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Thomas Frank is an earnest liberal confounded by conservatism’s revival under Obama.
(Page 2 of 3)
Here’s how he puts it: “For the master Spirits of our contemporary Right [it’s] straightforward sympathy for the billionaire plus tangled rationalizations for the death or humiliation of everyone else. The game is finally up for the whiners of the world, they exult. The first shall be first. Root hog, or die.”
Thus, in that unpleasant, and nearly unhinged paragraph, Frank comes as close as any place in this strange, disconnected book, in which he seems to war with unspecified demons, to summing up his message. But despite all the noise, he doesn’t seem able to provide—or interested in providing—a coherent analysis of the causes of the 2008 financial collapse.
A DIFFICULT ASSIGNMENT, to be sure. But as a starting point, most observers, left or right, agree that it was brought on by the inevitable bursting of the housing bubble. But why was there a housing bubble in the first place? What caused that housing crisis? Frank refers to it as “‘foreclosuregate,’ the revelation…that banks had cut all sorts of legal corners in order to hustle borrowers to default out of their houses as quickly as possible.”
That’s no doubt part of it. But many respected economists and commentators—none of whom are mentioned in Frank’s’ book—believe it was the direct result of government policies.
In The Housing Boom and Bust, for instance, the respected economist Thomas Sowell describes just how the scam worked. At some point it became apparent to politicians that increasing home ownership among low-income people—people with bad credit and no money for the conventional down payment—could create a whole new political constituency. This became the “underserved population,” to whom politicians like Barney Frank and Christopher Dodd set out to pander.
Governmental agencies reporting to Congress pressured lending institutions they regulated to loosen loan requirements and revise them downward. In effect, lending quotas were established, and if banks were reluctant to lower standards to serve “the underserved population,” they could find it difficult to compete against more cooperative institutions. And so the loans became increasingly risky; and as the new “underserved” homeowners were unable to make payments, the money ran out.
For Frank, however, these issues are inconsequential. Barney Frank’s involvement is mentioned in a note explaining how Glenn Beck apparently confused Fannie Mae and Freddie Mac with an insurance company. Christopher Dodd is mentioned in connection with the same company, and the complex and confusing Dodd-Frank financial reform bill, after the passage of which both Dodd and Frank left town, is referred to once in a long paragraph.
Nor are the roles of the government banks Freddie Mac and Fannie Mae examined here. Frank brushes aside any need to take criticism of them seriously, citing—again, in a note—the conclusion of the Financial Crisis Inquiry Commission, charged in 2009 with determining the causes of the collapse and issuing a report in early 2010, that loans guaranteed by Fannie and Freddie were “far less risky” than those issued by private lenders. And that’s pretty much what he has to say on the subject.
Interestingly, in the same note, he also tells us: “Full disclosure: My wife, Wendy Edelberg, worked for the Financial Crisis Inquiry Commission….” But it’s a little more than that. Frank’s wife, previously with the president’s Council of Economic Advisers and the Federal Reserve, and now an assistant director at the Congressional Budget Office, did a bit more than “work for” the commission. She was its executive director.
THE COMMISSION, whose 10 members reflected the composition of Congress in 2009 when it was formed—six Democrats, four Republicans—released its final report in early 2011, with the six Democrat members approving, three Republicans dissenting, and one member, Peter Wallison, a senior fellow at AEI, issuing an eloquent dissent (hard to believe that the spouse of the executive director seems not to be familiar with it), identifying governmental policies as the main cause of the collapse.
In May 2011, Wallison elaborated on his views in a strong and persuasive article in TAS.
The financial crisis, he argued, “would not have occurred if government housing policies had not fostered the creation of an unprecedented number of subprime and other risky loans immediately before the financial crisis began…it was the U.S. government’s housing policies—and nothing else—that were responsible for the 2008 financial crisis.”
In 1992, he writes, Congress mandated what were called “affordable housing loans” for Fannie Mae and Freddie Mac. The initial goals required that 30 percent of all loans Fannie and Freddie brought in each year had to be made to low-income borrowers. The Department of Housing and Urban Development (HUD) increased this requirement, reaching 55 percent in 2007. “HUD took Congress’s enactment of the affordable housing goals as an expression of a congressional policy to reduce underwriting standards so that low-income borrowers would have greater access to mortgage credit.”
This put Fannie and Freddie into competition with the Federal Housing Administration (FHA), an agency charged with providing credit to low-income borrowers, and with subprime lenders like Country-wide (Senator Dodd’s favorite mortgage company). Add all this to the requirements under the Community Readjustment Act of 1977 (CRA), making mortgages available to borrowers below 80 percent of the median income in their communities, and “the inevitable result was a significant deterioration in underwriting standards.”
As a result, by 2008, “19.2 million out of the total of 27 million subprime and other weak loans in the U.S. financial system could be traced directly or indirectly to U.S. governmental housing policies.”
A man of faith in a godless age is hitting Americans where it hurts.
Mr. and Mrs. American Spectator Reader, let P.J. O’Rourke talk sense to your kids.
In Britain, defending your property can get you life.
It won’t take long for conservatives to scratch this presidential wannabe off their 2008 scorecard.
Was the President done in by the economy, or by the politics of the economy?