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Why I Mostly Blame the Democrats for the Financial Crisis

October 5, 2008

I hold forth here in the comments. Please click through because frankly I don’t have time to make it into a full post. “Written in haste, repented in leisure”.

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6 Comments leave one →
  1. Timmy C. permalink
    October 5, 2008 9:04 pm

    In your (and MIke Toay’s) posts you both blame the Community Reivestment Act which was indeed put in place by a Democrat (Carter) as core to blame on the Financial Crisis.

    You wrote: “Has it not been made clear that in was Democrats that created the CRA? That forced Fannie Mae and other lenders to take on bad loans or else face legal troubles or political disgrace?”

    While I agree that blame goes to both D’s and R’s in this, so far my reading makes me disagree that the CRA is a culprit. I’ve read balanced sounding arguments that say that the CRA was being weakened while the bad loans boomed, that it applied to the banks that actually had far less problems than those outside the CRA, and that during the housing frenzy and crash years CRA loans were only 25% of all loans.

    I’ll look more into it, but in doing so I’d love to hear that from relatively non-ideologue reputable Economists… Here is one, Barry Ritholz, political Independent, and Chief Market Strategist for an institutional research firm, and the Chief Economics Commentator for an asset management firm….and blogger.

    He blogs:

    As I have said repeatedly, Fannie and Freddie were cogs in the great housing machinery, and they bear some responsibility for the current debacle. But to argue they were the most significant factor misses the true tale of the Housing and credit debacle.

    Fannie has been around since 1938, Freddie since 1968, the CRA has been around since 1977 — suddenly, all of housing goes to hell in 2005, and then credit collapses 2 years after — and the best explanation some people can come up with is Fannie, Freddie and CRA? Gee, isn’t that rather odd — especially after 70 years?

    Update: Then there is the international issue: If Fannie and Freddie and the 1977 CRA are to blame for the US boom and bust, how did the rest of the world end up with a housing boom too? Why did prices and sales go skyward in the UK, France, Spain, Ireland, Australia, etc.? They had no CRA, or a Fannie Mae, or a Freddie Mac, — so then what caused their housing boom?

    The short answer: Ultra low rates, securitization, and perhaps some of our homegrown, innovative lending standards.

    While I understand that reducing the complexities of economic history into bumper sticker phrases is politically expedient, it does not help us understand the root cause of the problems. And, it gets in the way of helping us fashion a solution for the future. Hence, why I hold the weasels who are attempting to obscure reality and rewrite history in such disdain.

    Update: For the non-partisan, non hacks amongst you, for the policy makers and academics and economists who are truly interested in how this came to pass, and what we can do to fix it, the bottom line remains: The CRA was irrelevant to the current crisis, and Fannie Mae and Freddie Mac are mere cogs in a complex machine.

    But the primary cause of the mess? Not even close . . .

    http://bigpicture.typepad.com/comments/2008/10/fannie-mae-and.html

    So if he says CRA is not to blame, then what Governmental action or inaction did hurt?

    Here is his Barron’s article:

    http://online.barrons.com/article/SB122246742997580395.html

  2. October 6, 2008 11:55 am

    Tim-
    I agree that putting ALL the blame on the CRA is not accurate. I tried to indicate that in a, previous post
    perhaps you missed the update:

    Some have tried to blame teaser-rates on the Community Reinvestment Act of 1977, which encouraged lending to minorities and lower income Americans. But that act only applied to commercial banks. A majority of this crisis’s teaser-rate loans were made by unregulated originators not subject to the act. More fundamentally, there is no evidence the present crisis started in 1977. Teaser-rate mortgages first became widespread after Mr. Bush took office in 2001.

    CRA I think while noble in it’s aims, did tend to create an political environment where threatening banks with charges of redlining became more and more effective (through groups like ACORN, of which Obama was a trainer). Once standards were lowered for minorities, they became the standard for everyone.

    I respecfully disagree with your expert above. How could the failure of Fannie and Freddie not be a key component of what has gone down? They have backed half of the mortgages in America, correct?

