurred and like dominoes down went banks, investment houses, insurance agencies and the economy in general. When fingers were pointed at the culprit, they went squarely on first the Democrats and then poor folks. This is a great story except that itâ€™s missing a few detailsâ€¦like inconvenient facts.
Now the Left tells a different tale. The left purports that the banks were not coerced but rather more than happy to make ill-advised loans because it was instrumental in creating vast amounts of quick profits with the intent of selling said products before the inherent risk involved could be felt. Wall Street (investment houses) was clamoring for mortgages that the banks were willing to sell to them so that they could create derivatives for them to sell. What the Left blames the Republicans for is blocking regulation of said derivatives. So essentially you have bankers and traders dealing in monopoly money, claiming itâ€™s real money and punting these farces down the line while the GOP watchdogs turned a blind eye to these proceedings. Had the bankers and traders been regulated, the more toxic trades would have been stopped and thus the economy would not have exploded. This certainly follows the narrative that the GOP and Wall Street are in cahoots with one another to screw â€œthe little guy.â€ The problem with this story is that while itâ€™s not an out and out lie, it too is neglecting a few inconvenient facts.
Now hereâ€™s what really happened, complete with all the facts and figures.
First off we have a premise wherein the Democrats have the power of the Gods to promote their agenda while the GOP remained a minority party helplessly watching as the Socialist Democrat Party wrecked the country. Glen Beck may think this is true but it does not correlate with reality. For the last 30 years Republicans controlled Congress and the Senate for 40% of the time. They controlled the presidency for 73% of the time. They controlled all three branches for 20% of the time. If one is to believe that the Democrats were so successful in pushing their agenda, then one must believe that the Republican Party has shown a prodigious display of incompetence, EPIC FAIL, if you will. Then there is the Regan Revolution. His economic policies supposedly transformed both the USâ€™ and the world economy. He even inspired Margaret Thatcher in England to follow his policies. So if the Reagan Revolution happened, why are the Democrats getting blamed for wrecking the global economy? The answer is that when the facts are inconvenient, we replace them with mythology.
Moving on to the specifics, if you are to place blame for the economic meltdown at the feet of the CRA then you must first realize said legislation was a bi-partisan effort and not the single effort of Saul Alinsky and the congressional Democrats. The CRA was passed in 1977 under President Carterâ€™s watch and was a bipartisan attempt to address the issue of housing discrimination based on racial or ethnic heritage otherwise known as redlining. Now if this were really a poison pill foisted on the banks against their will, one would have to assume that in the 12 years of Republican presidents that followed the Carter administration, somebody would have either done away with the CRA or at least weakened it.
That brings us to President GW Bush. President Bush promoted the idea of an â€œownership society,â€ by providing down payment assistance to the tune of two hundred million dollars annually and a tax credit of 2.4 billion dollars to encourage the production of two hundred thousand affordable homes for low and moderate income families. Meanwhile the Bush administration had been weakening CRA enforcement and the lawâ€™s reach since the day it took office. In contrast, the CRA was at its strongest in the 1990s, under the Clinton administration, and up to this point those who had received CRA loans had been paying them regularly. It was only after the Bush administration cut back on CRA enforcement while promoting his â€œownership societyâ€ that problems arose.
Fannie Mae and Freddie Mac, our national lending institutions, were also encouraged to make more loans during the Bush years. In fact, the leadership of Fannie and Freddie were more than eager to get in on a scheme where they could make loans and then sell them incurring no risk of their own. President Bush substantially increased the financial commitment by more than 440 billion dollars. All of these proceeds were to be directed towards the low and moderate-income market. It is intellectually dishonest to blame the housing bubble squarely on the Democrats when it is clear the Republicans were just as involved in the mess.
However, since the CRA had very little impact on the financial meltdown, all that has been said above is meaningless in a discussion of what went wrong. If you look at the data, not only were there more loans made to higher income buyers but also the bulk of the toxic mortgages belonged to middle and upper class individuals.
â€œâ€¦while some major retail banks did make subprime loans to minorities in an attempt to satisfy the requirements of the CRA, the problem didnâ€™t become truly cancerous until unregulated financial firms like Argent and American Home Mortgage began to sell â€œcreative financingâ€ to subprime borrowers, many of whom were actually professional people with shaky credit, real estate speculators, and middle class buyers in â€œbubbleâ€ states like California and Florida who were looking to purchase homes priced well beyond their means, egged on by real estate agents who were on a roll.â€¦lending money to poor people and minorities isnâ€™t inherently risky. Thereâ€™s plenty of evidence that in fact itâ€™s not that risky at all. Thatâ€™s what weâ€™ve learned from several decades of microlending programs, at home and abroad, with their very high repayment rates. And as the New York Times recently reported, Nehemiah Homes, a long-running initiative to build homes and sell them to the working poor in subprime areas of New Yorkâ€™s outer boroughs, has a repayment rate that lenders in Greenwich, Conn., would envy. In 27 years, there have been fewer than 10 defaults on the projectâ€™s 3,900 homes. Thatâ€™s a rate of 0.25 percentâ€¦lending money recklessly to obscenely rich white guys, such as Richard Fuld of Lehman Brothers, or Jimmy Cayne of Bear Stearns, can be really risky. In fact, itâ€™s even more risky, since they have a lot more borrowing capacity. And, here, again, itâ€™s difficult to imagine how Jimmy Carter could be responsible for the supremely poor decision-making seen in the financial system. I await the Krauthammer column in which he points out the specific provision of the Community Reinvestment Act that forced Bear Stearns to run with an absurd leverage ratio of 33:1, that instructed Bear Stearns hedge-fund managers to blow up hundreds of millions of their clients money, and that required its septuagenarian CEO to play bridge while his company ran into trouble.â€
More to the point, if you look at the statistics for areas where there were monumental mortgage defaults, the kind that would destroy a multi-trillion dollar economy, you wonâ€™t find them in the poor neighborhoods but rather in what were the boom areas of Nevada, California, Arizona and Florida. Specifically, the neighborhoods most to blame for the economic meltdown were more than 80% white and had median incomes of more than $50,000 per year. Again, these folks were not even the target population of the CRA but people who did in fact get suckered into bad financial products by greedy bankers who were being winked at by their friends in Washington. It was like a 1980â€™s cocaine party that nobody thought would end, until it did.
Now we know it wasnâ€™t the CRA or poor people who killed the economy, and it would also seem like the Republicans, the banks and the Wall Street traders all had a hand in killing the American economy. Where does this leave the Democrats? Just as I said earlier about the Republicans having a great degree of control of the countries political apparatus, so to did the Democrats. In terms of deregulation of derivatives and overall financial regulation, the Democrats had no will to stop any of it. Just as the Republicans were allowing Wall Street to bleed the country dry, so too did the Democrats stand right next to them with little to no objection.
So who really killed the American economy? We did. We the American voters and investors murdered it when we decided to stop doing math, stop paying attention and flushed our collective integrity and common sense right down the drain. Much like the debt and the deficit, you canâ€™t accept what looks like free lunches and then turn around and get angry when the real bill comes due. Also itâ€™s rather silly that pointed examination of an issue gets pushed away in favor of party loyal finger pointing and name calling. Clearly this whole episode is evidence that is almost every case, blame is equally shared between political parties. Thatâ€™s not intellectually honest, politically literate or emotionally mature. Contrary to popular victim mentality, the US government is not an all-powerful entity that cannot be stopped. If recent elections are any indication, all it takes to stop the government from doing stupid things (like wholesale deregulation of an industry) is to vote the bums out. We murdered our own economy because we didnâ€™t pay attention and we let the good times rollâ€¦right out of control.