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Have you heard this one:

The government forced banks to make bad loans and caused the economic crisis.

If you haven't, you probably haven't talked to any conservatives lately.

Be thankful though when someone brings this up. It's an easy win and you don't have to know anything about economics.

Here's how to drive a giant, non-partisan economic truck through their argument.

From the Wall Street Journal, here's the argument in the words of Russell Roberts:

Beginning in 1992, Congress pushed Fannie Mae and Freddie Mac to increase their purchases of mortgages going to low and moderate income borrowers. For 1996, the Department of Housing and Urban Development (HUD) gave Fannie and Freddie an explicit target -- 42% of their mortgage financing had to go to borrowers with income below the median in their area. The target increased to 50% in 2000 and 52% in 2005.

Does this sound familiar?

You know where it's headed: banks were just trying to make a profit but they couldn't because the government was forcing them to make bad loans.

In the words of a conservative friend:

The govt forced the banks to take on greater risk by giving loans to those who could not afford it. Glass-steal (sic) was the instrument which allowed the transfer of risk to fanie/Freddie (sic), but the fundamental problem was not the deregulation, it was the micromanagement of the banks which created the problem.

The micromanagement of the banks by the government. Got that? The banks were a victim of government.

The first giant gaping hole

Here's the easiest way to approach this argument: remember that not all of the banks failed.

If the government was forcing banks to make bad decisions as Mr. Russell and others argue, wouldn't all of the banks have failed?

How did some manage to survive this purportedly ruthless victimization where they had to give out super risky loans?

The answer is simple: Some banks made good decisions and some banks took on much greater risk to try and turn huge profits.

Government didn't force any of these decisions.

The second giant gaping hole

If that argument isn't enough for you, I'll drive a second truck through Mr. Russell's argument.

He doesn't even mention the risky derivatives trading and credit default swaps that occurred.


Because he wants you to think that the banks failed ONLY because the government made them make bad loans to low-income people.

Remember a little company called AIG? AIG took a bailout of almost $200 billion because they lost it on insuring credit default swaps, a form of derivatives. They lost it by insuring the risky bets that banks made with each other.

Did the government "make" them place these bets?


Banks had argued for deregulation since at least the 1980s and when Gramm-Leach-Bliley was repealed in 1999, they could finally merge with investment banks and make more risky loans.  

For the first time since Glass-Steagall in 1933, banks could use their assets and savings to make risky market bets.

Many didn't. But many did.

The point is that government never "forced" anything on them.  

So where are all these ridiculous arguments coming from?

It's hard to tell, but someone sure seems eager to shift blame onto the government. Perhaps it's the people who've been telling us for years that government is the problem.

Maybe the money the Koch brothers have donated to George Mason University has colored Mr. Robert's opinion.

Because he sure seems to leave out a lot of important details.

The third giant gaping hole (if you need more and want to get into economic detail)

If the first two weren't enough, here's a third truck-sized hole that I credit to Joseph Stiglitz. (Ok, in all fairness, I got the second one from Joe too and probably enough of the details to put together the first one.)

People like Mr. Roberts place the blame on Fannie Mae and Freddie Mac and here's my favorite, the Community Reinvestment Act of 1977.

1977. Yes, you heard that right ... 1977.  

In the words of Mr. Roberts, here's how they bring in the CRA:

The Community Reinvestment Act (CRA) did the same thing with traditional banks. It encouraged banks to serve two masters -- their bottom line and the so-called common good. First passed in 1977, the CRA was "strengthened" in 1995, causing an increase of 80% in the number of bank loans going to low- and moderate-income families.

A couple points from Mr. Stiglitz's book Freefall:

Default rates on the CRA lending were actually comparable to other areas of lending - showing that such lending, if done well, does not pose greater risks.

Not only does this make sense, but it explains why some banks didn't fail.


Fannie Mae and Freddie Mac's mandate was for "conforming loans," loans to the middle class. The banks jumped into subprime mortgages - an area where, at the time, Freddie Mac and Fannie Mae were not making loans - without any incentives from the government.

A later privatized Fannie and Freddie would get into the market for securities, but the key point here is that many banks moved into these risky loans first, without any incentive from the government.

