October 15, 2008

Crush the Obamamedia Narrative: Deregulation Did Not Cause the Financial Crisis

[The title of this post is inspired by that of Michelle Malkin's powerful post, "Crush the Obamedia narrative: Look who’s 'gripped by insane rage'"]

Yesterday a good friend of mine told me that he had heard, and regarded it as common knowledge, that deregulation was the cause of the bad home mortgages that are key to the current financial crisis. So evidently this blatant canard, put forward by Obama, has not yet been widely enough debunked.

When Obama says that deregulation is the cause of the bad home loans, he is not speaking accurately, and he knows it. In fact, it was government regulation that caused it. From Investors Business Daily (link):

In 1977, President Carter and a Democrat Congress created the Community Reinvestment Act mandating that banks must meet the credit needs of everyone in the banks' community, including uncreditworthy borrowers. It was done for a good social purpose and had the greatest intentions - expanding home ownership. And, through the 1980s and into the 1990s at least, it seemed to work.

However in 1995, President Bill Clinton imposed more and stronger regulations and performance tests. These coerced banks into significantly increasing their loans to low-income borrowers in economically-troubled communities, or face possible fines and expansion restrictions.

These new rules encouraged banks to bundle their risky subprime loans together with prime loans and re-sell them in packages to other financial institutions, thereby freeing the original lenders from any further risk. Thanks to the new rules and oversight from the CRA, Fannie Mae and Freddie Mac got involved in a big way, buying literally trillions of dollars of the questionable loans from banks and feeding the dangerous cycle that had begun.

Eventually, it turned into a kind of pyramid scheme that overwhelmed some lending organizations when housing prices softened in late 2006 and 2007.

So what's the big lesson to be learned here by the public? That this financial crisis was the result of yet another Big Government program that had great intentions but created devastating unintended consequences that hurt millions of people.

It was not the fault of African American groups, which naturally want to help their people. Nor was it the fault of America's free enterprise system, or a lack of enough regulation. No, it was Big Government once again trying to run a private industry.

You can't take one dollar and loan it 50 times. Watch out when Big Government spenders tell you they can run our entire medical industry, give you far better care and save you lots of money.

From the Wall Street Journal (link):

Jimmy Carter signed the Community Reinvestment Act into law in 1977. The Clinton administration turned this Act, a once-obscure and lightly enforced banking regulation law, into one of the most powerful mandates shaping American cities and, as Senate Banking Committee chairman Phil Gramm memorably put it, a vast extortion scheme against the nation's banks. Under its provisions, U.S. banks have committed nearly $1 trillion for inner-city and low-income mortgages and real estate development projects, most of it funneled through a nationwide network of left-wing community groups, intent, in some cases, on teaching their low-income clients that the financial system is their enemy and, implicitly, that government, rather than their own striving, is the key to their well-being. Thus it was made practically compulsory for an investment bank to loan mortgage money to literally anyone who came along or face the wrath of government bureaucracy. The banks were so pressed to abide by this government mandate that they felt the need to offer a new kind of loan to make their product appear even more attractive the sub prime loan. Thus the story goes on.

For the next ten years, the banks were forced to abide by the law and deliver their quota of minority and subsistence wage earner loans. When I say subsistence wage earner loans, I mean that the banks were forced to accept Social Security and unemployment payments as earned income for mortgage purposes. Some companies quit asking for income verification altogether and provided the now infamous 'liar loans' simply to meet some government standard set by national legislative fiat. Meantime, we the people made hay on the stock market and congratulated ourselves on how smart we were and how well we were doing.

Obama was part of forcing the banks to make these bad loans. From the NY Post (link):

WHAT exactly does a "community organizer" do? Barack Obama's rise has left many Americans asking themselves that question. Here's a big part of the answer: Community organizers intimidate banks into making high-risk loans to customers with poor credit.

In the name of fairness to minorities, community organizers occupy private offices, chant inside bank lobbies, and confront executives at their homes - and thereby force financial institutions to direct hundreds of millions of dollars in mortgages to low-credit customers.

