Mean-spirited reactionary politics below the fold. If you’re a kind-hearted liberal here for the physics, you might want to skip this post, have a nice tea instead, and calmly meditate on Obama’s recent rise in the polls.
I’ve had several conversations with people over the past few days about the cause of the current financial crisis. One common refrain is that deregulation regulation pushed though by heartless free marketers is the cause. “Ok”, I ask them, “what regulation specifically?” And I generally don’t get an answer. The reason is that the crisis is due to loans not being repaid. The only way to have prevented that would be to have prevented the loans from being made. The only way to do that would have been to deny credit to low-income people and people with bad credit. One party was opposed to any such regulatory regime which would have had the effect of making credit harder to come by for poor, often minority borrowers. I don’t think the NYT is generally accused of bias in my direction, so we’ll use their and the Los Angeles Times’ news reports.
New York Times, 1999.
In a move that could help increase home ownership rates among minorities and low-income consumers, the Fannie Mae Corporation is easing the credit requirements on loans that it will purchase from banks and other lenders.
The action, which will begin as a pilot program involving 24 banks in 15 markets — including the New York metropolitan region — will encourage those banks to extend home mortgages to individuals whose credit is generally not good enough to qualify for conventional loans. Fannie Mae officials say they hope to make it a nationwide program by next spring.
Fannie Mae, the nation’s biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people and felt pressure from stock holders to maintain its phenomenal growth in profits.
Los Angeles Times, 1999
In 1992, Congress mandated that Fannie and Freddie increase their purchases of mortgages for low-income and medium-income borrowers. Operating under that requirement, Fannie Mae, in particular, has been aggressive and creative in stimulating minority gains. It has aimed extensive advertising campaigns at minorities that explain how to buy a home and opened three dozen local offices to encourage lenders to serve these markets. Most importantly, Fannie Mae has agreed to buy more loans with very low down payments-or with mortgage payments that represent an unusually high percentage of a buyer’s income. That’s made banks willing to lend to lower-income families they once might have rejected.
New York Times, 2003
“The regulator has not only been outmanned, it has been outlobbied,” said Representative Richard H. Baker, the Louisiana Republican who has proposed legislation similar to the administration proposal and who leads a subcommittee that oversees the companies. “Being underfunded does not explain how a glowing report of Freddie’s operations was released only hours before the managerial upheaval that followed. This is not world-class regulatory work.”
Significant details must still be worked out before Congress can approve a bill. Among the groups denouncing the proposal today were the National Association of Home Builders and Congressional Democrats who fear that tighter regulation of the companies could sharply reduce their commitment to financing low-income and affordable housing
“These two entities — Fannie Mae and Freddie Mac — are not facing any kind of financial crisis,” said Representative Barney Frank of Massachusetts, the ranking Democrat on the Financial Services Committee. “The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing.”
Representative Melvin L. Watt, Democrat of North Carolina, agreed.
“I don’t see much other than a shell game going on here, moving something from one agency to another and in the process weakening the bargaining power of poorer families and their ability to get affordable housing,” Mr. Watt said.
Cutely enough, the bill that has been occasionally scapegoated for causing this crisis passed the senate 90-8 in a strongly bipartisan manner. Biden voted yea. McCain didn’t vote. Now all this isn’t to say the Republicans are blameless – they were in power in congress since 1994 and in the presidency since 2000. They could have reigned in Fanny and Freddy, but they didn’t. What I am saying is of the specific policies implemented by congress which helped cause this, deregulation isn’t one of them. Naive congressional idealism about mean old bankers denying credit to Tiny Tim is.
Don’t think for a moment that I’m criticizing the loaning of money to low-income people or minorities. It’s a great thing for everyone to have fair access to credit. But bending the rules and lowering standards is not that, and once it became common practice this current crisis was inevitable.
That is the cold, hard history. My interpretation of that history is my own, but I think at this point blaming deregulation while knowing the above is simple demagoguery.