Why did they do this?

Because they thought they could make massive amounts of money off of the higher interest rates and because they had figured out a way to move these loans off their books by reselling them in the form of securities.

To spell this out, banks recognized what organized crime has known since the dawn of time: you can make a lot of money off of high-interest loans.  

So not only did they make subprime loans without the government "forcing" them to do it, they've been lobbying the government to allow them to do it for years.

The first step was to legalize it.

The ability to charge high rates and fees to borrowers was not possible until the Depository Institutions Deregulation and Monetary Control Act (DIDMCA) was adopted in 1980. It preempted state interest rate caps. The Alternative Mortgage Transaction Parity Act (AMTPA) in 1982 permitted the use of variable interest rates and balloon payments.

The next step was to make it viable:

Subprime lending would not become a viable large-scale lending alternative until the Tax Reform Act of 1986 (TRA). The TRA increased the demand for mortgage debt because it prohibited the deduction of interest on consumer loans, yet allowed interest deductions on mortgages for a primary residence as well as one additional home. This made even high-cost mortgage debt cheaper than consumer debt for many homeowners.

And I already mentioned the elimination of Glass-Steagall with the passage of Gramm-Leach-Bliley in 1999.

Now how did Mr. Roberts miss some of this? Isn't he supposed to be a knowledgeable economist?

Why is he only presenting some of the information? Why does he single out 1977 and 1995 as key dates in his argument?

I'll leave you to guess at his motives.

But his arguments? Holier than the Vatican on Easter Sunday.


To summarize, when someone argues that the "government made the banks do it," this is a great opportunity to ask them:

  1. Why didn't all the banks fail?
  2. How did government make them trade risky derivatives?
  3. Why did the banks move into subprime loans without any push from the government?
  4. Why have the banks spent so much time lobbying to deregulate the market so they could make more risky bets?
When I brought up these points with my conservative friend, he had to admit that:
Agreed... some banks made stupid decisions on their own. Personally, I couldn’t care less. They make bad decisions, then they must suffer the consequences. They should not be bailed out.

Ok, so he's still sipping the "free" market Kool-Aid.

But I can tell I'm getting through to him and, more importantly, I'm getting through to some of his friends as I've seen them start to raise their voices and chime in.

This one's an easy win. And it doesn't take a Ph.D. in economics.

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Comment Preferences

    •  Bless you (4+ / 0-)

      and thank you for these links!

      •  "Why didn't all banks fail?" is a really good (3+ / 0-)
        Recommended by:
        sc kitty, wasatch, G2geek

        point. It's partly because not all banks were as egregious as the biggest subprime lenders Countrywide and Washington Mutual.

        It is also because the big banks securitized mortgages with bad (many subprime) loans bundled in and hid them. Without the big bailouts of fall 2008, many more banks would have failed.

        Guess who helped them Countrywide and WaMu?

        From a wikipediatimeline on the subprime crisis:

        2003-2007: U.S. subprime mortgages increased 292%, from $332 billion to $1.3 trillion, due primarily to the private sector entering the mortgage bond market, once an almost exclusive domain of government sponsored enterprises like Freddie Mac.[90][91]

            The Federal Reserve fails to use its supervisory and regulatory authority over banks, mortgage underwriters and other lenders, who abandoned loan standards (employment history, income, down payments, credit rating, assets, property loan-to-value ratio and debt-servicing ability), emphasizing instead lender's ability to securitize and repackage subprime loans.[67][92]

      •  sounds like your friend is starting to budge. (0+ / 0-)

        The fact that s/he said that banks should not be bailed out for their own bad decisions, is major progress.

        That's something we can agree on across the political spectrum.  For conservatives it's about market justice, and for liberals it's about social justice, but the bottom line is, we can ALL agree on this.

        And therein resides a potentially enormously powerful point for organizing.  

