Why government regulations were not the cause of the housing collapse
Sometimes you have to hand it the market fundamentalists for their ability and willingness to take any situation under the sun and turn it into an excuse to call for the demise of a public institution.
- Poor kids struggling in school? Must be time to de-fund public education and turn it over to the "free market."
- One in six people without health insurance and the insurance and drug industries raking in runaway profits? Obviously it's time to end all public oversight of health care.
- Public revenues falling short? Must be time to cut taxes on the rich.
- Social Security facing some demographic challenges? Must be time to invest everything in the stock market. Oops, check that last one.
The most recent and outrageous example of this kind of ideological spin comes as the result of the ongoing meltdown of the banking industry. Over the last few weeks, there's been a concerted effort in the work of various far right think tanks and writers to pin the blame for the current economic crisis on public regulations – especially fair lending regulations like the Community Reinvestment Act (CRA).
Here's one of the Washington Post's designated right-wingers, Charles Krauthammer:
"For decades, starting with Jimmy Carter's Community Reinvestment Act of 1977, there has been bipartisan agreement to use government power to expand homeownership to people who had been shut out for economic reasons or, sometimes, because of racial and ethnic discrimination. What could be a more worthy cause? But it led to tremendous pressure on Fannie Mae and Freddie Mac — which in turn pressured banks and other lenders — to extend mortgages to people who were borrowing over their heads. That's called subprime lending. It lies at the root of our current calamity."
This line has quickly found resonance in conservative echo chambers around the country. Here's the Raleigh-based Pope-Civitas Institute weighing in on the matter:
"HUD, Fannie Mae, Freddie Mac and the Community Reinvestment Act strengthened under Bill Clinton forced lenders to give risky loans to people, which caused a horrible ripple effect we're experiencing today as a tsunami."
Got that? The current freefall in the financial services industry is not the result of greedy corporations and CEO's making zillions of risky loans in order to make record profits and salaries – it's the result of meddlesome government bureaucrats who, as part of their ill-conceived efforts to help low-income (i.e. minority) borrowers, "forced" lenders to make these loans. In other words, "the devil made them do it."
Setting the record straight
There are lots of ways to explain why the market fundamentalist explanation is dead wrong, but most of them boil down to this central point: Public institutions and regulations cannot force giant lending corporations to make stupid and irresponsible loans. They can certainly enable such a phenomenon, but they cannot make it happen.
And so it was with the giant government created corporations – Fannie Mae and Freddie Mac. It's true that these quasi-public/quasi-private institutions played a role in the meltdown. Newsweek and Slate.com financial columnist, Daniel Gross puts it best when he described the situation:
"Look: There was a culture of stupid, reckless lending, of which Fannie Mae and Freddie Mac and the subprime lenders were an integral part. But the dumb-lending virus originated in …midtown Manhattan… not…Washington, D.C. Investment banks created a demand for subprime loans because they saw it as a new asset class that they could dominate. They made subprime loans for the same reason they made other loans: They could get paid for making the loans, for turning them into securities, and for trading them-frequently using borrowed capital."
In other words, Fannie Mae and Freddie Mac played a role in facilitating the problem, but this was the result of their aiding and abetting reckless, greedy behavior – not forcing it through regulation. Moreover, although they were started by the government and are, in effect, subsidized by the government, Fannie and Freddie are themselves, giant, profit-seeking corporations. If anything, it was a lack of regulation and government oversight that allowed them to help promote irresponsible lending.
The second prong of the market fundamentalist attack – that the current crisis is somehow attributable to the Community Reinvestment Act – is an even more outrageous canard and a thinly veiled attempt to promote the impression that the current crisis is somehow the result of a kind of financial affirmative action program. It's not hard to understand what implications the right is trying to gin up with this particular argument.
In point of fact, however, nothing could be further from the truth.
As is explained in an excellent issue brief prepared by the Center for Responsible Lending, the CRA is a 31 year-old law that had a proud record of achievement long before the subprime market even existed. Its mission, of course, was to put a halt to racist redlining practices by mainstream depository institutions in which communities of color were, for decades, systematically excluded from affordable loans – regardless of the ability of the inhabitants to pay. Though, it has often been a tough fight, advocates for CRA and its goals have made great progress over the past three decades in making the lending practices of these banks substantially more just.
Unfortunately, CRA doesn't apply to everyone in the lending world. Here's how the Center explains it:
"The predominant players in the subprime market – mortgage brokers, mortgage companies and the Wall Street investment banks that provided the financing – aren't covered under CRA. Finance company affiliates of major banks also participated heavily, but are only included in CRA to the extent their bank parents choose them to be. In fact, many banks shifted the most risky lending – the loans at the root cause of this current crisis – to affiliates to escape CRA requirements and regulatory oversight."
In other words, to the extent the subprime lending meltdown affected lower income communities and people of color, it was largely as the result of efforts to avoid fair lending practices – not comply with them.
Having said this, it's critical to note that the vast majority of ruinous subprime loans did not go to minority households. Here again, the Center weighs in:
"It is true that African-American and Latino families disproportionately received ruinous subprime loans, but the majority of total loans were made to non-Latino white families. According to data from the Home Mortgage Disclosure Act (HMDA) from 2005-2007, 58% of higher-cost loans went to white borrowers, with 18% to African-American borrowers and Latino borrowers each."
The intended implication of the right's attack on CRA and other federal fair lending regulations is, of course, that Congress should repeal such measures and completely unleash the "free market." Like an alcoholic who seeks to ease his hangover with a "hair of the dog" cocktail the next morning, the market fundamentalists simply can't admit that recent events have demonstrated their philosophy to be broken and bankrupt. For the sake of the country, let's hope that responsible officials in Washington deny them their drink and place our entire economy on 12-step process to economic sobriety.