Did Liberals Cause the Sub-Prime Crisis? (Barf)

American Prospect ^ | April 7, 2008 | Robert Gordon

[Lusis]

The idea started on the outer precincts of the right. Thomas DiLorenzo, an economist who calls Ron Paul "the Jefferson of our time," wrote in September that the housing crisis is "the direct result of thirty years of government policy that has forced banks to make bad loans to un-creditworthy borrowers." The policy DiLorenzo decries is the 1977 Community Reinvestment Act, which requires banks to lend throughout the communities they serve.

The Blame-CRA theme bounced around the right-wing Freerepublic.com. In January it figured in a Washington Times column. In February, a Cato Institute affiliate named Stan Liebowitz picked up the critique in a New York Post op-ed headlined "The Real Scandal: How the Feds Invented the Mortgage Mess." On The National Review's blog, The Corner, John Derbyshire channeled Liebowitz: "The folk losing their homes? are victims not of 'predatory lenders,' but of government-sponsored -- in fact government-mandated -- political correctness."

[kcvl]

Could you get anymore left-wing than this guy?! How's your 'friend' John Edwards and his new baby doing, jerk? As if you didn't know Edwards was a scoundrel while working for him.

I don't think we need a lecture from him on anything!

Prior to joining American Progress in 2005, Robert was domestic policy director for the Kerry-Edwards campaign. He previously worked for Senator John Edwards (D-NC) as Judiciary Committee counsel, legislative director, and policy director on his first presidential campaign. Earlier in his career, Robert was a law clerk for Justice Ruth Bader Ginsburg and a Skadden Fellow at the Juvenile Rights Division of the Legal Aid Society in New York City

[kcvl]

Center for American Progress founded in 2003, CAP is headed by John D. Podesta (who knows where all the bodies are buried), former chief of staff to President Bill Clinton.

[21stCenturyFreeThinker]

It is not about illegal aliens and poor blacks getting loans, which is the racist knee jerk response.

The investors who bought these loans up are as much to blame as anyone. They knew what the risk and they choose to invest their capital there anyway. If the CRA made the risk unacceptable then they should have bought some corporate bonds or something. Nobody forced them to put their money anywhere.

[kcvl]

http://www.americanprogressaction.org/

EVENTS

House Majority Leader Steny Hoyer on Failed Conservative Policies
September 23, 2008

Developing a Black Women’s Agenda for the Next Administration
September 23, 2008

[kcvl]

Podesta explained how he would recruit hundreds of fellows and scholars — some in residence and others spread around the country — to research and promote new progressive policy ideas. American Progress is slated to operate with a $10 million budget next year, raised from big donors like the financier George Soros.

******

American Progress Founders:

Herb Sandler, together with his wife Marion Sandler, purchased Golden West Savings and Loan, from the founder Mr.Jacoby in Oakland, California, and created Golden West Financial Corp, the parent company of World Savings Bank, one of the US’s largest savings and loans with assets of almost $80 billion, deposits of $46 billion and 9,300 employees as of November 30, 2003.

Golden West was sold in 2006 for $24 billion to Wachovia Bank. The merger was completed in October 2006. The Sandlers owned about 10% of the company at the time of the sale, making their share of the sale price worth about $2.4 billion. Of this, the Sandlers gave $1.3 billion to the Sandler Family Supporting Foundation.

[kcvl]

Herb and Marion Sandler

[whitedog57]

Well, Anthony Sanders of Arizona State University has a paper which lays the blame squarely on the CRA as well. Also, the failure of our regulators. Unlike most who recommend strengthening regulation, he argues that regulators can never do it properly and we should reduce or eliminate any lending that requires regulators. Such as subprime lending.

[kcvl]

Since the late 1980s, the Sandlers used their wealth to finance a variety of nonprofit organizations, including Human Rights Watch, the American Civil Liberties Union and Acorn, the grass-roots organizers. They helped found the Center for Responsible Lending, where they are among the largest benefactors.

In 2003, they started the Center for American Progress, which is intended to be a liberal counterweight to the heavyweight policy centers of the right, like the Heritage Foundation and the Cato Institute. So far, the Sandlers have given around $20 million to the center.

