Thursday, February 19, 2009

Bill Clinton and The Community Reinvestment Act of 1977

Jimmy Carter’s 1977 Community Reinvestment Act has become the focal point of a debate over Leftist intervention in the housing market. Apologists for these policies focus on attempting to prove that the CRA alone did not cause the current housing mess. That argument is akin to trying to prove that the queen bee did not cause the death of a person attacked by the entire hive.

The CRA is one of MANY enormously destructive Leftist interventions in the housing market. These interventions date at least as far back as the National Housing Act of 1934 and the Housing Act of 1937. Every decade since the 1930s has seen more and more destructive Federal intervention in the housing markets (and everywhere else). The Department of Housing and Urban Development Act of 1965 was another major milestone in destructive Leftist intervention in the housing markets. MANY, if not ALL of these Leftist interventions contributed to the current mess. The reason the CRA is a legitimate focal point in this series of follies is because the CRA represented a major turning point towards a far, far more radical, aggressive, costly and destructive set of Leftist housing policies.

The Clinton administration put the CRA on steroids and boasted about doing so. But, the one event which probably contributed the most to the current housing mess came in 1999 when Clinton pressured Fannie Mae to lower “the credit requirements on loans that it will purchase from banks and other lenders”.

When Clinton made that move, the New York Times warned:

“In moving, even tentatively, into this new area of [subprime] lending, Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980's.”
That one move by Clinton - inspired by the CRA - shifted to the tax payers ALL moral hazard associated with originating ANY bad subprime loan - whether directly covered by the CRA or not. From that day forward, ANYBODY could originate an excessively risky subprime loan, book the origination profits and then sell that risky loan to Fannie Mae or have Fannie Mae or Freddie Mac or any other “too big to fail” entity insure that risky loan.

Fannie Mae, in particular, was a glutton for taking on more and more insane levels of risk in the pursuit of purely political goals and under the “leadership” of (Democratic) politicians - not business people.

The media and all other Democrats are focusing their attention on AIG. But, the AIG bailout amounts to $170 billion whereas the Fannie and Freddie bailout amounts to $400 billion (update: the Fannie and Freddie bailouts are now UNLIMITED!). What VERY few in the media mention is that the Federal housing policies of the Democrats are directly to blame in BOTH CASES!

Too big to fail” is, for all practical purposes, no different than a GSE. In both cases, there was an implicit guarantee that the Federal government would come to the rescue. In other words - thanks to Bill Clinton and all other Democrats who pushed subprime loans - ALL moral hazard associated with the origination of ALL subprime loans fell squarely on the shoulders of the tax payers - and EVERY scam artist involved in this travesty KNEW IT!

I am not defending anybody who originated bad loans. I am saying that government, especially Clinton, created the conditions whereby that bad behavior would be richly rewarded - with little or no risk to those engaged in the bad behavior (so long as our politicians were willing to use our money to bail them out - AIG included).

Even apologists for the CRA - such as Elizabeth Duke - admit that the subprime market - pushed by Clinton and a whole hoard of other Democrats - is the epicenter of the housing mess:
“According to the latest data, 25 percent of subprime loans and 13 percent of near-prime loans are now seriously delinquent--that is, more than 90 days past due or in foreclosure. The serious delinquency rate for prime mortgages, at between 3 percent and 4 percent, is much lower than for nonprime loans”
Whether the CRA - in isolation - is solely responsible for the current mess is a moot question. The CRA is the contemporary nucleus of a much larger Democrat driven low income housing entitlement folly which, with lots of “help” from an hysterical media and spineless, incompetent (at BEST) knee jerk politicians, wrecked the entire global economy.

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