From Mark Levin’s Liberty and Tyranny, pages 67-71:
From where does the Statist acquire his clairvoyance in determining what is good for the public? From his ideology. The Statist is constantly manipulating public sentiment in a steady effort to disestablish the free market, as he pushes the nation down tyranny’s road. He has built an enormous maze of government agencies and programs, which grow inexorably from year to year, and which intervene in and interfere with the free market. And when the Statist’s central planners create economic perversions that are seriously detrimental to the public, he blames the free market and insists on seizing additional authority to correct the failures created at his own direction.
Consider the four basic events that led to the housing bust of 2008, which spread to the financial markets and beyond:
EVENT 1: In 1977, Congress passed the Community Reinvestment Act (CRA) to address alleged discrimination by banks in making loans to poor people and minorities in the inner cities (redlining). The act provided that banks have “an affirmative obligation” to meet the credit needs of the communities in which they are chartered.1 In 1989, Congress amended the Home Mortgage Disclosure Act requiring banks to collect racial data on mortgage applications.2 University of Texas economics professor Stan Liebowitz has written that “minority mortgage applications were rejected more frequently than other applications, but the overwhelming reason wasn’t racial discrimination, but simply that minorities tend to have weaker finances.”3 Liebowitz also condemns a 1992 study conducted by the Boston Federal Reserve Bank that alleged systemic discrimination. “That study was tremendously flawed. A colleague and I … showed that the data it had used contained thousands of egregious typos, such as loans with negative interest rates. Our study found no evidence of discrimination.”4 However, the study became the standard on which government policy was based.
In 1995, the Clinton administration’s Treasury Department issued regulations tracking loans by neighborhoods, income groups, and races to rate the performance of banks. The ratings were used by regulators to determine whether the government would approve bank mergers, acquisitions, and new branches.5 The regulations also encouraged Statist-aligned groups, such as the Association of Community Organizations for Reform Now (ACORN) and the Neighborhood Assistance Corporation of America, to file petitions with regulators, or threaten to, to slow or even prevent banks from conducting their business by challenging the extent to which banks were issuing these loans. With such powerful leverage over banks, some groups were able, in effect, to legally extort banks to make huge pools of money available to the groups, money they in turn used to make loans. The banks and community groups issued loans to low-income individuals who often had bad credit or insufficient income. And these loans, which became known as “subprime” loans, made available 100 percent financing, did not always require the use of credit scores, and were even made without documenting income.6 Therefore, the government insisted that banks, particularly those that wanted to expand, abandon traditional underwriting standards. One estimate puts the figure of CRA-eligible loans at $4.5 trillion.7
EVENT 2: In 1992, the Department of Housing and Urban Development pressured two government-chartered corporations – known as Freddie Mac and Fannie Mae – to purchase (or “securitize”) large bundles of these loans for the conflicting purposes of diversifying the risks and making even more money available to banks to make further risky loans. Congress also passed the Federal Housing Enterprises Financial Safety and Soundness Act, eventually mandating that these companies buy 45% of all loans from people of low and moderate incomes.8 Consequently, a SECONDARY MARKET was created for these loans. And in 1995, the Treasury Department established the Community Development Financial Institutions Fund, which provided banks with tax dollars to encourage even more risky loans.
For the Statist, however, this was still not enough. