During a lengthy colloquy (which I mostly stayed out of…until the end) regarding economics and the necessity of electing ‘intelligent’ businessman Mitt Romney as a moderate alternative to the economic extremism of Gingrich and Obama (yes, that’s right, economic extremism of Obama), a Facebook acquaintance, speaking about the causes of the economic meltdown, informed one and all that “The reason [the banks] loaned out so much on people that could not pay it back had to do with legislation way back in the Clinton White house”
That bit about the Clinton White House is funny because while conservatives will no longer allow us to mention the small role the Bushistas may have played in setting the stage for the worst economic catastrophe in our lifetimes, apparently we can reach back to Clinton for the sources of our problems. The legislation Facebook Acquaintance was referring to is the Federal Housing Enterprises Financial Safety and Soundness Act of 1992, and the 1997 amendment of the Community Reinvestment Act of 1977, both of which were passed on a bipartisan basis to put a final end to the banking industry’s redlining and repair the devastation caused by the practice.
(The cognoscenti at the Facebook Economics Summit are, once again, spewing the talking points of the right. Click here for another familiar source of this spittle.)
So, let’s see if we can’t get the record straight here with…
A BRIEF HISTORY OF HOW DIMWITS DESTROYED THE WORLD
The ’77 CRA was essential legislation necessary to stop the racist and deliberately destructive practice of redlining by banks. (The original version of the Act was not passed however, and only a weak and ineffectual version made it through congress—more about which in due course.)
Redlining was the once official, and then secret, banking practice of cutting off standard mortgages and commercial loans and local banking branches in neighborhoods deemed ‘unstable’—in the 1940s and 50s a red line was literally drawn around such areas on loan underwriters’ maps and neighborhoods with too high a mix of races would be deemed ‘unstable’ and not qualified for standard FHA loans. The practice was supposedly ended by the Fair Housing Act, but of course it continued.
Remember, the motivations for redlining were not prudential (S&Ls had been making prudent yet sufficiently profitable loans in ‘unstable’ communities since the 1930s which had in fact helped to create modestly prospering but highly sustainable workingclass neighborhoods all over the nation), nor were they only—or even primarily—racial; race will rarely stop a capitalist from taking an opportunity or an advantage. Advantage is the key to understanding this phenomenon; there was money to be made by creating vast areas of ‘urban blight’.
Redlining for Profit
After redlining ‘ended’ officially, lenders and developers continued the practice—which makes sense only when the pattern is recognized: Without access to mortgages, buyers could not buy in redlined areas, property values plummeted (where did the buyers who couldn’t get downtown loans go? To the shiny new suburbs where developers were building condos and apartments for folks of modest means, townhouses and single family homes for the more well-off, and shopping malls for everyone! All using loans provided by banks that had a major stake in seeing to the success of suburban developers…); home improvement loans were unavailable and properties deteriorated driving property values even lower; the same process was taking place in the same neighborhoods for neighborhood businesses so restaurants, stores, bars, etc. closed or decayed driving down local employment (where did folks who had any means left to get the hell out of the gathering storm go before the last remaining bit of value disappeared from their residential or commercial property was swept away? Suburbs.); ‘blight’ set in.
Meanwhile, the same banks that redlined the ‘unstable’ neighborhoods (1) appeared to be making reasonable business decisions since their prophesy was confirmed; (2) found it VERY profitable to take stake positions in payday lenders and other high-cost, low-service predatory ‘financial service’ providers in the very neighborhoods they would not place standard banks, using front companies to extract income from poor people who lacked access to prudent options (go slow now, Why did they lack access to prudent lending and banking options? Have you ever cashed–not borrowed on—just cashed a paycheck at a downtown check cashing ‘establishment’? Compare the service fee with the cost of having a checking account.)
So the pattern takes shape. Blight worsens more instigating public outcry for ‘urban redevelopment’ ‘urban renewal’ and ‘slum clearance’, etc. And so as the last extractable pennies are squeezed from the neighborhoods of the destitute the way has been paved for developers to come in and buy up all the land for nothing, send in the bulldozers and clear it all away to make room for urban enclaves of shiny new condos, restaurants, and shops to cater to folks with more wallet and paler skin—all financed by whom? Say it! The same banks whose redlining created the ‘blight’ that is now being cleansed at a handsome profit. So, no. Redlining did not end with the Fair Housing Act.
(By the way, who got blamed for the blighting of urban communities? Well you know the song here folks! Who always gets blamed for economic failure? The poor and their lazy, careless ways. Poverty, my friends, is not a habit adopted by a population, it is a hole deliberately dug by the wealthy for the vulnerable to fall into thus turning the hole into a well from which the wealthy can extract billions one bleeding penny at a time—it’s the greatest capitalist show on earth!)