******

“THEY WERE GOOD SOURCES”

One day in the fall of 2006, Paul Steiger got a call from Herb and Marion Sandler. It came completely out of the blue. At the time, Steiger was the managing editor of The Wall Street Journal, the paper’s top editorial position, a job he’d held for 15 years.

He knew the Sandlers, but not well. “They were people who were interesting and good sources,” he recalled not long ago. “I would have dinner with them once a year or so.”

“They told me they were thinking about spending $10 million a year on investigative journalism,” Steiger recalls. The Sandlers didn’t know precisely what they wanted to do, but they knew they wanted to do something big. “They said they were talking to a bunch of people, soliciting ideas,” Steiger says. “What advice would I give them?”

Steiger drew up a proposal for a nonprofit that would employ around 25 reporters and editors and would conduct the kind of ambitious investigations that only a handful of the country’s most prominent news organizations do as a matter of course. Although the Sandlers solicited plenty of other ideas besides Steiger’s, his was the one they loved. They told Steiger that they would finance it, but only if he would run it. After a little soul-searching, Steiger agreed. ProPublica — as it is called — opened its doors in early January and in recent weeks has made its first few hires and named a star-studded advisory board (which includes Jill Abramson, a managing editor of The New York Times). It intends to begin producing investigative articles by the summer and then give its biggest exposés, free, to major news outlets like “60 Minutes.” Although there have been nonprofit investigative efforts in the past, nobody has ever proposed a model quite like this before.

http://www.nytimes.com/2008/03/09/magazine/09Sandlers-t.html

Lowell Bergman, a New York Times and “Frontline” contributor who has long been friends with the Sandlers

What the Sandlers want, clearly, is investigative journalism that leads to change in public policy or finds, as Herb put it to me, “the next Enron.” (“Get the bastards,” he said to me excitedly at another point.) Other people who talked to the Sandlers when they were first soliciting ideas say that they mused about having the organization engage lobbyists to push Congress to make changes after an exposé ran or have journalists testify before Congress.

[kenavi]

The investors who bought these loans up are as much to blame as anyone. They knew what the risk and they choose to invest their capital there anyway. If the CRA made the risk unacceptable then they should have bought some corporate bonds or something. Nobody forced them to put their money anywhere.

Capitalism will push a money-making idea to the limit, until there is a correction. Housing prices must have increased 2-3 times in the space of just a few years, while most people's income barely increased at all. Me-too banks jumped on the bandwagon, relaxed their lending rules, so as not to be left behind. Regulators don't set rules for lending, they look at performance of portfolio. As long as portfolios were performing well, there was nothing they could do to stop banks. Meanwhile, investors were valuing bank stocks at 2-3 times book value.

The housing value bubble, like the internet bubble and the leveraged buy-out bubble before it, is the fault of many of us, not just of a few.

[pyrless]

“And the worst offenders, the independent mortgage companies, were never subject to CRA — or any federal regulator. Law didn’t make them lend. The profit motive did.”

Fannie and Freddie still take blame for buying the substandard loans from these independent lenders without doing due diligence on quality.

The independents were glad to grant and then immediately sell these substandard loans to Dannie and Freddie. They didn’t care a bit about quality, because they weren’t stuck with them when they went bad. The independents had no incentive to grant quality loans. It was a numbers game to them.

[wardaddy]

Steve Sailer, Rush Limbaugh and Rupert Murdoch all think these affirmative action loans are a big part of the problem.

Especially with Freddie and Fannie.

I respect all three of them.

[Technogeeb]

This bill was written by Phil Gramm, blame clitoon for what clitoon did. Blame the republicans for what they did. It is posted all over this forum.

All Gramm's part of Gramm-Leach-Bliley did was repeal a part of Glass-Steagall that put commercial US banks on an unequal footing with foreign banks, allowing them to offer certain investment services.

Yeah; it's "posted all over this forum", but that doesn't make it right. The Left is floating the idea that this is all Phil Gramm's fault, and that is a lot of nonsense. Unfortunately, they're getting away with it because some posters here refuse to educate themselves. Glass-Steagall was a terrible law, just like almost every law passed during FDR's new deal. And its repeal had almost nothing to do with the current problems, which are more the result of fraud (in the case of FNM) and incompetence (in the case of AIG, etc.)

