Of all the canards that have been offered about the financial crisis, few are more repellant than the claim that the “real cause’’ of the mortgage meltdown was blacks and Hispanics.
Oh, excuse me — did I just accuse someone of racism? Sorry. Proponents of the above actually blame the crisis on “government policy’’ to boost home-ownership among low-income families, who just happened to be disproportionately non-white and immigrant. Specifically, the Community Reinvestment Act “forced’’ banks to make bad loans to irresponsible borrowers, while Fannie Mae (FNM) and Freddie Mac (FRE) provided the financial torque by purchasing billions worth of subprime paper.
The argument has been discredited time and again, shriveling up almost as soon as it’s exposed to sunlight. But it keeps coming back, mainly because the anti-government narrative gives Republicans a way to deflect allegations that de-regulation allowed Wall Street to run wild. It’s the financial version of Sarah Palin’s new line that “extreme environmentalists” caused the BP (BP) oil spill.
Paul Krugman caught a whiff of it in a recent commentary by Raghuram Rajan in the FT, and quickly denounced it.
But far more outrageous is this working paper, which Bruce Bartlett brought to my attention, published last month by no less an authority than the World Bank. What galls me isn’t the argument per se; what galls me is that the World Bank would cloak a piece of political drivel with fixings of a serious economic analysis.
Written by David G. Tarr, who is described as a “consultant’’ and “former lead economist” at the World Bank, the paper says Wall Street and the banks were led by the government like lambs to the slaughter. The paper reads with a breezy authority, though you get a clue that Tarr is something of a hack when he mistakenly says “HUD Secretary Mario Cuomo” put pressure on the banks. (It was Andrew Cuomo, Mario’s son, who was HUD secretary.)
In the mid-1990s, the Clinton Administration changed enforcement of the Community Reinvestment Act and effectively imposed quotas on commercial banks to provide credit to underserved areas….. Failure to meet the quotas would result in denial of merger or consolidation requests…Riskier mortgage standards by banks were not the consequence of deregulation; rather the banks were compelled to change the standards by new regulations at the behest of community groups….Once the banks were pressured by regulation to offer risky mortgages to underserved areas, they (and mortgage brokers) found they could make money on them by selling them to “securitizers,” who in turn packaged the mortgages in pools and sold them.
Tarr then says Fannie Mae and Freddie Mac made it all possible, because they had an implicit government guarantee and were lusting to expand their market share in subprime mortgages. And as we all know, Fannie and Freddie effectively went bankrupt in 2008 and have been bailed out with more than $200 billion in taxpayer money since then.
But none of the devil-made-me-do-it arguments is new, and none of them is true. The Federal Reserve analyzed the Community Reinvestment Act in 2008, and emphatically concluded that it had nothing to do with the explosion of hallucinogenic mortgage lending. For starters, the Fed noted, there was “essentially no change in basic CRA rules or the enforcement process that can reasonably be linked to subprime lending activity.”
More importantly, the Fed said, the vast bulk of subprime mortgages were originated by non-bank lenders that either weren’t subject to the Community Reinvestment Act or were made by banks outside their community assessment areas. Bottom line: in 2006, only 6 percent of all high-priced loans (a proxy for subprime loans) had anything to do with the Community Reinvestment Act.
What makes this smear so repellant is that it blames poor people – mostly minorities – for bringing on the crisis. But what makes it so maddening is that it’s so demonstrably false. We have reams of evidence that banks and mortgage lenders actively targeted blacks, Hispanics and other immigrant groups for reckless loans. The lenders weren’t forced. They were making a fortune.
An almost equally unforgivable lie is that Fannie and Freddie caused the subprime meltdown. It’s true that Fannie and Freddie were allowed by Congress (especially by Democrats) to run up huge leverage. And it’s true they bought a hefty volume of securities backed by subprime mortgages.
But Fannie and Freddie weren’t driving the market. They were scrambling to keep up with private mortgage securitizers.
As Krugman shows, Fannie and Freddie were largely sidelined during the heyday of the subprime market, partly because they were doing penance for their prior accounting scandals. Fannie and Freddie’s market share in securitizations slumped from 2004 until 2007. By contrast, the market share of private issuers soared.
It’s true that Fannie and Freddie jumped into the muck with born-again enthusiasm. Here is an excellent account of that by David Hilzenrath in the Washington Post in 2008. But as Hilzenrath vividly documented, the quasi-government behemoths weren’t pushing their private sector rivals to roll the dice. They were late to the craps table and desperately trying to make up for lost time.
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