So redlining did not stop with the Fair Housing Act, nor did it stop after the passage of the milquetoast Community Investment Act of 1977. The hounds of extractionist capitalism were baying and the dogs of corporate America lobbied strong to water down the legislation which ended up merely requiring Federal financial regulators to use their authority “when examining financial institutions, to encourage such institutions to help meet the credit needs of the local communities in which they are chartered.” A mighty strong blow against market manipulation and safeguard against market failure if there ever was one! No prescribed actions, no enforcement teeth. Good job, congress!
Legislative Response to Continued Redlining in the 1990s
So, redlining and financial fuckery continued well into the ‘90s—in DC our very own Chevy Chase Bank and BF Saul were caught red-handed at it in 1993 and entered into a consent decree with the Department of Justice. The Clinton DOJ was filing dozens of fully documented cases at the time and Congress took action to strengthen the CRA and put some testicular fortitude into it so that lenders could not, rather than assessing the individual credit-worthiness mortgage applicants, continue to claim that certain areas and neighborhoods were not good credit risks. At the same time, Congress took steps to see that housing and lending laws acted affirmatively to insure lending was not denied in low-income neighborhoods; the Federal Housing Enterprises Financial Safety and Soundness Act (FHEFSSA) of 1992 mandated that a certain percentage of loans purchased in the secondary mortgage market by Fannie Mae and Freddie Mac had to be written in low- and moderate-income areas and other underserved neighborhoods.
And this is the supposed big GOTCHA of the right; this is where they get all frothy lipped and spinny eyed as they drench you in the hot spittle of their charges that Freddie Mac and Fannie Mae and government intervention in the free market caused the whole housing bubble and subsequent crash which sent us to the hell of politically instigated failure of socialistically inspired economic tinkering, blah-blah-blah. Oh and remember friends, this is a great narrative to them because it allows them to once again blame the poor for an economic catastrophe. Yes! Yes! That’s it! The poor and their liberal allies and socialist masters! THEY did it!
The problem for the right is that this narrative about Freddie, Fannie, the Sinful Poor and their Profaning of the Purity of the American Free Market Which Would Never Fail Us if Liberals and Socialists Would Just Keep their Commie Hands Off It (Dammit!)—this grindingly familiar narrative is…
…UTTER BULLSHIT. Why?
Totalitarian Capitalists’ Lies and the Laughably Inept Understandings of their Self-Selected Dupes.
FIRST of all, no one mandated anyone to make subprime loans. The law only mandated that two Government Sponsored Entities (GSEs) operating in the secondary mortgage market (where original lenders sell the mortgages they have originated; such mortgages being sold as “mortgage backed securities” or MBS), Fannie Mae and Freddie Mac buy a certain percentage of loans originated in low-income communities, not that it make a certain percentage of loans to people with poor credit worthiness. Freddie and Fannie are NOT government agencies, they are private businesses sponsored (and some believe this means inevitably secured) by the government. They chose to underwrite riskier mortgages as a (more profitable) way of meeting the mandate, not as a condition of the mandate itself. It is important to note a few things here:
- A number of non-profits have successfully made hundreds of thousands of loans in low-income areas AND to low-income borrowers at default rates close to those made by private market lenders of standard loans to standard qualified borrowers.
- During the peak of the subprime lending boom, Fannie and Freddie lost their former market power in the MBS market as private investment entities entered and began to buy up mortgaged backed securities. By 2005, the two big GSEs together had less than 50% of the MBS market. And any research will show that Fannie and Freddie both maintained much tighter underwriting standards than the private operators were allowing.
- Want to know why these monopolistic behemoths were set up to indirectly facilitate liquidity in the mortgage market rather than having the government directly make loans to homebuyers? The reason that some asshats decided to conduct student loans in essentially the same dumbass manner. In order to ‘moderate’ the program, the centrists of both parties tried to make the program look all markety and less ‘socialistic’ by having private entities (made efficient and prudent because they were all private and such and so self-interest, which Ayn Rand proved was the only real incentive for anything in human life, you see…) playing the role of both facilitator and gatekeeper. (This is the same rococo dogshit way we got the less-than-half-a-loaf Health Care act…)
SECOND of all…While those in thrall to their capitalist overlords continue to shriek bloody blue murder about the Community Reinvestment Act and Fannie and Freddie, they seem unaware of (or unwilling to mention) the most significant pieces of legislation, the killing shots to all notions of prudential regulation of financial markets, that the Senator from Evil Phil Gramm championed to victory between 1999 and 2004.[1]
In 1999, Gramm pushed through legislation that killed the Glass-Stegal ban on banking practices that had for generations kept commercial banks—relied on by ordinary consumers—out of the tricky and hyper-risky investment and securities markets where, given the customer base of their market, they had no business doing business. In 2000, he quietly slipped an eleventh-hour, 200-plus page amendment deregulating the derivatives market into the 2000 omnibus spending bill then making its way through congress in the waning days of the Clinton Administration.
