[GCFL-discuss] FW: Whose Financial Mess is it, Anyway?

Wed Oct 1 20:57:17 CDT 2008

 an eye-opening email I received. 

greenBubble

-----Original Message-----
From: naomiragen at mail-list.com [mailto:naomiragen at mail-list.com] On
Behalf Of nragen at netvision.net.il
Sent: Monday, September 29, 2008 1:30 AM
Subject: Whose Financial Mess is it, Anyway?

Friends,

So, what really happened to the U.S. economy, and where should the buck
really land?

Jeff Jacoby, one of the few U.S. journalists that you could read during
the
Intifada because he always got things right,
gets it right again.  Beyond the hysteria to the facts.

Naomi

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September 28, 2008

WHOSE MESS, CONGRESSMAN FRANK?

By Jeff Jacoby

The Boston Globe

Sunday, September 28, 2008

     "The private sector got us into this mess. The government has to
get us
out of it."

     That's Barney Frank's story, and he's sticking to it. As the
Massachusetts Democrat has explained it
<http://www.youtube.com/watch?v=X1fM28w34uQ>  in recent days, , the
current
financial crisis is the spawn of the free market run amok, with the
political class guilty only of failing to rein the capitalists in. The
Wall
Street meltdown was caused by "bad decisions that were made by people in
the
private sector," Frank said; the country is in dire straits today
"thanks to
a conservative philosophy that says the market knows best." And that
philosophy goes "back to Ronald Reagan, when at his inauguration he
said,
'Government is not the answer to our problems; government is the
problem.' "

    In fact, that isn't what Reagan said. His actual words  were: "In
this
present crisis, government is not the solution to our problem;
government is
the problem." Were he president today, he would be saying much the same
thing.

     Because while the mortgage crisis convulsing Wall Street has its
share
of private-sector culprits -- many of whom have been learning lately
just
how pitiless
<http://edition.cnn.com/2008/BUSINESS/09/15/lehman.merrill.stocks.turmoi
l/in
dex.html>  the private sector's discipline  can be -- they weren't the
ones
who "got us into this mess." Barney Frank's talking points
notwithstanding,
mortgage lenders didn't wake up one fine day deciding to junk long-held
standards of creditworthiness in order to make ill-advised loans to
unqualified borrowers. It would be closer to the truth to say they woke
up
to find the government twisting their arms and demanding that they do so
--
or else.

     The roots of this crisis go back to the Carter administration. That
was
when government officials, egged on by left-wing activists, began
accusing
mortgage lenders of racism
<http://query.nytimes.com/gst/fullpage.html?res=950DE1DF1E39F932A3575AC0
A96F
948260
<http://query.nytimes.com/gst/fullpage.html?res=950DE1DF1E39F932A3575AC0
A96F
948260&sec=&spon=&pagewanted=all> &sec=&spon=&pagewanted=all>  and
"redlining" because urban blacks were being denied mortgages at a higher
rate than suburban whites.

     The pressure to make more loans to minorities (read: to borrowers
with
weak credit histories) became relentless. In 1977 Congress passed the
Community Reinvestment Act <http://www.federalreserve.gov/dcca/cra> ,
empowering regulators to punish banks that failed to "meet the credit
needs"
of "low-income, minority, and distressed neighborhoods." In 1995, under
President Clinton, the law was made even more stringent. Lenders
responded
by loosening their underwriting standards and making increasingly shoddy
loans. The two government-chartered mortgage finance firms, Fannie Mae
and
Freddie Mac, encouraged this "subprime" lending by authorizing ever more
"flexible" criteria by which high-risk borrowers could be qualified for
home
loans, and then buying up hundreds of billions of dollars' worth of the
questionable mortgages that ensued. Some state and local governments
added
pressure of their own
<http://query.nytimes.com/gst/fullpage.html?res=950DE4D8153AF937A2575AC0
A96F
948260> . 

     All this was justified as a means of increasing homeownership among
minorities and the poor. Affirmative-action policies trumped sound
business
practices. A manual issued by the Federal Reserve Bank of Boston advised
mortgage lenders to disregard financial common sense. "Lack of credit
history should not be seen as a negative factor," the Fed's guidelines
<http://www.bos.frb.org/commdev/commaff/closingt.pdf>  instructed.
Applicants lacking sufficient savings to cover a down payment and
closing
costs should be allowed to rely instead on "gifts, grants, or loans from
relatives, nonprofit organizations, or municipal agencies." Lenders were
even directed to accept welfare payments and unemployment benefits as
"valid
income sources" to qualify for a mortgage. Failure to comply could mean
a
lawsuit.

     As long as housing prices kept rising -- and with millions of
otherwise
unqualified borrowers adding to demand, they did -- the illusion that
all
this was good public policy
<http://articles.latimes.com/1999/may/31/news/mn-42807>  could be
sustained.
But it didn't take a financial whiz to recognize that a day of reckoning
would come. "What does it mean when Boston banks start making many more
loans to minorities?" I asked in this space in 1995. "Most likely, that
they
are knowingly approving risky loans in order to get the feds and the
activists off their backs . . . When the coming wave of foreclosures
rolls
through the inner city, which of today's self-congratulating bankers,
politicians, and regulators plans to take the credit?"

     Not Barney Frank. And yet his fingerprints are all over this
fiasco.
Time and time again, Frank insisted that Fannie Mae and Freddie Mac were
in
good shape. Five years ago, for example, when the Bush administration
proposed much tighter regulation of the two companies, Frank was adamant
that "these two entities, Fannie Mae and Freddie Mac, are not facing any
kind of financial crisis." When the White House warned  of "systemic
risk
for our financial system" unless the mortgage giants were curbed, Frank
complained that the administration was more concerned about financial
safety
than about housing.

     Now that the bubble has burst and the "systemic risk" is apparent
to
all, Frank blithely declares: "The private sector got us into this
mess."
Well, give the congressman points for gall. Wall Street and private
lenders
have plenty to answer for, but it was Washington and the political class
that derailed this train. If Frank is looking for a culprit to blame, he
can
find one likely suspect in the nearest mirror.

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