To rely on the government for anything long-term is stupidity at best and insanity at worst. – Equal Diversity
And yet that is exactly how and why the American Dream for millions of Americans is becoming a nightmare.
For most of us, the American dream is a good job, a family with 2.5 kids (where the .5 is a mystery), a house with a white picket fence and a 2 car garage with cars, steak once a week, and looking forward to a comfortable retirement playing with the grandchildren. Of course, I’m being stereotypical, but bear with me.
To this end, to provide each and every American a slice of the American Dream, our politicians waaaay back in 1977(!) came up with the Community Reinvestment Act (CRA). This Act essentially forced banks to make housing loans to the African American community. From a September 28, 2008 editorial from Investors Business Daily (IBD):
The main idea, as the late Democratic Sen. William Proxmire said on the Senate floor in 1977, was “to eliminate the practice of redlining by lending institutions.”
That term — “redlining” — seems quaint today. But in the 1970s, it was widely seen as the cause of housing disparities between white and black Americans.
The redlining theory went thus: Banks set up shop in low-income areas, took deposits, then lent the funds to richer areas — leaving poor and minority communities starved of housing and capital.
President Carter, a reformist former governor from the racially aware “New South,” embraced the 1977 CRA as a way to end the supposed practice of redlining.
Coming as it did just years after other major civil rights legislation — including the 1964 Civil Rights Act, the Fair Housing Act of 1968 and the Equal Credit Opportunity Act of 1974 — community activists and others viewed it as essential to bringing African-Americans into the American dream.
At the time, the U.S. was in the middle of what came to be known as stagflation. After the first oil embargo in 1973 sent prices spiraling upward, the economy struggled to emerge from a vicious two-year recession in 1974 and 1975.
By 1977, inflation hit 7% — on its way to 14% in 1980. A year earlier, in 1976, 30-year mortgage rates crested 9% for the first time ever.
Meanwhile, the jobless rate stood at 7% — 14% for blacks. Many African-Americans felt frozen out of home ownership. As home prices soared, affordability became a crisis for black families.
In such a nasty economic environment, it’s easy to see why something like the CRA got passed.
Good intentions, bad results.
Unfortunately, this well-intended law eventually led to a housing boom based on shoddy loan practices, a subsequent bust, and the financial mess we are in today.
Initially, the CRA was supposed to not just lend to poor areas, but to do so “consistent with safe and sound lending practices.” That latter key proviso was ignored as CRA was implemented.
As IBD has already shown, the CRA forced banks and savings institutions — then, far more heavily regulated than today — to make loans to poor, often uncreditworthy minority borrowers.
Banks were required to keep extensive records of their minority lending practices. Those that didn’t pass muster could be denied the right to expand their branches, merge with other banks, or boost lending in new markets.
Regulators didn’t need to do much policing; they let that job fall to radical community groups, such as ACORN and NACA, which siphoned literally billions of dollars from banks and lent the money in poor communities.
It wasn’t entirely altruistic.
The community groups booked thousands of dollars in fees for every loan. And loans often required recipients to become active in radical causes — what’s today called “community organizing.”
If a community group decided a bank was operating in bad faith, it could affect the bank’s “CRA rating” — the scorecard for how well it was doing as a minority lender.
Banks became pliable, easy targets. No bank CEO wanted to be mau-maued as an enemy of the poor. They became shakedown targets, channeling billions of dollars to groups that had, at best, meager results to show for it.
That’s how it began. Later, in the Clinton era, Fannie Mae and Freddie Mac got involved — buying up bad loans from banks, and securitizing them for sale on world markets. The seeds of the subprime meltdown were planted.
And the results of billions of dollars in investments in minority communities? From the same editorial:
As of last year, the home ownership rate among all Americans was 68.1% — up from 63% in 1970. For black Americans, it’s up from just below 42% in 1970 to 47.2% last year. It’s still below 50%, and still the lowest of any minority group.
Looks like not much improved, and the funds actually went to radical groups and “community organizers.” Not a very good investment, in my opinion.
But what Congress can do, Congress can also undo. But they didn’t. They chose instead to bury their heads in the sand and stuff money in their pockets. From another IBD editorial from September 26, 2008:
As early as 1992, alarm bells were going off on the threat Fannie and Freddie posed to our financial system and our economy. Intervention at any point could have staved off today’s crisis. But Democrats in Congress stood in the way.
