Saturday, October 04, 2008

Three Articles by Barry Ritholtz

Barry is on top of the Republican effort to explain away the financial crisis as the fault of Democrats forcing banks to loan to the poor and minorities, who we all know are bad risks.

Misunderstanding Credit and Housing Crises: Blaming the CRA, GSEs

Making the rounds amongst a certain subset of wingnuts on CNBC, at IBD and other selfconfoozled folks has been the meme that the entire housing and credit crisis traces to the the Community Reinvestment Act (CRA) of 1977. An alternative zombie myth is the credit crisis is due to Fannie Mae and Freddie Mac. A 1999 article from the New York Times about the GSE's role in subprime mortgages has been circulating as if its the rosetta stone of the credit crisis.

These memes have become a rallying cry -- cognitive dissonance writ large -- of those folks who have been pushing for greater and greater deregulation, and are now attempting to disown the results of their handiwork.

I feel compelled to set the record straight about this pseudo-intellectual detritus. As we have painstakingly discussed over the past few years, there were many direct and indirect causes of the current financial mess. ...

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.

Check out the full article for a laundry list of questions about just what parts of the practices leading to the mortgage meltdown were created, enforced and/or followed by the CRA. He also has links to 13 sources at the foot of the post, including four examples of conservative talking heads trying to advance this argument.

As the Spousal Unit keeps trying to explain to his wingnut friends who email and argue about the centrality of the CRA and the GSEs (Government Sponsored Enterprises) to the financial collapse, the fact that you want them to be the cause does not make them the cause - or even major players.

Next, Barry has some great quotes today from the Federal Reserve Director on the CRA. The focus in the quotes is how the CRA is not particularly onerous to follow, and that very few lending institutions have had difficulty staying within lending bounds.

Finally, Barry has links to an interview by Bill Moyers with Emma Coleman Jordan, a legal and finance scholar at Georgetown University, The CRA: Its a Racial Thing . . . Barry Moyers picked out a series of quotes by rightwing talking heads about why CRA was so dangerous:

BILL MOYERS: There've been a lot of voices on cable channels recently blaming this bubble, this crisis, the cause of all of this catastrophe we're in right now, on poor people who took out mortgages that they couldn't afford to buy home they wanted. They shouldn't have. Watch these clippings and tell me what you think about them.

LAURA INGRAHAM: 1995 when Bill Clinton decided to tell, you know, Robert Rubin to rewrite the rules that govern the Community Reinvestment Act and push all these institutions to lend to minority communities, many very risky loans, that was a noble idea, perhaps, but that certainly wasn't following free-market principles.

NEIL CAVUTO: I don't remember a clarion call that said, Fannie and Freddie are a disaster. Loaning to minorities and risky folks is a disaster.

LARRY KUDLOW: It's time for the Congress, Republicans and Democrats,to stop encouraging, exhorting, and forcing banks to make low income loans with no documentation. Stop that. The community reinvestment act which was passed in the mid nineties, which was extended in the early 2000s, literally pushed these lenders to make low income loans.

BILL MOYERS: Lending to minorities and risky people. Do you see this, are they seeing this as issues of race and class?

EMMA COLEMAN JORDAN: Absolutely. And it's a cynical manipulation. It's reprehensible. And, in the worst tradition of Lee Atwater and the Willie Horton ad, to use race as a wedge issue to make people who pay their mortgages believe that the people who are getting the benefit of the 700 billion dollars, that we're being asked to pay, are poor, minority people who caused the crisis.

This is unconscionable. This problem is not a problem that was caused by the Community Reinvestment Act. The data is very clear that the Community Reinvestment Act loans were being offered in a way to people that were much more responsible and had none of the characteristics of default that are being attributed in this discussion. And what this does is to say, this problem is a problem that was caused by black people.

And it means that it gives an opportunity to bring up that old wedge. But I think the people in the country are smarter today. I just don't think it's going to fly. I think that people understand that the enemy is not a person who got a home loan and was tricked into getting that loan by a fast-talking broker who originated the loan but that the problem was the securitization process, the high leveraging that Wall Street was doing, the lack of regulation.

There is an embedded video of the whole interview. Well worth a watch.

The point that Barry is making with these three posts is that this argument is something the Right has been trying to push for a long time in order to deregulate the mortagage and lending industry. There is nothing too low or too vile for them to claim in order to advance their objectives, which is to allow the banking industry to do whatever the hell it pleases. From John McCain down to the Spousal Unit's deranged friends, there is a consistent message coming out of the Right Wing Noise Machine - the Democrats have ruined the financial sector with the CRA and the GSEs beacuse they are forcing the industry to make bad loans to undeserving borrowers whose defaults are bringing down the system.

As Prof. Jordan points out, the Right uses race instrumentally as a wedge to divide groups who have common interests to protect, such as extension of reasonable credit, protection from predatory lending, reliance on housing for cross-generational wealth, greater exposure to the effects of residential property values, and so forth. The arguments that undermine restructuring risk to reduce its impact on low income borrowers deliberately call upon race to stir up resentment against minority borrowers and make it easier to deregulate protections for all borrowers. In recent months, it has also been used to try to deflect attention away from the true architects of the financial collapse - none other than the Merry Banksters led by our dear Hanky Panky Paulson.

The question is whether the current Democratic leadership is going to fight for regulation that defends borrowers, or whether it will continue to captitulate to Wall Street.

I know where I'm placing my bets.


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