This problem wasn't caused by not enough government. It was caused by too much government; specifically an implied government guarantee of FNM that resulted in a distortion of the market value and risk of certain instruments, allowing FNM to sell what should have been junk at AAA. Sure, there were other problems too (like AIG's insane leverage), but the source of just about all these problems is government interference in the market and the resulting value distortion which is a direct result of that interference.

[Technogeeb]

this deregulation from a law passed during the depression allowed banks to get into securities, insurance and investments services banking, etc. and greed did the rest.

The idea that such a thing is a bad idea is a result of metal derangement (something that was unfortunately common in nearly all legislation during the time of FDR).

It is the equivalent of saying there would be a collapse in the market for beef and other meat products if supermarkets were allowed to sell it instead of restricting its sale from butcher shops.

[backhoe]

Thoughts?

Sure- I recommend the incomparable Anchoress- and like I always tell y'all...

Use the links...

Why our financial system nearly collapsed

Yes, I know is voice is grating, yes I know he can be too rude by half on his program, but take the time to listen to this audio of last Friday’s Mark Levin show. (H/T Ace) You want the breakdown of what happened and why it happened? Levin gives it to you in plain language. Listen to it, even if you really don’t want to. I didn’t want to, but it’s important that we understand what happened, here, historically, that we don’t simply succumb to spin. Look past Levin’s politics and his cranky yelling, and just get the history.

He talks about how the foundation for the crisis was laid down in 1977 by Jimmy Carter (a point which the editors of Investor’s Business Daily go into here) and the Community Reinvestment Act (CRA) which came into being under his watch.

Levin talks about how the sub-prime mortgages began to take off with Bear Sterns in the 1990’s, which is again explained in more detail here [All Emphasis Mine - admin]:

To hear today’s Democrats, you’d think all this started in the last couple years…the Carter-era Community Reinvestment Act forced banks to lend to uncreditworthy borrowers, mostly in minority areas.

Age-old standards of banking prudence got thrown out the window. In their place came harsh new regulations requiring banks not only to lend to uncreditworthy borrowers, but to do so on the basis of race.

These well-intended rules were supercharged in the early 1990s by President Clinton. Despite warnings from GOP members of Congress in 1992, Clinton pushed extensive changes to the rules requiring lenders to make questionable loans.

Lenders who refused would find themselves castigated publicly as racists. As noted this week in an IBD editorial, no fewer than four federal bank regulators scrutinized financial firms’ books to make sure they were in compliance.

Failure to comply meant your bank might not be allowed to expand lending, add new branches or merge with other companies. Banks were given a so-called “CRA rating” that graded how diverse their lending portfolio was.

Explains Levin: “the federal government compelled this activity, compelled this behavior” beginning January 31, 1995, under Clinton administration regulatory revisions which authorized sub-prime loans in the secondary market - loans with no savings, no collateral, to back them up. The first securitization of CRA loans began in 1997, with Bear Stearns.

Meanwhile, Congress gave Fannie and Freddie the go-ahead to finance it all by buying loans from banks, then repackaging and securitizing them for resale on the open market.

…With those changes, the subprime market took off. From a mere $35 billion in loans in 1994, it soared to $1 trillion by 2008.

Wall Street eagerly sold the new mortgage-backed securities. Not only were they pooled investments, mixing good and bad, but they were backed with the implicit guarantee of government.

Fannie Mae and Freddie Mac grew to become monsters, accounting for nearly half of all U.S. mortgage loans…As they grew, Fannie and Freddie grew heavily involved in “community development,” giving money to local housing rights groups and “empowering” the groups, such as ACORN, for whom Barack Obama once worked in Chicago.
[...]
Since 1989, Fannie and Freddie have spent an estimated $140 million on lobbying Washington. They contributed millions to politicians, mostly Democrats, including Senator Chris Dodd (No. 1 recipient) and Barack Obama (No. 3 recipient, despite only three years in office).

There is plenty of blame to go around. Well-intentioned people started the ball rolling - with a very noble idea; break down the wall of discrimination that was keeping middle class minorities from owning their own homes. That was a good notion; others exploited the good intentions, and also strong-armed banks to do more and more. Wall street got greedy. The folks funny Fanny & Fred got greedy. We homeowners and the general public got greedy. Everyone wanted easy money and lots of credit, and no one wanted to think to much about what was backing it up; whether there were sufficient securities behind all the loans.

