The Huffington Post, October 2, 2008
Conservatives Seek To Shift Blame For Crisis Onto Minority Housing Law
by Thomas B. Edsall
Blame for the current economic crisis has been laid on many doorsteps,
including the Gramm-Leach-Bliley Financial Services Modernization Act of
1999; credit default swaps; hedge funds; the Commodity Futures
Modernization Act of 2000; Alan Greenspan; and Phil and Wendy Gramm.
But it has fallen to right-wing pundit Ann Coulter to blaze a truly
simple path through the maze of credit derivatives, collateralized loan
obligations, tranches, securitization transactions, and Thomson
Financial League Tables.
This gentle lady spells out the source and origin of the current
economic crisis:
"THEY GAVE YOUR MORTGAGE TO A LESS QUALIFIED MINORITY!"
Coulter is putting forward an argument popular (who could be surprised?)
among besieged conservatives, that "social engineering" is the root
cause of the current economic crisis -- in the form of a 31-year-old law
passed during the Carter administration by a Democratic Congress, the
Community Reinvestment Act of 1977, "intended to encourage depository
institutions to help meet the credit needs of the communities in which
they operate, including low- and moderate-income neighborhoods,
consistent with safe and sound operations."
In Coulter's words, traditional yardsticks of a mortgage applicant's
ability to make payments were replaced with "nontraditional measures of
credit-worthiness, such as having a good jump shot or having a missing
child named 'Caylee';" the result, Coulter continues, is that
"middle-class taxpayers are going to be forced to bail out the
Democrats' two most important constituent groups: rich Wall Street
bankers and welfare recipients."
To make sure her meaning is clear, Coulter echoes a line from the famous
anti-affirmative action "White Hands" commercial Jesse Helms used in his
1990 campaign against black challenger Harvey Gantt. The ad shows a pair
of white hands crumpling a job rejection slip as the voiceover intones,
"You needed that job, you were the best qualified. But they have to give
it to a minority because of a racial quota."
Coulter is in the forefront of a concerted drive to shift the partisan
consequences of the collapse on Wall Street from helping Democrats to
favoring the GOP. To this end, conservatives have initiated a racially
explosive argument, shifting the blame for the current economic crisis
to legislation designed up improve access to mortgage financing for
African Americans, other minorities and residents of low-income
neighborhoods generally.
Story continues below
The campaign is being conducted by such leading advocates of the right
as Charles Krauthammer, Mona Charen, Jeff Jacoby, television hosts like
Lou Dobbs, and the editorial pages of the Wall Street Journal, Investors
Business Daily and the Washington Times.
Krauthammer, for example, makes the case that, "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 -- who
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."
For those inclined to blame Democratic liberals, this argument is
appealing. Neither Krauthammer nor Charen quotes any sources to back up
their respective cases, and the only expert cited by Boston Globe
columnist Jacoby is Loyola College economist Thomas DiLorenzo. DiLorenzo
is most famous as a defender of the Confederacy and for his anti-Abraham
Lincoln books, including The Real Lincoln: A New Look at Abraham
Lincoln, His Agenda, and an Unnecessary War and Lincoln Unmasked: What
You're Not Supposed To Know about Dishonest Abe.
The Community Reinvestment Act has, however, received some attention
from more mainstream economists, including Robert Litan of the Brookings
Institution. Litan told the Washington Post that when banks sought to
merge, "they had to show they were making a conscious effort to make
loans to subprime borrowers....If the CRA had not been so aggressively
pushed, it is conceivable things would not be quite as bad. People have
to be honest about that."
There are a host of experts who sharply dispute that blame for the
current Wall Street crisis should be directed at the Community
Reinvestment Act (CRA).
Janet L. Yellen, President and CEO, Federal Reserve Bank of San
Francisco, made the following case in a March 31 speech:
"There has been a tendency to conflate the current problems in the
subprime market with CRA-motivated lending, or with lending to
low-income families in general. I believe it is very important to make a
distinction between the two. Most of the loans made by depository
institutions examined under the CRA have not been higher-priced loans,
and studies have shown that the CRA has increased the volume of
responsible lending to low- and moderate-income households. We should
not view the current foreclosure trends as justification to abandon the
goal of expanding access to credit among low-income households, since
access to credit, and the subsequent ability to buy a home, remains one
of the most important mechanisms we have to help low-income families
build wealth over the long term."
University of Michigan Law Professor Michael Barr, a specialist in
banking and finance law, flatly rejected claims that the CRA was "a
significant factor in the current crisis. CRA was enacted more than 30
years ago. It would be quite odd if this 30-year old law suddenly caused
an explosion in bad subprime loans from 2002-2007....Subprime mortgages
were mostly made by mortgage brokers and lenders and securitized by
investment banks -- institutions not covered by CRA," he told the
Huffington Post, adding, "CRA only covers banks and thrifts, and these
institutions mostly have not suffered to the same extent or kind from
bad lending as the non-CRA-covered institutions at the core of the
current crisis. The problem here is not CRA. It is what the late former
Fed Governor Ned Gramlich called 'the giant hole in the supervisory
safety net' -- bad lending by firms outside the banking sector's rules
for prudential supervision, capital requirements, consumer protection
and yes, the CRA."
Along similar lines, University of Oregon economist Marc Thoma also
cited for the Huffington Post the long delay between enactment of CRA
and the current crisis and the fact that only 20 percent of subprime
loans were made by CRA-regulated lenders, adding two other points: that
"subprime loans grew twice as fast in institutions that did not have to
meet the conditions of the CRA" and that the scope of coverage of CRA
was reduced in 2004 under the Bush administration, "but even though
fewer banks were subject to CRA restrictions, the growth of the subprime
market continued unabated."
This idea of faulting the CRA originated in the anti-regulation wing of
the far right, and the goal is to blame government intervention for the
current economic meltdown, and to score political points by blaming
Democrats.
While the preponderance of evidence suggests that the role of the CRA in
the current meltdown was modest at most, that does not prevent it from
becoming a useful wedge issue for a Republican presidential candidate on
the ropes, and there is already some evidence that McCain could well be
tempted to pounce on it. In an April interview with Larry Kudlow, the
two had the following exchange:
KUDLOW: Would you consider, by the way, rolling back the Community
Reinvestment Act, which a lot of people say triggered this, mandating
banks and other lenders to make substandard loans in the first place,
and the creator of the subprime mortgages back in the middle '90s? Is it
time to take a look at the Community Reinvestment Act?
McCAIN: Absolutely, Larry. There were people who predicted that the
Community Reinvestment Act might lead to reckless and unsound lending
practices just to sort of fill a--you know, a amount of--I don't like to
use the word "quota," but certain percentages of a--of a home--of the
bank's lending practices. Yes, it has to be re-examined, it has to be
judged by its effect, and we need to find out how this particular system
affected the overall insolvency of the subprime lending issue. And I
think it--I'm not saying it needs to be repealed, but it certainly needs
to be re-examined and what its effects have been. And we'll be able to
figure that out.
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