The latest meme coming out of the right-wing is that the current financial crisis should be blamed on African American and Latino low-income home buyers, and/or on the Community Reinvestment Act (CRA). That's right, they want to blame the victims of predatory lending as well as the law that was designed to prevent banks from practicing discrimination (by only making loans in wealthy neighborhoods, a practice known as redlining).
Both claims are patently false, and as we near election day and talk to our family, friends, neighbors, and coworkers, it is important to know the facts about these two bogus claims.
Marc H. Morial, a former mayor of New Orleans, has called on Treasury Secretary Henry Paulson to come out and set the record straight about subprime mortgages being granted to minority home buyers, saying Paulson has "an obligation to correct the misinformation that is spread concerning the root cause of the current financial crisis." He went further, explaining that the real abuse was putting borrowers who actually qualified for prime loans into subprime loans because it was more profitable to the predatory lenders -- something that proper regulation would have prevented:
"It's an effort to shift the climate away from deregulation and the lack of oversight," he said. "The numbers are becoming clearer each day that a large number of people who ended up with a subprime loan could have qualified for a prime loan. That's the abuse that's inherent here."
On the House floor, on cable network television and in Internet blogs in recent days, conservative politicians and commentators have traced the problem to the Community Reinvestment Act, or CRA, enacted in 1977 to extend loans to minorities who were historically denied homeownership.
Activists Angered By Blame For Crisis
The right-wing would also like to blame the 1977 Act for subprime mortgages issued in 2004 because they don't want to see the deregulation and lack of regulation that the Bush Administration has had oversight of for the last eight years. As an oped distinctly points out today,
If you're not turned off by the undertone of blaming the victims; if you're not suspicious about blaming a 1977 law for shaky subprime loans that didn't begin to appear until 2004; and if you're willing to believe that the Bush administration used heavy-handed regulation against banks on behalf of poor people, you might find this explanation plausible - as long as you don't know much about the CRA.
Here are three things you should know about it:
- The CRA doesn't require loans to be made; it requires that the same rules apply to people seeking mortgages in poor neighborhoods as those buying in other neighborhoods. "Nor does the law require institutions to make high-risk loans that jeopardize their safety," according to the Fed's CRA Web site, "To the contrary, the law makes it clear that an institution's CRA activities should be undertaken in a safe and sound manner."
- The CRA only applies to banks and thrifts whose deposits are insured by the FDIC. Mortgage companies like Countrywide Financial and fly-by-night cheapmortgage.com-type operations aren't CRA banks. Half of the subprime mortgages were made by companies that weren't covered by the CRA, and another 30 percent were written by organizations only loosely affiliated with CRA banks.
- The CRA only works in designated low-income neighborhoods. As Rep. Jim McGovern noted in Hopkinton Wednesday, the CRA has nothing to do with a mortgage on a $500,000 home in Hopkinton, let alone a $800,000 home. This borrowing binge was a nationwide phenomenon.
Yes, some low-income, urban neighborhoods have been especially hard hit by foreclosures, but poor families live closer to the edge and are always the first hurt when the economy turns. But because CRA banks operate under more supervision, the failure rate for those mortgages has been lower, and those mortgages were less likely to be bundled into the mortgage-backed securities that have caused most of the headaches on Wall Street.
Editorial: Don't blame meltdown on the CRA
While the mainstream banking community vigorously opposed the CRA, which was enacted to ensure that the credit needs of entire communities were met, it was the predatory lenders who rushed in to exploit the people the CRA was meant to help:
The ugly truth is this: The redlining that led to the passage of CRA has been replaced by reverse-redlining. Lenders didn't have to be dragged into low-income neighborhoods. They rushed in. It was there that they could push their complicated mortgages onto the elderly, blacks and Hispanics, and then sell the loans to somebody else. At least 40 percent of the holders of subprime mortgages could have qualified for cheaper prime mortgages, according to one study.
Far from being spurned by financiers, low-income Americans have become their cash cow. Payday lenders are listed on the New York Stock Exchange. Operators go into poor neighborhoods pretending to be retailers. The product they "sell" – be it a used car or new sofa – is just a hook to saddle the trusting buyer with a loan that eventually costs them several times the ticketed price.
Yes, low-income people can be credit risks. That cannot be ignored. But this financial scandal is the work of fat cats, enabled by a permissive government. There's something highly indecent about blaming it on an innocuous law meant to remove some of the unfairness in the lives of the working poor.
Froma Harrop: Law for poor didn't cause meltdown
When you read opinions like this one today in the Wall Street Journal, claiming that multiple mistakes by politicians in Washington are to blame:
By pressuring banks to serve poor borrowers and poor regions of the country, politicians could push for increases in home ownership and urban development without having to commit budgetary dollars. Another political free lunch.
