|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.