When Barack Obama, Nancy Pelosi, Harry Reid, and other upstanding Democrats point to the “failed policies” of the Bush administration as the cause of the current chaos in the financial markets, they are deliberately trying to transfer the spotlight from their own party’s mistakes. The current crisis can be traced directly to President Clinton’s revision of the 1977 Community Reinvestment Act, or CRA.
The revision essentially required banks to expand their loan portfolios to include more low-income customers. Bank examiners rated banks on their compliance with these revisions. Community organizations such as ACORN (Association of Community Organizations for Reform Now) were empowered to comment on bank compliance. Banks quickly learned that a generous donation to these organizations was easier than defending themselves against complaints filed by these organizations. Loans made to low-income borrowers were immediately sold to Fannie Mae and Freddie Mac, whose policies also were revised to allow the purchase of these loans.
The task of revising Fannie Mae’s regulations fell to Herb Moses, director of product initiatives, who was also the homosexual “lover” of Rep. Barney Frank, who was a member of the House Banking Committee, which had oversight of Fannie Mae. These policy revisions were, in hindsight, spectacularly stupid. Rather than income verification and standard debt-to-income analysis, a welfare check stub or enrollment in a credit-counseling program were acceptable as “proof” of ability to make mortgage payments.
Freddie Mac specialized in the repackaging of these mortgages into securities that carried the federal government’s seal of approval, and resold them through the financial markets.
The structure of disaster was almost complete. The Clinton administration directed federal agencies to expand credit, particularly home loans, to low-income buyers. ACORN and other community organizations were empowered to promote loans and encourage banks to make them, and Fannie and Freddie were instructed to buy the loans. The Federal Reserve joined the parade by reducing interest rates to help facilitate these loans.
No wonder the housing market exploded.
Countrywide, once heralded as the nation’s largest CRA lender, with $600 billion in sub-prime mortgages, was among the first to fall. Lehman Brothers, an eager buyer of Freddie Mac securities, also collapsed. Then fell Fannie Mae and Freddie Mac; the ripples are still rippling across the financial markets.
As early as 2004, the Bush administration tried to increase regulation of Fannie and Freddie, but ran into stiff opposition from Democrats, especially from Barney Frank, who was afraid that lending activities would be sacrificed in the name of market risk. Now, Frank is blaming the Republicans for failing to enact reforms that he and his party blocked.
During the high-flying days at Fannie and Freddie, more than $200 million was spent on lobbyists and political contributions. Chris Dodd, Democrat chairman of the Senate Banking, Housing and Urban Affairs Committee, collected $165,400. Barack Obama received $126,349, and Barney Frank got $42,350, of the $4.2 million the two housing giants gave to lawmakers.
Clearly, the Democrats caused the problem by insisting that mortgage money be made available to people who could not qualify for a mortgage under normal banking procedures. Democrats, led by Barney Frank and Chris Dodd, blocked Republican efforts to tighten the regulations that governed Fannie and Freddie. Now, Democrats point the finger of blame at the Republicans.
The current crisis is yet another example of the mess government makes when it indulges in social engineering by trying to manage a free market. The declaration that all people have a “right” to housing was a popular theme among liberals in the 1990s. So popular, in fact, that in 1994, a lame-duck Democratic Senate ratified a U.N. treaty that effectively adopted the obligation to provide housing to everyone. Relaxation of the lending requirements at Fannie and Freddie was one way of meeting this new U.N. obligation.
The division in Congress, and in the country, about what caused the problem and what to do about it is a bright line between the people who believe government power must be limited by the people who are governed, and the people who believe government must limit the power of people who are governed. The people who subscribe to unlimited government power have achieved ascendancy in Congress and in the country. This philosophy results in disaster.
On the other hand, people who believe that the power of government must be limited by the people who are governed may see the urgency of getting angry, active and involved in government at every level. The people who share this belief are the people who have the power to unseat socialist politicians and unleash another era of freedom and prosperity.