How Government Stoked the Mania
Housing prices would never have risen so high without multiple Washington mistakes.
Keep the facts in mind, and don't forget, which politicians in Washington to point the finger at. It was the Bush Administration that aggressively acted to keep all 50 States from protecting their residents from predatory lenders as we learned back in February:
Even though predatory lending was becoming a national problem, the Bush administration looked the other way and did nothing to protect American homeowners. In fact, the government chose instead to align itself with the banks that were victimizing consumers.
Predatory lending was widely understood to present a looming national crisis. This threat was so clear that as New York attorney general, I joined with colleagues in the other 49 states in attempting to fill the void left by the federal government. Individually, and together, state attorneys general of both parties brought litigation or entered into settlements with many subprime lenders that were engaged in predatory lending practices. Several state legislatures, including New York's, enacted laws aimed at curbing such practices.
What did the Bush administration do in response? Did it reverse course and decide to take action to halt this burgeoning scourge? As Americans are now painfully aware, with hundreds of thousands of homeowners facing foreclosure and our markets reeling, the answer is a resounding no.
Not only did the Bush administration do nothing to protect consumers, it embarked on an aggressive and unprecedented campaign to prevent states from protecting their residents from the very problems to which the federal government was turning a blind eye.
Predatory Lenders' Partner in Crime
How the Bush Administration Stopped the States From Stepping In to Help Consumers by Eliot Spitzer, The Washington Post, February 14, 2008.
I know, Eliot Spitzer had to resign from office in shame, but that doesn't mean he wasn't right about what happened with the Predatory Lenders. So when you hear people talking about how the victims of the predatory lenders are to blame, be armed with the facts.
And if that is not enough to convince the people you know who are considering a vote for the McCain/Palin ticket, remind them that a McCain Administration would probably feature a Treasury Secretary by the name of Phil Gramm.
At the moment, everyone is guessing. We see the men and women the candidates have recruited as advisers, to be sure. We know that until he embarrassed his candidate, former Sen. Phil Gramm (now working for the Swiss investment bank UBS) was co-chairman of McCain's campaign. After he called the U.S. "a nation of whiners" suffering from "a mental recession," Gramm made himself scarce. But if McCain were to become president, Gramm might come out of hiding in a hurry.
Few may recall, but Gramm himself ran for president for a time in 1996, and his campaign chairman was none other than John McCain, who in the past has referred to Gramm as his "economic brain."
Hey McCain And Obama: Who's Your Paulson?
And if Gramm isn't named Secretary of the Treasury, he is sure to play an important role in the economic policies somewhere else in a McCain Administration.
Yes, this is same Gramm who was recently John McCain's campaign manager, until he was dismissed by McCain after putting down the subprime-housing meltdown as merely a "mental recession" in the minds of a bunch of "whiners." Gramm's rumored to be McCain's first choice as Treasury Secretary. He could become Chairman of the Council of Economic Advisors, maybe Fed or SEC chairman, or just McCain's go-to economist because he definitely channels the best of Friedman's ideas and Reaganomics into the new McCainonomics.
In any event, with McCain as president, Gramm would have much to say about "privatization, deregulation, deep cuts in social spending" as well as how to run Paulson's megabillion-dollar bailout on hard-core conservative principles.
Gramm is a diehard Reaganomics free-market guru and arch-deregulator. In 1999 Gramm masterminded the legislation that killed the Glass-Steagall Act, killing the original 1932 protections that separated commercial and investment banking. So while McCain admits he knows little about economics, Gramm is an economics professor, a long-time buddy of McCain and obviously the master architect of McCainonomics.
The shocking evolution of disaster capitalism
Warning: McCainonomics channels inner Friedman/Reagan/Bush/Gramm
While the legislation to bailout rescue Wall Street may pass the House today, most of us probably agree with Paul Krugman's that it is not the ideal solution to the crisis facing our nation.
I hope that it passes, simply because we’re in the middle of a financial panic, and another no vote would make the panic even worse. But that’s just another way of saying that the economy is now hostage to the Treasury Department’s blunders.
(snip)
So we probably have to wait for the next administration, which should be much more inclined to do the right thing — although even that’s by no means a sure thing, given the uncertainty of the election outcome. (I’m not a fan of Mr. Paulson’s, but I’d rather have him at the Treasury than, say, Phil "nation of whiners" Gramm.)
And while the election is only 32 days away, it will be almost four months until the next administration takes office. A lot can — and probably will — go wrong in those four months.
One thing’s for sure: The next administration’s economic team had better be ready to hit the ground running, because from day one it will find itself dealing with the worst financial and economic crisis since the Great Depression.
Edge of the Abyss
Let's work as hard as we can to make sure that the next administration is called the Obama Administration, because the alternative is frightening.