Yes, banks did overleverage and take risks they shouldn't have.
But the fact is, President Bush in 2003 tried desperately to stop Fannie Mae and Freddie Mac from metastasizing into the problem they have since become.
Here's the lead of a New York Times story on Sept. 11, 2003: "The Bush administration today recommended the most significant regulatory overhaul in the housing finance industry since the savings and loan crisis a decade ago."
Bush tried to act. Who stopped him? Congress, especially Democrats with their deep financial and patronage ties to the two government-sponsored enterprises, Fannie and Freddie.
"These two entities — Fannie Mae and Freddie Mac — are not facing any kind of financial crisis," said Rep. Barney Frank, then ranking Democrat on the Financial Services Committee. "The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing."
It's pretty clear who was on the right side of that debate.
As for presidential contender John McCain, just two years after Bush's plan, McCain also called for badly needed reforms to prevent a crisis like the one we're now in.
"If Congress does not act," McCain said in 2005, "American taxpayers will continue to be exposed to the enormous risk that Fannie Mae and Freddie Mac pose to the housing market, the overall financial system and the economy as a whole."
Sounds like McCain was spot on.
But his warnings, too, were ignored by Congress.
To hear today's Democrats, you'd think all this started in the last couple years. But the crisis began much earlier. The Carter-era Community Reinvestment Act forced banks to lend to uncreditworthy borrowers, mostly in minority areas.
Age-old standards of banking prudence got thrown out the window. In their place came harsh new regulations requiring banks not only to lend to uncreditworthy borrowers, but to do so on the basis of race.
These well-intended rules were supercharged in the early 1990s by President Clinton. Despite warnings from GOP members of Congress in 1992, Clinton pushed extensive changes to the rules requiring lenders to make questionable loans.
Lenders who refused would find themselves castigated publicly as racists. As noted this week in an IBD editorial, no fewer than four federal bank regulators scrutinized financial firms' books to make sure they were in compliance.
Failure to comply meant your bank might not be allowed to expand lending, add new branches or merge with other companies. Banks were given a so-called "CRA rating" that graded how diverse their lending portfolio was.
It was economic hardball.
"We have to use every means at our disposal to end discrimination and to end it as quickly as possible," Clinton's comptroller of the currency, Eugene Ludwig, told the Senate Banking Committee in 1993.
Except, here's the hard truth no one wants to face, expressed perfectly by someone referring to an entirely other form of "discrimination":
you’re missing the point. You’re not being discriminated against. You’re being weeded out. It’s quite deliberate.I'm not suggesting it's never happened in the history of the country that someone was denied a loan purely because of skin color, but profit is a powerful incentive against such bigotry; as a businessman, I don't want to lose market share to the egalitarian competition down the street. The financial safeguards were common sense, not there to keep down the wrong sort of folk, as goes the malicious assumption.
Speaking of malicious assumptions, this is where My Man McCain goes wrong, too, with all due respect. The enemy here is not "greed" (I am sorry, but I never want to hear about greed unless envy is denounced simultaneously; denouncing the former smacks to me of those folks of the 40s who'd denounce fascism but not communism). The enemy is wrong-headed, "compassionate" over-regulation.
I am not comfortable with McCain being so close to Carly Fiorina, not because there's anything wrong with her per se, but because the CEOs of our country have lost their commitment to the free market. Big Business loves it some regulation, Baby, because it keeps down competition from upstarts, and while Big Mac says some good things about the economy, his instinct seems to be to fix everything by regulation.
Likewise, I get very nervous when I hear Bush's (Congressionally rejected) effort to save Fannie & Freddie in 2003 referred to as "sweeping regulation" and Mayor Bloomberg & Sen. Schumer denounced for proposing "loosening regulations" on lending institutions, as if regulation were a good in itself. The issue isn't "regulation," it's adequate capitalization of loans, as in: Bush wanted adequate capitalization and Schumer didn't.
I've spent the past few days reading stories in which Conservatives purport to be outraged that Bush was blocked from creating another Federal agency to oversee Fannie & Freddie. Are you kidding me? The solution is repeal that stupid, meddling, regulatory law that forced the private sector under penalty of law to do what it knew was folly. Congress did this, two Democratic presidents signed the law, and now Congress has the nerve to point fingers. Congress should back the heck off and let lending institutions develop their own sensible "best practices." I really don't want to hear Conservatives calling for new agencies and more regulation. Really.
Curtsy to the Anchoress for the IBD story.
