Monday, May 4, 2009

Sub-prime 101

I'm on a kick to write about revisionism. 

Last week's post about FDR got me thinking and researching another popular meme, specifically that the Sub-prime crisis is primarily the fault of Democrats. This theory is based the belief that the Community Reinvestment Act, (CRA), enacted in 1977 and amended by Bill Clinton in the 90's, required the quasi-federal lending institutions Fannie Mae and Freddie Mac to make bad loans to unqualified poor folks which resulted in the current crisis. 

While this is a gross simplification of a complicated series of events, it is true that there were bad loans were made, and as a result, both institutions have had to be bailed out by the US government. 

That said, there are three basic distortions here:

1. Confusing pressure from Democrats, who clearly wanted an expansion of loans to the poor, with the bad decisions made by the CEO's of Fannie and Freddie(conservative Republicans appointed by President Bush, by the way.) The CEO's fell victim to the same greed-fueled gold-rush mentality that wrecked everyone else. In order to make a lot of money, they purged whistle-blowers, relaxed regulatory standards, and bought up bad, "Alt A" loans. Now, while this activity contributed to the overall sub-prime crash, it was not the "match that lit the subprime crisis", as Senator the economy is healthy McCain proclaimed during the 2008 election. Fannie and Freddy were more like ships steered into a hurricane by greedy Ahabs riding a wave of unethical profiteering. And where are the roots of such activity found?  Why, in conservative anti-regulatory ideology. 

2. Bad loans made by the Fannie and Freddie caused the crisis. In actuality, 80% of the subprime loans were made by institutions NOT regulated by the Community Reinvestment Act. In other words, only about one out of four bad loans originated with Fannie Mae or Freddie Mac. 

3.  Democrats killed off the 2005 Federal Housing Reform Act, a bill that if passed, would have prevented the whole meltdown hoohah. The bill died in the majority Republican Senate, despite passing the House, 331 to 90. It perished from a the lack of an effective Senate champion. Mostly likely this was due to a troika of hostility to the bill from the Bush Administration, the Fed, and the Treasury, who saw privatization as the only solution. Add staunch resistance from the minority Dems who thought they were defending the poor, and the bill was DOA. 

So are the D's to blame for anything? Sure- besides congressional Democrats doing their best doe-eyed naive doofus impressions about what was actually happing over on the decks of HMS Frannie and Freddie, Bill Clinton, being the great triangulator that he is, signed into law the Financial Services Modernization Act of 1999. This rather odious piece of Republican legislation is most often blamed for allowing the spiral of deregulation that allowed financial organizations from Banks to Insurance Companies swap tens of trillions of dollars worth of transactions in the dark, and grow "too big to fail." Of course, ol Bubba is nowhere near ready to admit he messed up, but in all fairness, the national tide was running pretty strongly against him on that one. 

A careful reader will note that far from being a Democratic Party pooch-screwing, the whole Sub-Prime crisis emerges from almost thirty years of ideologically fueled deregulatory practices, including defanging the folks who were supposed to be watching the store. And deregulation, that same reader may note, is a tune the GOP cats love to riff on.

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