Levin also talks about how President Bush tried - in 2003 - to get Congress to pay attention to the household finance markets and Freddie and Fanny, and how he was rebuked by Barney Frank, among others,

The Bush administration today recommended the most significant regulatory overhaul in the housing finance industry since the savings and loan crisis a decade ago.

Under the plan, disclosed at a Congressional hearing today, a new agency would be created within the Treasury Department to assume supervision of Fannie Mae and Freddie Mac, the government-sponsored companies that are the two largest players in the mortgage lending industry.

The new agency would have the authority, which now rests with Congress, to set one of the two capital-reserve requirements for the companies. It would exercise authority over any new lines of business. And it would determine whether the two are adequately managing the risks of their ballooning portfolios.

The plan is an acknowledgment by the administration that oversight of Fannie Mae and Freddie Mac — which together have issued more than $1.5 trillion in outstanding debt — is broken. A report by outside investigators in July concluded that Freddie Mac manipulated its accounting to mislead investors, and critics have said Fannie Mae does not adequately hedge against rising interest rates.
…
“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. - [all emphasis mine - admin]

Here’s Investor’s Business Daily, again:

Congress has been surprisingly passive. As Sen. Majority Leader Harry Reid put it, “no one knows what to do” right now.

Funny, since it was a Democrat-led Congress that helped cause the problems in the first place.

When House Speaker Nancy Pelosi recently barked “no” at reporters for daring to ask if Democrats deserved any blame for the meltdown, you saw denial in action. Pelosi and her followers would have you believe this all happened because of President Bush and his loyal Senate lapdog, John McCain. Or that big, bad predatory Wall Street banks deserve all the blame.

“The American people are not protected from the risk-taking and the greed of these financial institutions,” Pelosi said recently, as she vowed congressional hearings.

Only one problem: It’s untrue.

Yes, banks did over-leverage and take risks they shouldn’t have. But the fact is, President Bush in 2003 tried desperately to stop Fannie Mae and Freddie Mac from metastasizing into the problem they have since become.
[...]
It’s pretty clear who was on the right side of that debate.

As for presidential contender John McCain, just two years after Bush’s plan, McCain also called for badly needed reforms to prevent a crisis like the one we’re now in.

“If Congress does not act,” McCain said in 2005, “American taxpayers will continue to be exposed to the enormous risk that Fannie Mae and Freddie Mac pose to the housing market, the overall financial system and the economy as a whole.”

Sounds like McCain was spot on. But his warnings, too, were ignored by Congress.

Levin insists that it is disingenuous to suggest that political parties should not be mentioned - that accountability demands it. I understand why people would prefer to keep politics out of any solution that comes about, this really should be above political sniping. But I see the press already trying to pin all of this on poor President Bush - the guy who tried to reform this nonsense in 2003. Bush has been blamed with a lot; should be blamed for a lot, but it seems to me that it is simply “too easy” and also plain falsehood to simply dump all of this on Bush’s shoulders.

Levin quotes the GOP senate in 2003 on their worries and their desire to address the coming problem. He also quotes the Democrats who blocked it. He has a lot of citations, here are a few:

In August of 2007, Sen. Chuck Schumer (D-NY) and Sen. Chris Dodd (D-CT), heading the Senate Banking Committee argued to life the portfolio cap from Freddy & Fannie to create more loans and allow F&F to buy more sub-prime mortgages “to calm the market.”

Senate Majority Leader Harry Reid, (D-NV) in 2005, in response to an effort by the GOP to trim Fanny & Freddy’s portfolios: “The legislation from the Senate banking committee, passed today on a party line vote by the Republican majority, includes measures that could cripple the ability of Fannie Mae and Freddie Mac to carry out their mission of expanding homeownership,” said Sen. Harry Reid, D-Nev., the Senate Minority Leader Thursday…”While I favor improving oversight by our federal housing regulators to ensure safety and soundness, we cannot pass legislation that could limit Americans from owning homes and potentially harm our economy in the process,” Reid said.

Writing in the Wall St. Journal with Mayor Michael Bloomberg, Sen. Chuck Schumer (D-NY) argued to reduce the regulations passed after Enron. He plays an audio clip of Schumer trashing Bush and trying to get what he wants.