    I would agree that the situation is very complex, and it’s best to avoid simplistic polemics. Still I get mad because of the nakedly partisan nature of Pelosi and Co. during this time of crisis- which has only made the situation worse for the country.

  3. David permalink
    October 6, 2008 1:36 pm

    This time of crisis, you can also blame McCain for partisan politics with the ‘suspending campaign’ stunt (William Krsitol drooled about how it was an act of genius). Many in the GOP felt that he wedged himself into the process to score points in the polls, but that has seemed to have backfired on him and his party

    If you have been reading the polls, the race is tight in the south, because there are many people who will vote against their own well-being, because they can’t vote for a black man-and these are democrats. This is going to be one ugly final four weeks. The republican smear machine is well grease with BS and its going to be throwing as many cowpats as possible.

    Ultimately, this bail-out screws us all in the middle-class and poor. The rich will get their golden parachutes and be rescued in this Neo-Socialist movement (we are being neo-conned once more). Very little is helping out the ones struggling with their loans, the unemployment rate is going up, the stock market is dropping. None of our politicians know what’s going on, and very few are standing up to the system that got us here. It’s not the democrats fault, its both parties that are thumbing their nose at us, and our children and sticking us with the bill (especially those of us who have done the right things over the years)

    Wake up, people of this country, wake up!

  4. Timmy C. permalink
    October 6, 2008 6:21 pm

    More on this when I can:

    But as I read it Ritholz he’s saying Fannie and Feddie were “cogs in a bigger machine,” that broke not irrelevant, but by no means the real full story.

    He would say that CRA had NO relevance as a primary cause, what you are saying is that it WAS a primary cause, just not the only one.

    More from him, he asks a series of VERY good questions on the theory of CRA as a primary cause of the housing/credit crisis:

    “Let’s clarify the causes of current circumstances. Ask yourself the following questions about the impact of the Community Reinvestment Act and/or the role of Fannie & Freddie:

    • Did the 1977 legislation, or any other legislation since, require banks to not verify income or payment history of mortgage applicants?

    • 50% of subprime loans were made by mortgage service companies not subject comprehensive federal supervision; another 30% were made by banks or thrifts which are not subject to routine supervision or examinations. How was this caused by either CRA or GSEs ?

    • What about “No Money Down” Mortgages (0% down payments) ? Were they required by the CRA? Fannie? Freddie?

    • Explain the shift in Loan to value from 80% to 120%: What was it in the Act that changed this traditional lending requirement?

    • Did any Federal legislation require real estate agents and mortgage writers to use the same corrupt appraisers again and again? How did they manage to always come in at exactly the purchase price, no matter what?

    • Did the CRA require banks to develop automated underwriting (AU) systems that emphasized speed rather than accuracy in order to process the greatest number of mortgage apps as quickly as possible?

    • How exactly did legislation force Moody’s, S&Ps and Fitch to rate junk paper as Triple AAA?

    • What about piggy back loans? Were banks required by Congress to lend the first mortgage and do a HELOC for the down payment — at the same time?

    • Internal bank memos showed employees how to cheat the system to get poor mortgages prospects approved that shouldn’t have been: Titled How to Get an “Iffy” loan approved at JPM Chase. (Was circulating that memo also a FNM/FRE/CRA requirement?)

    • The four biggest problem areas for housing (by price decreases) are: Phoenix, Arizona; Las Vegas, Nevada; Miami, Florida, and San Diego, California. Explain exactly how these affluent, non-minority regions were impacted by the Community Reinvesment Act ?

    • Did the GSEs require banks to not check credit scores? Assets? Income?

    • What was it about the CRA or GSEs that mandated fund managers load up on an investment product that was hard to value, thinly traded, and poorly understood

    • What was it in the Act that forced banks to make “interest only” loans? Were “Neg Am loans” also part of the legislative requirements also?

    • Consider this February 2003 speech by Countrywide CEO Angelo Mozlilo at the American Bankers National Real Estate Conference. He advocated zero down payment mortgages — was that a CRA requirement too, or just a grab for more market share, and bad banking?

