Wednesday, September 24, 2008

When Democrats write the rules

Here is an excellent breakdown of the current financial crisis:

HOW did America wind up in its worst financial crisis in decades? Sen. Barack Obama explained it this way last week: "When sub-prime-mortgage lending took a reckless and unsustainable turn, a patchwork of regulators systematically and deliberately eliminated the regulations protecting the American people."

That's exactly backward. Mortgage lending took that "reckless and unsustainable turn" because of regulation - regulation driven by liberals and progressives, not free-market "deregulators."

Pushed hard by politicians and community activists [you mean community organizers - like Barack Obama? - LC], the regulators systematically and deliberately altered financially sound lending practices.

The mortgage market was humming along just fine when, in the late 1980s, progressives decided that it needed to be "fixed." Their complaint: Some ethnic groups got approved for mortgages at lower rates than others.

In reality, mortgage lenders were simply being prudent - taking care to provide mortgages to those who could best afford to make the payments.

The shift began in 1989, when Congress amended the Home Mortgage Disclosure Act to force banks to collect racial data on mortgage applicants. By 1991, critics were using that data to paint lenders as racist by showing that minority applicants were approved at far lower rates. Banks were "Shamed By Publicity," as one 1993 New York Times headline put it.

In fact, they found a racial disparity only by ignoring relevant data on applicants' ability to make mortgage payments - such as their assets and credit history.

But the political pressure was intense - with few in politics or media eager to speak the truth. And then, in 1992, came a study from four researchers at the Boston Fed, which seemed to bear out the critics' contentions.

Notice how yet another disaster for the United States traces back to a Democrat presidential administration (Bill Clinton) backed by a Democrat controlled congress. Do we really want to entrust the solving of this problem to that lethal combination? Think about that this November.

That study was, in fact, based on quite flawed data - but the authors' political, media and academic protectors stifled most serious criticism, smearing the reputation of one whistleblower and allowing the Boston authors to avoid answering serious academic challenges (mine included) to their work. Other studies with different conclusions were ignored.

The very next year, the Boston Fed announced new requirements for banks - rules that have now turned out to be monumentally catastrophic: Adopt "relaxed lending standards" or risk being labeled as racists, and face serious penalties under the federal Community Reinvestment Act.

Gone (as "arbitrary" and "outdated") were traditional lending requirements such as requiring a down payment or limiting mortgage payments to 28 percent of income. (Of course, the loosened lending standards weren't limited to poor and minority applicants - that would be discriminatory.)

The new standards performed as intended: Home- ownership rates, stagnant for 25 years, began a rapid 10-year ascent in 1995, with many new homeowners being lower-income and/or minority families.

The large rise in demand for houses, however, fed a run-up in prices starting in 1997 - the infamous housing bubble. And rising prices hid the great vulnerability of these loans to defaults and foreclosures, because refinancing or selling at a profit was the easy alternative.

The government regulations distorted the free market and started pushing money into the housing market. Buying a house was given the appearance of being a better investment than it was.

Soon, these loans began to be sold in the secondary market. Fannie Mae and Freddie Mac were enthusiastic proponents of relaxed lending standards and purchased large swaths of these loans.

Time after time, Fannie and Freddie trumped criticism by pointing to how they were helping broaden homeownership. Because of the subject's racial overtones, they beat back calls for reform even after financial irregularities were found.

Executives at Fannie and Freddie (who are now Barack Obama's economic advisers) used the only-on-paper increase in the value of their assets to trigger performance based bonuses. This is very much like what the top management at Enron did.

Rating agencies such as Standard & Poor's had no experience with such loans - and imprudently used the misleading bubble-induced performance to incorrectly judge the likely performance of financial instruments based on such loans.

In 2002, the "reformers" declared victory. In a Fannie report, four academic supporters of relaxed standards crowed how these changes were "fundamentally altering the terms upon which mortgage credit had been offered in the United States from the 1960s through the 1980s . . . These changes in lending herald what we refer to as mortgage innovation."

Lucky us.

Now that the popped bubble has left us swimming in foreclosures, the supporters of loosened credit standards seem shy about taking credit for their "mortgage innovations." Instead, they blame subprime lenders for becoming "predatory" - when they were simply taking the Boston Fed rules to their logical conclusion while broadening the mortgage market.

Amazing isn't it how quickly the "enlightened and progressive lenders who were making it possible for minority and other economically disadvantaged Americans (and illegal aliens) to realize the American Dream of home ownership" turned into "greedy robber barons". Nothing changed except the fact that enough time passed to make manifest the foolishness of basing economic (or any other, for that matter) policy on political correctness rather than sound real world principles (and political correctness will always differ from sound real world principles).

Investors holding mortgage-based assets now want out. Perhaps they deserve a $700 billion refund - since they were sold a bill of goods by "progressive" politicians, academics and government officials who, in the hope of remaking society, insisted that loans based on relaxed underwriting standards were sound.

No they do not deserve a "refund". Anyone who makes an investment has the responsibility to do his due diligence. In this case the fact that home ownership was being driven by politically correct regulations which were forcing lenders to grant mortgages to people who did not have either the income or credit history to indicate that they could or would be able to repay them was not a secret. People who made these investments were doing so in he belief that they could ride the housing market boom to profit and jump off before the collapse. If they timed it wrong then that's on them not on the taxpayers. I do feel sorry for the poor people who were told that they could have a mortgage that they could in no way repay but the lenders were not being "predatory" they were being "law abiding". The government told the lenders that they had to loan money to people who couldn't pay it back.

One of the comments on this New York Post story said:
This article just doesn't add up to me. With the exception of an 8 year presidency, those horrible liberals were not in charge of the government. Republicans held the presidency, the House and the Senate.
Obviously this person doesn't know his history. Both the Bush administration and John McCain tried to tighten regulation on the lending industry. In 2006 McCain even stood on the Senate floor and gave a speech in support of a bill which he was cosponsoring in which he predicted exactly what is currently happening.

However each time that Republicans (otherwise known as "the grownups") tried to return some semblance of reality to this out-of-control politically correct mess the left, who had created this mess and whose hands were in the till up to the elbow siphoning cash out of Fannie and Freddie, would rise in feigned indignation and self-righteously condemn any attempt to restore sanity to the housing market as a racist attack, as though only Bull Connor would think it was a bad idea to loan people money which they couldn't pay back.

The lesson here is that whenever you see left-liberal politicians wrapping "the poor" around themselves like the Shroud of Turin you can know that they are in the process of stealing your money or your liberty (or both).

H/T: Shooting the Messenger