Do listen to Levin. He gets loud and shrill sometimes; he is certainly passionate. But he is also very, very informative, especially about the “corrosive cronyism,” as Levin describes it. I had not realized that so many of Barack Obama’s top financial advisors are people who made millions running Fan & Fred. And yes, that’s troubling. It would be troubling if it was true of McCain’s campaign, too. But it’s more troubling about Obama, because Obama has not done anything. He’s running for president on 140 days of experience in the Senate. It feels, increasingly, like he’s simply being put into place to maintain the status quo.

They wouldn’t work together in 2003 or 2005, but Schumer is making bi-partisan noises. One hopes he means it. Really.

Ace notes that Obama’s finance chair is “the queen of sub-prime mortgages” and notices that the Huffpo talked about that back in February of ‘08.

The New Yorker talks about the recklessness of Lehman Brothers and Bear Sterns

by TheAnchoress @ 10:34 pm. Filed under America, Bride at every wedding, corpse at every funeral, Bush Good, Dumb Democrat moves, Economic woe, Election 2008, Free Speech?, John McCain, Podcasts, Socialism doesn't work, The Fourth Estate, The Perpetual Adolescents, rants

[Comments (0)] 

 

[org.whodat]

You must be right therefore there is no bailout needed. And doctors would never steal(over bill) from medicate and Medicare either. LOL

[org.whodat]

but the source of just about all these problems is government interference in the market and the resulting value distortion which is a direct result of that interference.

Then let them go broke, you cannot get government interference in a bailout and take tax payers money without strings. Never going to happen, no business should be allowed to get so big that it cannot fail. And there is nothing wrong with a bank being a bank and a mortgage lender a mortgage lender, an insurance company an insurance company, and foreign banks should operate in this country the same as us banks are be thrown out, that is as straw man argument at best. This worked for years, no problem.

[Technogeeb]

You must be right therefore there is no bailout needed.

Correct; there is no need for a bailout. Letting those companies who acted stupidly go broke, and letting the stockholders who invested in them go broke, is the best thing we could do for long-term economic health.

And doctors would never steal(over bill) from medicate and Medicare either.

They certainly wouldn't if there was no Medicaid nor Medicare. Pointing out the flaws of one socialist program doesn't legitimize another, especially when those programs are the cause of the problem in the first place (Medicare and Medicaid are the reason for, not the result of, excessive health care costs, and FNM is the cause of, not the result of, the current economic problem).

[org.whodat]

I’m all for letting them go broke but many of these people need to spend a long time in jail.

[Technogeeb]

Then let them go broke

Gladly. Unfortunately, there are too many people with political connections that want to prop up incompetent management with this "bailout". If you can find a way to stop them, I'm on board.

Never going to happen, no business should be allowed to get so big that it cannot fail.

Nonsense. The "no business should be allowed" implies government regulation, and IT IS GOVERNMENT REGULATION THAT CAUSED THIS PROBLEM IN THE FIRST PLACE.

And there is nothing wrong with a bank being a bank and a mortgage lender a mortgage lender, an insurance company an insurance company

Certainly there is nothing wrong with it if that is what the management and stockholders want to do. But if a bank wants to offer the sale of gold coins, or an insurance company wants to offer an annuity backed by stocks, there is nothing wrong with that either. There is nothing wrong with a supermarket; there is nothing economically destabilizing about a store that sells more than one product. The only people blaming this problem on Gramm-Leach-Bliley are socialists who don't understand how economies work and leftists who just hate Phil Gramm.

and foreign banks should operate in this country the same as us banks are be thrown out, that is as straw man argument at best.

No, it isn't, and it shows just how confused you are. Economies are global, and making rules on those foreign banks in the US would have no effect, since they would just engage in the business elsewhere. The ONLY effect of Glass-Steagal was to make a bank incorporated in the US weaker than a bank incorporated in a foreign country. Once again, you (and half the country along with you) fail to grasp that the problem was government interference in the marketplace. More government interference is not the solution to this problem, BECAUSE GOVERNMENT INTERFERENCE IS WHAT CAUSED THE PROBLEM IN THE FIRST PLACE.

[Technogeeb]

I’m all for letting them go broke but many of these people need to spend a long time in jail.

Perhaps, but taking their money away in civil litigation where signs of wrongdoing are apparent (such as FNM) would be a good start. In the case of this "bailout", government is doing the exact opposite for both justice as well as the long-term economic health of the United States.