        "Minus one vote for the Democrat" equals "plus one vote for the Republican." Arithmetic doesn't care about your feelings.

        by G2geek on Sat Oct 29, 2011 at 07:29:22 PM PDT

        [ Parent ]

  •  Here You Go (0+ / 0-)

    This series of posts outlines the Clinton administrationss National Home Ownership Strategy (which the Bush administration bought into whole hog 'cause it dovetailed nicely into the 'ownership society), Fannie Maes's easing of credit standards, the whole enchilada, and this is not formed of opinion, it is documentation from the actual period of time in question

    Urban Policy Brief, Number 2

    I won't be coming home tonight, my generation will put it right - Genesis 9:3

    by superscalar on Sat Oct 29, 2011 at 10:15:00 AM PDT

  •  I know my husband will appreciate (5+ / 0-)

    this since so many wingers in our area keep blaming the government what what the banks and Wall Street have done. Thank you for a true public service.

    "The object of persecution is persecution. The object of torture is torture. The object of power is power. Now do you begin to understand me?" ~Orwell, "1984"

    by Lily O Lady on Sat Oct 29, 2011 at 10:20:53 AM PDT

  •  The other issue (7+ / 0-)

    that is bugging the heck out of me is the wingnut solution to all these problems...less regulation is needed and lower taxes on gazillionaires. I've heard wingnuts agree with #OWS thoughts, but feel the solution to fix the problem is less regulation on banks and less taxes on gazillionaires.

    So when they say that, I say, but our tax rates and regulations on banks and corporations is at it's lowest in decades and the resulting economy from this is a worse jobs picture and terrible conomy for must of us, with stagnant wages except the wealthy. And I ask them, so please do tell me how more tax cuts and even less regulation is going to create more jobs and a better economy since it hasn't done that now....and they still don't believe it. They go off on how taxes are too high and too much waste in gov't because of liberals etc.

     The rightwing noise machine and it's slew of billionaire blowhard propagandist that have graced the airways for decades, have suckered many people so badly is a cult. It's going to take years and years of deprogramming to offset the lies and that cult mindset...but I don't think we will survive that. I fear that due to years of rightwing indoctrination, fearmongering, disinformation, outright lying, that it's just going to get worse before it gets better. The divide will there's a sucker born everyday, and that is exactly what Limball, Kochs, Beck, Murdoch and the rest of the greedy, slimeball  republicons thrive, manipulate, and are relying on for their survival.

    The best thing I can tell people to do is to shut off the tv and  turn off Fox News (and much of the corporate mainstream media)'s called the idiot box for a reason.

    48forEastAfrica-Donate to Oxfam The Plutocratic States of America, the best government the top 1% and corporations can buy. We are the 99%-OWS.

    by emal on Sat Oct 29, 2011 at 10:53:37 AM PDT

    •  Amen ... (3+ / 0-)

      I just posted a very similar comment on another article. Conservatives seem to now agree with the problem, but still think the solution is to double down on more of what lead to the crisis.


      All I can think of is "Baby steps ..." from the movie "What about Bob?"


    •  Because they own the media - we are here (2+ / 0-)
      Recommended by:
      emal, G2geek

        - to take it back!  
      Without a true FREE PRESS we have NO democracy!

      Media ownership study ordered destroyed
      Sept 14, 2006
      ‘Every last piece’ destroyed
      Adam Candeub, now a law professor at Michigan State University, said senior managers at the agency ordered that “every last piece” of the report be destroyed.

      “The whole project was just stopped - end of discussion,” he said. Candeub was a lawyer in the FCC’s Media Bureau at the time the report was written and communicated frequently with its authors, he said.


      “Television is altering the meaning of “being informed” by creating a species of information that might properly be called disinformation… Disinformation does not mean false information. It means misleading information - misplaced, irrelevant, fragmented or superficial information - information that creates the illusion of knowing something, but which in fact leads one away from knowing.”

    •  the answer to that is: we tried it, it didn't work (0+ / 0-)

      ... so now it's time to try something else.

      And then ask them for proposals.  Put the onus on them to come up with something new.

      "Minus one vote for the Democrat" equals "plus one vote for the Republican." Arithmetic doesn't care about your feelings.

      by G2geek on Sat Oct 29, 2011 at 07:39:40 PM PDT

      [ Parent ]

  •  Hole # 5 (9+ / 0-)

    Nice job of identifying the fallacies of conservatives' arguements that our government caused the economic collapse of 2008.

