In their increasingly desperate attempt to find something ideologically comfortable to blame for the credit crunch and recession, ’wingers have grasped at any conceivable economic flotsam. “Pay no attention to that iceberg,” they cry, “because something else sank this Titanic!”
They first seized upon the Community Reinvestment Act. The CRA prohibits redlining, where banks refuse to lend where they take deposits. Of course, nothing in the CRA requires banks to make bad loans; the CRA prohibits banks from taking money out of a community where the bank isn’t willing to invest.
There are a couple of problems with blaming the CRA. First, ’wingers have no explanation of how a 1977 law created the real estate and subprime bubble 25 years later. If banks managed to make CRA loans successfully for two decades, but then suddenly became wildly irresponsible, the problem isn’t the CRA.
More technically, as Robert Gordon of the Center for American Progress, and Ellen Seidman, former head of the Office of Thrift Regulation, have noted, the CRA only applies to federally insured banks and thrifts, which accounted for about 25 percent of subprime loans; half of that market was controlled by independent mortgage companies not covered by CRA, and another 25 percent to 30 percent from bank subsidiaries and affiliates, which don’t have nearly as significant responsibilities under the CRA. Also, institutions covered by CRA made fewer such loans than did comparable exempt or partially exempt lenders.
Finally, the CRA usually becomes an issue only when banks seek to merge — and the previous wave of bank mergers generally ended by 2001, just as the real estate boom, and subprime lending, took off. Blaming the CRA requires that you believe the Bush administration was serious about enforcing one, and only one, type of bank regulation.
Hey, ’wingers, if it’s all the CRA’s fault, let’s trade the CRA for getting back the 1993 tax code. Deal?
The next attempt to pass the blame goes to Fannie Mae and Freddie Mac, which does have some plausibility because the two did participate, big time, in subprime lending.
But Fannie and Freddie got to the party late, and while they contributed to the crisis, none of the ’wingers can explain how bad real estate loans securitized or guaranteed by Fannie and Freddie, which have since been guaranteed by the U.S. government, brought down Lehmann Brothers, Bear Stearns and AIG, or how low-income borrowers with bad loans have cratered the global financial system by falling behind on their mortgages.
At a congressional hearing last week, former Fed chairman Alan Greenspan, SEC chairman Christopher Cox and former Treasury secretary John Snow each were asked if Fannie and Freddie were the cause of the financial crisis. All three said no.
Greenspan is an interesting case. He steadfastly argued against government regulation of financial derivatives. He said that we need not fear concentration in banking and investment, because “many of the larger risks are dramatically — I should say, fully — hedged.” But at the hearing last week, Greenspan conceded that his fundamental world view was flawed. As quoted in The New York Times:
“I made a mistake in presuming that the self-interests of organizations, specifically banks and others, were such as that they were best capable of protecting their own shareholders and their equity in the firms,” Mr. Greenspan said.
Referring to his free-market ideology, Mr. Greenspan added: “I have found a flaw. I don’t know how significant or permanent it is. But I have been very distressed by that fact.”
(Rep. Henry) Waxman pressed the former Fed chair to clarify his words. “In other words, you found that your view of the world, your ideology, was not right, it was not working,” Mr. Waxman said.
“Absolutely, precisely,” Mr. Greenspan replied.
If Alan Greenspan — the High Priest of the Temple of Ayn Rand, the very face of libertarian market triumphalism — is rethinking his philosophy, then maybe the problem really wasn’t “too much government.” Not when it’s a GOP administration nationalizing the banks.
Welcome to reality, ’wingers!
Sam Coppersmith, Democratic party activist and former member of the U.S. House,