We need more bureaucrats to strong-arm banks into doing the stupid things that got America and the rest of the world into this colossal financial mess in the first place, argues the Obama administration.
Well, the administration didn’t use those words exactly, but in the interests of greater governmental transparency maybe it should have.
That’s because there is no doubt that the Carter-era Community Reinvestment Act (CRA) and other boneheaded government policies helped to create the subprime mortgage bubble that violently burst and that continues to wreak havoc on the world’s financial markets. CRA allowed activists to blackmail lenders into handing out mortgages to people with little regard for their ability to keep up payments.
Yet the Obama administration is now demanding that the bank-killing CRA, which in practice has been used to emphasize a largely race-based version of financial so-called social justice at the expense of sound banking practices, be strengthened.
The administration laid out its counterintuitive position in the Treasury Department’s new white paper, “Financial Regulatory Reform: A New Foundation,” which calls for the creation of a new super-duper-regulator, the Consumer Financial Protection Agency (CFPA).
My American Spectator colleague Joseph Lawler, who has his own doubts about the destructive power of the CRA, has a delightfully simple way of summing up the problems with the law:
“[T]he CRA was either potentially harmful or useless. Does it make sense to include provisions for expanding a harmful or useless measure in a regulatory overhaul?”
When and if the proposal finds its way into draft legislation, its sponsors should consider naming the bill the No Banking Bureaucrat Left Behind Act. Such a title would make sense because apparently the armies of government employees at the Securities and Exchange Commission (SEC), Federal Deposit Insurance Corporation (FDIC), Office of the Comptroller of the Currency (OCC), Commodity Futures Trading Commission (CFTC), Federal Trade Commission (FTC), National Credit Union Administration (NCUA), Office of Thrift Supervision (OTS), along with state and local prosecutors and watchdog agencies and the U.S. Department of Justice aren’t sufficient to protect the nation’s consumers. We must need more pencil pushers.
Another possible name for the measure could be the ACORN Activist Full Employment Act. The name would make sense because such legislation would help to keep the venal poverty predators at ACORN and similar groups such as the Greenlining Institute, National Council of La Raza, Neighborhood Assistance Corporation of America (NACA), and the RainbowPUSH Coalition busy, busy, busy.
The name is also appropriate because activist groups were encouraged to agitate by the CRA, which enshrined in law a kind of lending protection racket. Banking regulators were given the power to make trouble for banks that failed to lend enough money to so-called underserved communities. Spurred on by community organizers, banks that paid enough –whatever that means— got left alone, but banks that didn’t, got their legs broken.
How much money is enough to satisfy the law? Even the Federal Reserve Board can’t say for sure. From the Fed’s online summary of the Act:
“The CRA requires that each depository institution’s record in helping meet the credit needs of its entire community be evaluated periodically. That record is taken into account in considering an institution’s application for deposit facilities.
Neither the CRA nor its implementing regulation gives specific criteria for rating the performance of depository institutions. Rather, the law indicates that the evaluation process should accommodate an institution’s individual circumstances.”
The Obama administration wants to take this federal law, which is the very definition of arbitrary and capricious, and push it even harder.
Not surprisingly, bureaucrats don’t want to believe that the programs and laws they enforce hurt society. The white paper asserts that “[r]igorous application of the Community Reinvestment Act (CRA) should be a core function of the CFPA” and dismisses critics who say the statute must be weakened to promote financial stability. Critics’ “claims and arguments are without any logical or evidentiary basis,” it says.
In the absence of any evidence for boosting CRA enforcement efforts, the paper argues, “The appropriate response to the crisis is not to weaken the CRA; it is rather to promote robust application of the CRA so that low-income households and communities have access to responsible financial services that truly meet their needs.”
CRA defenders often cite the comments of Federal Reserve Governor Elizabeth A. Duke and Janet Yellen, president of the Federal Reserve Bank of San Francisco, who bemoans the “tendency to conflate the current problems in the subprime market with CRA-motivated lending.”
Supporters also look to plenty of politicians and regulators, even Republican appointees, who remain CRA true believers. One of them is Sheila Bair, head of FDIC: “I want to give you my verdict on CRA: NOT guilty.”
Bair threw her lot in with the financial affirmative action crowd a long time ago. In March she received the 2008 Gale Cincotta NHS Neighborhood Partnership Award from the Chicago office of Neighborhood Housing Services. The award is named after Gale Cincotta, whom some call the “mother of the Community Reinvestment Act” because she reportedly led the effort to create the law that President Carter signed in 1977. Cincotta founded the Saul Alinsky-inspired National Training and Information Center (NTIC), which recently agreed to fork over $550,000 to the U.S. government to make claims that it misused federal grant money go away.
Another Republican defender of the CRA is bank regulator John C. Dugan, Comptroller of the Currency. “CRA is not the culprit behind the subprime mortgage lending abuses, or the broader credit quality issues in the market place,” he said.
The sophistry-packed Treasury white paper insists the CRA could not have “caused an explosion in bad subprime loans more than 25 years after its enactment.” It also throws out a red-herring of a statistic from the Federal Reserve which found that only 6% of all “the higher-priced loans were extended by the CRA-covered lenders to lower income borrowers or neighborhoods in the local areas that are the focus of CRA evaluations.” What about all the other loans that government policies encouraged or forced banks to make to borrowers who didn’t have the financial wherewithal to buy a home?
University of Texas economist Stanley Liebowitz wrote that the current mortgage market debacle is “a direct result of an intentional loosening of underwriting standards – done in the name of ending discrimination, despite warnings that it could lead to wide-scale defaults.” Economist Thomas Sowell just wrote an entire book, The Housing Boom and Bust, on the destructive effects of government policies, including the affordable housing “crusade” and the CRA, on housing markets.
Sowell and Liebowitz are hardly alone is pointing out that U.S. financial markets have been asphyxiated by a terrible credit crunch that might have been avoided if lenders had refrained from doling out loans they ought to have known were doomed to default. Even former Federal Reserve governor Lawrence B. Lindsey, a steadfast defender of the CRA, admits that the law “did contribute to a downgrading of credit standards.”
Banks felt the heat from community organizers and CRA examiners and instead of fighting, they made loans they shouldn’t have and paid out millions of dollars in protection money to ACORN and its brethren.
The advent of Mortgage-Backed Securities (MBSs) by Fannie Mae and Freddie Mac gave banks an added incentive to write loans because they knew they could dump their dubious mortgages onto Fannie and Freddie investors who counted on a government bailout if things got rough. These MBSs—which should have been called MJBs (Mortgage Junk Bonds)— helped to spread the subprime contagion across America and the world.
These securities received strong bond ratings from credit agencies in part because Fannie and Freddie, which place politics over profit-making, had long enjoyed an implied guarantee from Uncle Sam. Accordingly, investors bought them with confidence.
The Obama administration’s new regulatory plans don’t call for anything to be done about Fannie and Freddie apart from navel-gazing. It calls for various branches of the government to talk about what, if anything, to do about them.
Don’t hold your breath waiting for reform of the two government-sponsored enterprises that have provided extraordinarily well paid sinecures for incompetent and corrupt Democratic politicians and courtiers (e.g. Franklin Raines, Jamie Gorelick, Jim Johnson) in recent years.