Blaming liberals, minorities and poor people for the economic meltdown.
In a discussion this past week on FOX News, commentators expressed indignation over this New York Times analysis of the roots of the financial crisis. The FOX commentators’ beef? The article failed to mention the role of liberals, government intervention and the pernicious effects of the Community Reinvestment Act (CRA). Originally passed in 1977 and expanded, in part, during the 1990s, the purpose of the CRA was to compel banks to expand opportunities for home-ownership for lower income Americans, including minorities. During the just-concluded presidential campaign, as the economic crisis mushroomed into a catastrophe, the CRA became a central element in a right-wing narrative about the sub-prime meltdown, the bursting of the housing bubble and the larger crisis. Desperately trying to deflect responsibility from their own blind fealty to the power of unfettered and unregulated markets, conservatives used the CRA to argue that liberal do-gooderism, government interference in otherwise always well-functioning markets and forced lending to irresponsible minority home-buyers were the real roots of the crash.
And, as Media Matters reported this past week, FOX News is still trying to push this bogus narrative despite the fact that it has been thoroughly debunked. Since we are likely to continue hearing it, below are five points (with plenty of links if you’re interested) to help parry conservative nonsense about the collapse of the housing bubble, its origins and its connection to the current economic collapse.
1) 1) The vast majority of subprime loans were originated by institutions not subject to CRA oversight. In other words, the vast majority of subprime loans were issued by financial institutions that had one over-riding incentive to make these loans – they were the most profitable.
But, don’t take it from me. Take if from Fed Chairman Ben Bernanke, appointed by President Bush to replace Alan Greenspan in 2006. In a letter to Senator Robert Menendez on November 19, Bernanke wrote: “Our own experience with CRA over more than 30 years and recent analysis of available data, including data on subprime loan performance, runs counter to the charge that CRA was at the root of, or otherwise contributed in any substantive way to, the current mortgage difficulties.”
For a thorough analysis of the flaws in this argument, see the Congressional testimony by Eric Stein, of the Durham-based organization Center for Responsible Lending (especially pp. 26-30).
I2I 2) If you add up to the total value of all subprime loans, not just those in default, but all of them, the figure you get is about $1.5 trillion. That’s a lot, but it’s a relatively small fraction of the many trillions of dollars of now bad mortgage-fueled securities. According to journalist and former Wall Street Banker Nomi Prins: “Subprime mortgages have been blamed for the financial crisis, but we’re spending more than five times more money (in Fed loans, injections, bailouts and guarantees) than the value of every subprime loan in the country combined.”
So, not only is CRA not a cause of the subprime meltdown, but the subprime meltdown itself is only a relatively small part of a much larger real estate bubble whose bursting is a key reason for the current economic crisis.
(For a good dissection of the mortgage feeding frenzy as it played out at the now failed Washington Mutual, see this New York Times article).
And, here’s a great analysis about the “boiler room” mentality more generally, how it drove that feeding frenzy and the business press’ failure to report it.
3) Sub-prime mortgages actually governed by CRA did relatively well in the current crisis – the rate of loan default in CRA-generated mortgages is much lower than the national average. That’s a hard piece of data to accept when you’re trying to spin a familiar yarn of liberal social policy in cahoots with irresponsible poor people screwing it up for everybody else. But for understanding reality, it’s important to keep in mind. According to the CEO of the Federal Reserve Bank of San Francisco Janet Yellen, “studies have shown that the CRA has increased the volume of responsible lending to low- and moderate-income households”
4) 4) Freddie Mac and Fannie Mae were followers, not leaders.
This is worth keeping in mind because a key part of the right-wing effort to obfuscate the true source of the current economic crisis is to blame those two (formerly) quasi governmental institutions. But it was a lack of regulation at those two institutions that contributed to their serious problems and they, in any event, were not leaders in the mortgage-security frenzy that helped take down the economy – they were followers – trailing the private institutions that were most aggressively pushing mortgages and their securitization in the critical 2002 to 2007 period.
5) 5) The subprime crisis has hit minority homeowners, particularly Blacks, especially hard, as greedy lending institutions did sell bad loans using unsavory sales pitches as aggressively as they could to the most vulnerable borrowers. They didn’t do this because of CRA, whose regulations make such conniving loan practices much harder to pull off or because of larger government mandates to make sure that minorities became home-owners, regardless of their means. Financial institutions pushed bad mortgages because an insatiable appetite for ever-greater profits in a nearly regulation-free lending environment allowed them to.
In nearly every way imaginable, the current economic crisis is a devastating blow to the Reaganite fantasy about unfettered markets. But right-wingers have grasped desperately for a straw man comprised of their favorite bogeymen – liberal social policy, poor people, minorities and ACORN (the right’s favorite new bogeyman). Basic facts are an important tool for tearing apart that straw man.