    There is another rebuttal argument you can trot out in your discussions with conservatives (if those conservatives hang around long enough to bring this up).

    The banking collapse of 2008 was not limited to US banks.  Housing and banking collapses occurred widely in many foreign countries.  Of course the US government does not dictate rules and regulations on home mortgages to overseas banks.  Ergo, governmental policies were not soley responsible for all banking problems.

    In fairness to conservatives, there is some truth to the claim that policies of the US government led to the banking collapse of 2008.  But it was not mortgage policy, but the deregulation as set forth in the Gramm-Leach-Biley act, which was signed into law by Pres. Clinton.  Clinton, for his part, has publicly admitted this was poor policy, even as conservatives continue to advocate for even lesser regulation.

    "The fool doth think he is wise: the wise man knows himself to be a fool" - W. Shakespeare

    by Hugh Jim Bissell on Sat Oct 29, 2011 at 10:56:23 AM PDT

    •  Well played! I hadn't even thought of that (2+ / 0-)
      Recommended by:
      David PA, G2geek

      Shows my U.S.-centric thinking :) as this is obvious once you see it.

      Also, I do agree with you that government has played a role. Even if it was at the behest of the financial sector.

      Also, I see have completely spelled "Gramm" wrong. Correction forthcoming.

  •  see also Krugman (4+ / 0-)

    "Fighting for us, good. Winning, better. Talking about fighting? Not so good."--Atrios

    by andrewj54 on Sat Oct 29, 2011 at 12:01:41 PM PDT

  •  More ... private lenders lead subprime Fannie lags (1+ / 0-)
    Recommended by:

    From this wikipedia article

    Following their mission to meet federal Housing and Urban Development (HUD) housing goals, GSEs such as Fannie Mae, Freddie Mac and the Federal Home Loan Banks (FHLBanks) have striven to improve home ownership of low and middle income families, underserved areas, and generally through special affordable methods such as "the ability to obtain a 30-year fixed-rate mortgage with a low down payment... and the continuous availability of mortgage credit under a wide range of economic conditions." (HUD 2002 Annual Housing Activities Report) Then in 2003-2004, the subprime mortgage crisis began.[32] The market shifted away from regulated GSEs and radically toward Mortgage Backed Securities (MBS) issued by unregulated private-label securitization conduits, typically operated by investment banks.

    As mortgage originators began to distribute more and more of their loans through private label MBS, GSEs lost the ability to monitor and control mortgage originators. Competition between the GSEs and private securitizers for loans further undermined GSEs power and strengthened mortgage originators. This contributed to a decline in underwriting standards and was a major cause of the financial crisis. [33]

    Investment bank securitizers were more willing to securitize risky loans because they generally retained minimal risk. Whereas the GSEs guaranteed the performance of their MBS, private securitizers generally did not, and might only retain a thin slice of risk. [33] Often, banks would offload this risk to insurance companies or other counterparties through credit default swaps, making their actual risk exposures extremely difficult for investors and creditors to discern. [34]

    The shift toward riskier mortgages and private label MBS distribution occurred as financial institutions sought to maintain earnings levels that had been elevated during 2001-2003 by an unprecedented refinancing boom due to historically low interest rates. Earnings depended on volume, so maintaining elevated earnings levels necessitated expanding the borrower pool using lower underwriting standards and new products that the GSEs would not (initially) securitize. Thus, the shift away from GSE securitization to private-label securitization (PLS) also corresponded with a shift in mortgage product type, from traditional, amortizing, fixed-rate mortgages (FRMs) to nontraditional, structurally riskier, nonamortizing, adjustable-rate mortgages (ARMs), and in the start of a sharp deterioration in mortgage underwriting standards.[32] The growth of PLS, however, forced the GSEs to lower their underwriting standards in an attempt to reclaim lost market share to please their private shareholders. Shareholder pressure pushed the GSEs into competition with PLS for market share, and the GSEs loosened their guarantee business underwriting standards in order to compete. In contrast, the wholly public FHA/Ginnie Mae maintained their underwriting standards and instead ceded market share.[32]

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