As the president recently said, Democrats have been “resisting any efforts by Republicans in the Congress or by me . . . to put some standards and tighten up a little on Fannie Mae and Freddie Mac.”
No, it wasn’t President Bush who said that; it was President Clinton, Democrat, speaking just last week.
Interesting, because it was his administration’s relentless focus on multiculturalism that led to looser lending standards and regulatory pressure on banks to make mortgage loans to shaky borrowers.
Freddie and Fannie, backed by an “implicit” taxpayer guarantee, bought hundreds of billions of dollars of those subprime loans.
The mortgage giants, whose executive suites were top-heavy with former Democratic officials (and some Republicans), worked with Wall Street to repackage the bad loans and sell them to investors.
Just as Republicans got blamed for Enron, WorldCom and other early-2000s scandals that were actually due to the anything-goes Clinton era, the media are now blaming them for the mortgage meltdown.
But Republicans tried repeatedly to bring fiscal sanity to Fannie and Freddie. Democrats opposed them, especially Sen. Chris Dodd and Rep. Barney Frank, who now run Congress’ key banking panels.
History is utterly clear on this.
After Treasury Secretary Lawrence Summers warned Congress in 1999 of the “systemic risk” posed by Fannie and Freddie, Congress held hearings the next year.
But nothing was done. Why? Fannie and Freddie had donated millions to key congressmen and radical groups, ensuring no meaningful changes would take place.
“We manage our political risk with the same intensity that we manage our credit and interest rate risks,” Fannie CEO Franklin Raines, a former Clinton official and current Barack Obama adviser, bragged to investors in 1999.
In November 2000, Clinton’s HUD hailed “new regulations to provide $2.4 trillion in mortgages for affordable housing for 28.1 million families.” It made Fannie and Freddie take part in the biggest federal expansion of housing aid ever.
Soon after taking office, Bush had his hands full with the Clinton recession and 9/11. But by 2003, he proposed what the New York Times called “the most significant regulatory overhaul in the housing finance industry since the savings and loan crisis a decade ago.”
The plan included a new regulator for Fannie and Freddie, one that could boost capital mandates and look at how they managed risk.
Even after regulators in 2003 uncovered a scheme by Fannie and Freddie executives to overstate earnings by $10.6 billion to boost bonuses, Democrats killed reform.
“Fannie Mae and Freddie Mac are not facing any kind of financial crisis,” said Rep. Frank, then-ranking Democrat on the Financial Services Committee.
North Carolina Democrat Melvin Watt accused the White House of “weakening the bargaining power of poorer families and their ability to get affordable housing.”
In 2005, then-Fed Chairman Alan Greenspan told Congress: “We are placing the total financial system of the future at substantial risk.”
That year, Sen. John McCain, one of three sponsors of a Fannie-Freddie reform bill, said: “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.”
Sen. Harry Reid — now Majority Leader — accused the GOP of trying to “cripple the ability of Fannie Mae and Freddie Mac to carry out their mission of expanding home ownership.”
The bill went nowhere.
This year, the media have repeated Democrats’ talking points about this being a “Republican” disaster. Well, McCain has repeatedly called for reforming the mortgage giants. The White House has repeatedly warned Congress. This year alone, Bush urged reform 17 times.
Some GOP members are complicit. But Fannie and Freddie were created by Democrats, regulated by Democrats, largely run by Democrats and protected by Democrats.
In essence, several Democratically-controlled Congresses are to blame for creating this situation in the first place, and the financial institutions were complicit in what has been termed a “giant Ponzi scheme” from a couple of different sources. Of course, huge amounts of money were being thrown around to executives and certain Congressional leaders. But like all schemes where money is borrowed to cover debts, the whole financial house of cards collapsed.
Now Congress is considering a $700 billion bailout to cover the unholy mess that they landed us into. The problem is that the taxpayers do not have an unlimited checking account, nor should they be asked to foot the bill.
And yet, that is exactly what the taxpayer is being forced to do – cover the bad decisions of other people. And what is going to happen to be sure that it doesn’t happen again? Nothing!! Perhaps Congress should consider what the Swedes did when they had a similar situation in the early 1990s. From Time:
The Swedish example offers one way to minimize such “moral hazard” and potentially recoup some of the funds taxpayers are being asked to spend to help get the credit markets rolling again. The idea, says Lundgren, is not to just give money, but “to get some ownership (in return), and eventually be able to get some revenue back.” By taking a stake in its enfeebled banks, Sweden was able to minimize the taxpayers’ burden in the long run.
