Who Caused the Global Economic Crisis?

In a post taking exception with an NYT article laying the blame for the current financial crisis on (who else) George Bush, Roger Kimball presents a fine anatomy of the actual causes:

For decades the government has done things to help Americans to realize the
dream, e.g., graciously allowing citizens to keep some of their own money to
help pay for the interest on a mortgage (the official term for this is a “tax
deduction,” but I prefer my locution since it emphasizes the fact that it is
YOUR MONEY we are talking about).

But what about people who do not work hard (if they work at all)? What
about people who have not saved up for a down payment? What about people who do not pay their bills on time (if they pay them at all)? Why shouldn’t they get to
live the American dream?

That was the question that led to (drum roll, please)

“The Community Reinvestment Act” (see here for more).

* The original Community Reinvestment Act was signed into law in 1977
by Jimmy Carter. Its purpose, in a nutshell, was to require banks to provide
credit to “under-served populations,” i.e., those with poor credit.
The buzz word was “affordable mortgages,” e.g., mortgages with low teaser-rates, which required the borrower to put no money down, which required the borrower to pay only the interest for a set number of years, etc.

* In 1995, Bill Clinton’s administration made various changes to the
CRA, increasing “access to mortgage credit for inner city and distressed rural
communities,” i.e., it provided for the securitization, i.e. public underwriting, of what everyone now calls “sub-prime mortgages.” Bottom line? It forced banks to issue something on the order of $1.5 trillion in sub-prime mortgages.
$1.5 trillion, i.e., one and a half thousand billion dollars in sub-prime,i.e., risky, mortgages, in order to push this latest example of social engineering.

But wait: how did it force banks to do this? Easy. Introduce a federal
requirement that banks make the loans or face penalties. As Howard Husock,
writing in City Journal way back in 2000 observed:
“Bank examiners would use federal home-loan data, broken down by neighborhood,
income group, and race, to rate banks on performance. There would be no more A’s
for effort. Only results—specific loans, specific levels of service—would count.” Way back in 1994, for example, Barack Obama sued Citibank on behalf of a
client who charged that the bank “systematically denied mortgages to African-American applicants and others from minority neighborhoods.”

* In 1997, Bear Stearns –- O firm of blessed memory –- was the first to
get onto the sub-prime gravy train.

* Fannie Mae & Freddy Mac — were there near the beginning, too.


Anatomy of a bubble

Step 1. The intoxication: “My house is worth millions!” From 1995 -
2005, the number of sub-prime mortgages skyrocket. So did the house
prices.

Step 2. The hangover: “Oh my God, my house isn’t selling. What went
wrong?”

Why didn’t someone try to stop it?

Someone did: “The Bush administration today recommended the most significant
regulatory overhaul in the housing finance industry since the savings and loan
crisis a decade ago,” The New York Times, September 11, 2003.

But someone intervened to stymie the Bush administration. Who? The New
York Times reports:

Supporters of the companies said efforts to regulate the lenders tightly under those agencies might diminish their ability to finance loans for lower-income families. . . . “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.”

Why didn’t someone else ring the alarm?

Someone else did. In 2005, John McCain co-sponsored the “Federal Housing
Enterprise Regulatory Reform Act,” which among other things provided for
more oversight of Freddie & Fannie. The bill didn’t pass. Guess who blocked
it? The bill was reintroduced in 2007. But again, no luck. Fannie Mae and
Freddie Mac had friends in the Senate:

* Chris Dodd, a recipient of “sweetheart” loans from a Freddie and Fannie backed company.
* The junior senator from Illinois, i.e., Barack Obama, who turned to Jim Johnson, former head (1991-1998) of Fannie Mae, to help advise him on whom to pick for the vice-presidential slot on his ticket. From 1985 to 1990, incidentally, Johnson was managing director of Lehman Brothers. Remember them?
* You might also want to check out one of Barack Obama’s other advisors: Franklin Raines, former CEO of Freddie Mac: see here, for example, or here, or here. (And thanks again to this great video for the outline I précis above.)

The dog that didn’t bark.

Perhaps the most amazing thing about the Times’s little drama that
casts George Bush as the protagonist of our economic tragedy is not what’s in it
but what isn’t. You will search in vain for the name “Barney Frank” or the
phrase “Community Reinvestment Act.” But telling the story of our economic
crisis with out those elements is like staging Macbeth without Macbeth or the
witches.

There is a great refusal in operation here, a refusal to face up to
facts. Thomas Sowell touched on this in a typically percipient column
a few months ago when he wondered, not without exasperation, whether facts still
mattered in our political life. The current economic crisis seems to have
benefitted Democrats. But how could that be? Sowell reminds us of some forgotten
facts:

Fact Number One: It was liberal Democrats, led by Senator Christopher Dodd and Congressman Barney Frank, who for years –- including the present year -– denied that Fannie Mae and Freddie Mac were taking big risks that could lead to a financial crisis.

It was Senator Dodd, Congressman Frank and other liberal Democrats who for years refused requests from the Bush administration to set up an agency to regulate Fannie Mae and Freddie Mac.

It was liberal Democrats, again led by Dodd and Frank, who for years
pushed for Fannie Mae and Freddie Mac to go even further in promoting
subprime mortgage loans, which are at the heart of today’s financial
crisis.

Alan Greenspan warned them four years ago. So did the Chairman of
the Council of Economic Advisers to the President. So did Bush’s Secretary of the Treasury, five years ago.

Yet, today, what are we hearing? That it was the Bush administration
“right-wing ideology” of “de-regulation” that set the stage
for the financial crisis. Do facts matter?

None of this is new. But Gide was right: although everything has
already been said, no one was listening, so it is always necessary to start over
again. Go into your local bank. Look around. Somewhere you’ll see posted on the
wall a notice advising customers that the bank’s lending practices follow the
dictates of the Community Reinvestment Act and that federal bureaucrats
regularly stop by to make sure the bank is abiding by its ruinous stipulations.
When will it stop?