In other words, community organizers help to undermine the US economy by pushing the banking system into a sinkhole of bad loans. And Obama has spent years training and funding the organizers who do it.

THE seeds of today's financial meltdown lie in the Community Reinvestment Act - a law passed in 1977 and made riskier by unwise amendments and regulatory rulings in later decades.

CRA was meant to encourage banks to make loans to high-risk borrowers, often minorities living in unstable neighborhoods. That has provided an opening to radical groups like ACORN (the Association of Community Organizations for Reform Now) to abuse the law by forcing banks to make hundreds of millions of dollars in "subprime" loans to often uncreditworthy poor and minority customers.

...Chicago ACORN sought out Obama's legal services for a "motor voter" case and partnered with him on his 1992 "Project VOTE" registration drive.

In those years, he also conducted leadership-training seminars for ACORN's up-and-coming organizers. That is, Obama was training the army of ACORN organizers who participated in Madeline Talbott's drive against Chicago's banks.

More than that, Obama was funding them. As he rose to a leadership role at Chicago's Woods Fund, he became the most powerful voice on the foundation's board for supporting ACORN and other community organizers. In 1995, the Woods Fund substantially expanded its funding of community organizers - and Obama chaired the committee that urged and managed the shift.

...The Woods Fund report makes it clear Obama was fully aware of the intimidation tactics used by ACORN's Madeline Talbott in her pioneering efforts to force banks to suspend their usual credit standards. Yet he supported Talbott in every conceivable way. He trained her personal staff and other aspiring ACORN leaders, he consulted with her extensively, and he arranged a major boost in foundation funding for her efforts.

And, as the leader of another charity, the Chicago Annenberg Challenge, Obama channeled more funding Talbott's way - ostensibly for education projects but surely supportive of ACORN's overall efforts.

In return, Talbott proudly announced her support of Obama's first campaign for state Senate, saying, "We accept and respect him as a kindred spirit, a fellow organizer."

IN short, to understand the roots of the subprime-mort gage crisis, look to ACORN's Madeline Talbott. And to see how Talbott was able to work her mischief, look to Barack Obama.

Then you'll truly know what community organizers do.

Obama was a lawyer in a lawsuit against CitiBank to force it to make these same kinds of bad loans. From the Chicago Sun-Times (link):

Obama represented Calvin Roberson in a 1994 lawsuit against Citibank, charging the bank systematically denied mortgages to African-American applicants and others from minority neighborhoods.

John McCain opposed what was going on at Freddie Mac and Fannie Mae in 2006. Here's the letter, signed by McCain and other Republicans - but not by one Democrat. The Democrats killed this effort, which could have mitigated, or perhaps even averted, this crisis. (link):

McCain made a speech to Senate about this later on May 25, 2006, warning:

I join as a cosponsor of the Federal Housing Enterprise Regulatory Reform Act of 2005, S. 190, to underscore my support for quick passage of GSE regulatory reform legislation. If Congress does not act, 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. 

The bill never got out of committee.

In the first presidential debate, Obama claimed that he had also warned about the impending crisis:

Two years ago, I warned that, because of the subprime lending mess, because of the lax regulation, that we were potentially going to have a problem and tried to stop some of the abuses in mortgages that were taking place at the time.

Last year, I wrote to the secretary of the Treasury to make sure that he understood the magnitude of this problem and to call on him to bring all the stakeholders together to try to deal with it.

The letter he is referring to appears to be here. The letter asks Paulson "to convene a homeownership preservation summit" to discuss, among other things, more requirements from the banks, not less - including, requirements for banks to "intervene" in (i.e. pay for) loans that that the loan-holders, can no longer afford:

How to facilitate and encourage appropriate intervention by loan servicing companies at the earliest signs of borrower difficulty.

Obama's statement that he warned of the crisis and attempted to fix it is inaccurate. Obama warned of the crisis and proposed changes that would have worsened the financial harm to the banks.

Conclusion: People need to be aware that deregulation was not the cause of the bad home loans that brought on the financial crisis; it was wrongful regulations that forced banks to make these bad loans to people who were not in a position to repay them.