Sweden’s financial crisis in the early 1990s stemmed from a 1985 deregulation of credit markets, which set the stage for overexpansion and bubbles in the real estate and finance markets. When those bubbles burst in the early 1990s, Sweden’s currency crumbled and interest rates spiked to 500% overnight. Of the country’s seven biggest banks, five needed either government bailouts or big injections of money from shareholders. The value of the country’s real estate market plunged 50-60% in 18 months. “The whole Swedish banking system was off-balance,” Lundgren recalls.
The government tried several stop-gap measures to no effect and in late 1992 opted for a complete re-booting of Sweden’s financial system. Conservative Prime Minister Carl Bildt’s administration sat down with the center-left opposition and came up with a bipartisan, multi-tiered approach. The government issued blanket insurance for a period of four years to creditors in all the country’s 114 banks. It established an agency to oversee all banks that needed recapitalization and told them to immediately write down their losses.
Most importantly, the government stipulated that in order to become eligible for government funding, banks would have to give up something — namely equity — in return. In the case of one leading bank, the mere prospect of the government taking a stake was enough to persuade shareholders to dig deeper and raise money on their own. For the rest, the government was able, once the markets rebounded, to sell off the stakes it had acquired, making a profit that was effectively returned to taxpayers’ coffers. At one point the government controlled more than 20% of the entire banking system.
The cash that Sweden poured into its banks at the time amounted to about 4% of the country’s Gross Domestic Product. The comparable share of the U.S. GDP would be about $850 billion, or not much more than what Paulson has recently proposed . But in Sweden’s case at least one half of that money, and possibly more, depending on the source, was recouped by subsequent equity sales.
One of the attractions of this Swedish model is that it reduces so-called “moral hazard” — effectively rewarding poor or reckless risk assessment — by forcing financial institutions that took the highest risks to pay towards their own rescue. And it allows the state to recoup the money that it expends to buy up the bad debt at the core of the problem.
Swedish experts caution that the Swedish financial system is relatively small compared to the U.S. In 1992 most leading government officials knew the bank chiefs on a first name basis. Still, the Swedish experience could hold other lessons, says Robert Bergquist, chief analyst at SEB, one of Sweden’s largest banks. “The Swedish success depended on four factors,” he explains. Stockholm acted quickly, in open acknowledgement of the problems, and under a broad political agreement across the party spectrum. “Running parallel with these three factors,” he says, “a new economic policy — new goals for inflation and the budget — was developed after the crisis.”
Within several years, Sweden succeeded in getting its economy back on course. Growth has been as robust as in any country in western Europe in recent years and its banks have helped finance the economic boom in the Baltics and points east. Whether its approach could work in the far larger and more complicated U.S. market isn’t clear. Certainly the captains of Wall Street would bray over the mere hint of nationalization. But with hundreds of billions of dollars at stake, it might be worth, at the very least, a hard look.
Quite frankly, I’m tired of the government dipping into the taxpayer’s pocket every time something goes wrong because of bad planning. What I am anticipating is that taxes will be raised across the board no matter who is elected.
But what really gets me going is that the politicians point fingers everywhere but themselves. This crisis is being used as a campaign topic on the political stump, and the lies & deceit are incredible. With the public so ill informed, it is easy for certain politicians to point the finger at the current administration for the problem instead of their own parties actions & inactions.
And that is the real tragedy.
UPDATE: It appears that Congress, in a late night session, is going to implement a part of Swedish model. An excerpt from MSNBC.com reads:
The plan calls for the Treasury Department to buy deeply distressed mortgage-backed securities and other bad debts held by banks and other investors. The money should help troubled lenders make new loans and keep credit lines open. The government would later try to sell the discounted loan packages at the best possible price.
At the insistence of House Republicans, some money would be devoted to a program that would encourage holders of distressed mortgage-backed securities to keep them and buy government insurance to cover defaults.
The legislation would place limits on severance packages for executives of companies that benefit from the rescue plan, but details were sketchy.
Also, the government would receive stock warrants in return for the bailout relief, giving taxpayers a chance to share in financial companies’ future profits.
To help struggling homeowners, the plan requires the government to try renegotiating the bad mortgages it acquires with the aim of lowering borrowers’ monthly payments so they can keep their homes.
The deal still needs to be put in writing, and who knows what the final deal will look like. I can only hope that these clowns don’t screw over the average American again.