Having received over $4.6 million from the financial services and real estate sectors while in congress, Gramm then left the Senate to become a lobbyist whose biggest achievement of 2005 was successfully getting his former Capitol Hill colleagues to pass H.R. 1295, the Orwellian named ‘Responsible Lending Act’ which was specifically designed to remove strong state consumer loan protection laws (like New York’s and North Carolina’s) by enacting a federal supervening law with far weaker anti-predatory regulations.
Together, these Gramm monstrosities were a massive experiment in deregulation. Neo-lib economics fans even labeled touted them as such and assured everyone in hearing distance that all would be well without these burdensome regulations hamstringing business (jesus, these rightwing memes just KEEP getting recycled) because super-brilliant Wall Streeters would have an inherent interest in policing their own activities so as not to pull the house down on themselves. Silly neo-libs.
The little-noticed deregulation of the derivatives market was and remains the key to the whole unraveling of the American economy. For among its many evils, the measure deregulated Credit Default Swaps. It’s complicated, but these CDS instruments (which were already stupid gambling chips in the casino-capitalist salons where for the Bain-Romney likes to place dangerous, manly bets, side bets, hedges, and take other erection-enflaming chances) became toxic when deregulated as they added jet fuel an already superheated private secondary mortgage market.
CDCs allowed investors in bundled mortgages (which had become increasingly unstable as private mortgage originators became ever more predatory and dumped complete trash loans into the secondary market—which was slopping up the swill like a swine with a tapeworm) to feel safe in putting ever more money (most of it belonging to other people) into MBSs because now they could hedge them with snappy Credit Default Swaps® (No One Percenter’s Christmas would be complete without a few of these toys under the tree!)
So the obvious happened. As long predicted by the left, as the underlying housing market softened, mortgage defaults and foreclosures began to rise. Primary lenders could not do workouts with borrowers because the private secondaries owned the obligations. The private secondaries didn’t feel it necessary to do workouts or to curb their appetites for even more MBSs because they believed they were in a no-lose game—either enough mortgagees would continue to pay to keep the overall bundled MBSs secure, or they wouldn’t, in which case the credit default swaps they’d made would payoff and make them whole. As the ground was fast sliding away, all those self-policing Wall Street geniuses (remember them?) kept up the magical thinking until Bear Stearns who’d gone way deep in credit default swaps had to throw in the towel and admit it couldn’t back its play. Lehman’s, which was holding several billion in mortgage-backed securities tanked and the world went to hell.
So, finally, let’s take aim at the biggest lie, the one the right secretly most loves to tell: Loans to low-income deadbeats killed America. You know who busted this piece of shit slander on the working class? Wall Street Journal. Quoting verbatim from a 2007 report by WSJ senior writer Ruth Simon and Rick Brooks:
“An analysis for The Wall Street Journal of more than $2.5 trillion in subprime loans made since 2000 shows that as the number of subprime loans mushroomed, an increasing proportion of them went to people with credit scores high enough to often qualify for conventional loans with far better terms. In 2005, the peak year of the subprime boom, the study says that borrowers with such credit scores got more than half — 55% — of all subprime mortgages that were ultimately packaged into securities for sale to investors, as most subprime loans are. The study by First American LoanPerformance, a San Francisco research firm, says the proportion rose even higher by the end of 2006, to 61%. The figure was just 41% in 2000, according to the study. Even a significant number of borrowers with top-notch credit signed up for expensive subprime loans, the firm’s analysis found.”
So you’re right moderate Facebookists: Newt, Barack—extremists. The guy we really need now to clean this whole economics mess up is that slick, smooth, and silvered private equities playah, that Fred Astaire of the tax code Mambo: Mitt Romney!
He’s just right for the job.
[1] This handpuppet of the financial services industry and mouthpiece for every quack economic theory since the rotting ghost of David Riccardo porked Friedrich Hayek who had a mutant baby they named Milton Friedman who became bffs with some drooling dimwit everyone knew as Laffer (for good reason) has sponsored, wrote, or lobbied for so much poisonous legislation he should be inducted into the Dr. Kevorkian Hall of Fame.