    The answer to all of the above questions is no, none, and nothing at all.

    The CRA is not remotely one of the proximate causes of the current credit crunch, Housing collapse,and mortgage debacle. As I detailed in Barron’s, there is plenty of things to be angry at D.C. about — but this ain’t one of them.

    If you were to ask me to reveal the prime causative factor for the Housing boom, I would point you to Fed Chairman Greenspan taking rates to 1%, and then leaving them there for a year. The prime factor in the bust was nonfeasance on the Fed’s part in supervising bank lending, allowing banks to give money to people who couldn’t possibly pay it back.

    The root legislative cause of the credit crisis was excessive deregulation. From exempting derivatives from regulation (2000 Commodities Futures Modernization Act) to failing to adequately oversee ratings agencies that slapped a triple AAA on junk paper, the pendulum swung too far away from reasonable oversight. By taking the refs off of the field and erroneously expecting market participants could self-regulate, the powers that be in DC gave the players on Wall Street enough rope to hang themselves with — which they promptly did.

    There are too many people who are trying to duck responsibility for the current mess, and seeking to place blame elsewhere.

    I find this to be terribly important, as we seek to repair the damage amidst an economic crisis. Rather than objectively evaluate the present crisis in an attempt to craft an appropriate response, the partisan hacks are trying to obscure the causes of the current situation. Like burglars trying to destroy the surveillance tape, they are all too aware of their role in the present debacle.

  5. October 6, 2008 11:30 pm

    Tim & Dave-
    I’ve been erratic on this issue at best, so bear with me. Unlike the other issue I usually blog about, this one I am less sure – how could anyone be.

    First of all there is a difference between blaming the Democrats for everything and calling them on their denial that they have any culpability in this situation.

    My primary reaction is that pretty much everyone is to blame- from main street to wall street to Congress and the White House. More on that later.

    I am also pissed off that it is so hard to get a handle on what’s really happening in this extremely politicized environment. It’s complicated enough on it’s own. Right now, I don’t particularly trust anyone, but I especially don’t trust the people who advocate simplistic “Bush Lied, People Died” type rhetoric.

    Your link makes sense to me (for once!) and does help clarify at least some facts. I think perhaps he downplays the importance of Fannie/Freddie, but it helps me understand at least the market regulation piece of all this.

    But consider this from Barney Frank today:

    http://www.breitbart.com/article.php?id=D93LAKT01&show_article=1

    The Massachusetts Democrat, chairman of the House Financial Services Committee, said the GOP is appealing to its base by blaming the country’s mortgage foreclosure problem on efforts to expand affordable housing through the Community Reinvestment Act.

    He said that blame is misplaced, because those loans are issued by regulated institutions, while far more foreclosures were triggered by high-cost loans made by unregulated entities.

    “They get to take things out on poor people,” Frank said at a mortgage foreclosure symposium in Boston. “Let’s be honest: The fact that some of the poor people are black doesn’t hurt them either, from their standpoint. This is an effort, I believe, to appeal to a kind of anger in people.”

    Frank also dismissed charges the Democrats failed on their own or blocked Republican efforts to rein in the mortgage companies Fannie Mae and Freddie Mac. The federal government recently took control of both entities.

    This is simply outrageous behavior, and a damned lie. Will you condemn it in any way?

    This is a great example of why it is so hard for conservatives to criticize these kinds of programs- the rascist label gets slapped on in heartbeat. I’m sick of it!

    I think the bailout bill was necessary – what I hate is all the pork that got attached. There should be no time for that in a crisis- a crisis prolonged by partisan bickering. Pelosi did everything she could to decrease confidence in goverment and the market- all to help her party. I hope that comes back to bite her. But I’m not real happy with the Republicans either.

    McCain at least dared to take a stand and get things happening rather that point fingers. He really held back at that debate I think to keep tempers low. A lot of good it did him. Time to take of the gloves.

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