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Another Perspective

Of late, at least in conservative quarters, reports have made clear how much of the current financial crisis may be laid at the feet of Democrats and their social engineering policies.

Jeff Jacoby, the lone conservative columnist at the Boston Globe, wrote Sunday, "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."

Charles Hurt, in his "Inside Washington" column in Monday's New York Post, wrote, "It's not that taxpayers refuse to dig deeper to avoid an even bigger catastrophe. It's that they're all puking over the notion that it's the same bums in Washington who caused the mess by allowing it to fester who are now demanding their money to fix it." Last week, the website Free Republic posted a 1999 story from the New York Times, detailing how the Clinton administration implemented policies at Fannie Mae and Freddie Mac to encourage home loans to people with low credit worthiness. It all came under the rubric of encouraging "minority home ownership" and "ending redlining."

Free Republic crashed, whether because of overloading or sabotage. I got the story when a money manager circulated the whole text.

The next to last paragraph of that story makes clear how the mortgage pool deteriorated, and why it deteriorated so fast:

"In July [this is 1999, remember], the Department of Housing and Urban Development proposed that by the year 2001, 50 percent of Fannie Mae's and Freddie Mac's portfolio be made up of loans to low and moderate-income borrowers. Last year, 44 percent of the loans Fannie Mae purchased were from these groups."

And the last graf makes clear Jeff Jacoby's "arm-twisting" by the Federal government.

"The change in policy also comes at the same time that HUD is investigating allegations of racial discrimination in the automated underwriting systems used by Fannie Mae and Freddie Mac to determine the credit-worthiness of credit applicants."

In her September 24 column, Ann Coulter cracked, "Threatening lawsuits, Clinton's Federal Reserve demanded that banks treat welfare payments and unemployment benefits as valid income sources to qualify for a mortgage. That isn't a joke -- it's a fact."

John Lott, the previous week, in an article titled "Analysis: Reckless Mortgages Brought Financial Market to Its Knees," had actually quoted the Fed regulation: "Did You Know? Failure to comply with the Equal Credit Opportunity Act or Regulation B can subject a financial institution to civil liability for actual and punitive damages in individual or class actions. Liability for punitive damages can be as much as $10,000 in individual actions and the lesser of $500,000 or 1 percent of the creditor's net worth in class actions."

If you bring up those facts in political debate, Democrats will say you are "blaming the poor."

THAT'S ONE SIDE OF THE STORY. The other side has been told most effectively, and most entertainingly, in a May broadcast of the NPR show "This American Life, titled, "The Giant Pool of Money."

First, the global money supply doubled by the early 1990s. That doubling, from $36 trillion to $72 trillion, took place in a mere six years, and signaled the emergence into the world economy of countries like Korea, Taiwan, Thailand, Malaysia, China, and India. That pool of money, much of it under institutional management, sought its classic investment: sovereign debt, the bonds issued by solid, secure countries, chief among them, the United States.

There wasn't enough sovereign debt to go around. Institutions around the world clamored for something from the world's big investment banks. Those banks cast around for some reasonable alternative, something "as good as" -- or just about as good as -- Treasury bills, bonds, and notes, and municipal bonds, and they came up with the idea of creating securities out of pools of mortgages.

That's the second element in the developing crisis: securitization. And here, the really technical aspects of the story come into play. Software boffins employed by the big investment banks found one after another way to fold mortgages into bond-like investments, and those instruments got more and more complicated. There were swaps, strips, mortgage securities exchanged as collateral for other investments, indexes of mortgage securities used as the basis for derivatives, and a whole lot more well beyond my ken or that of any ordinary citizen.

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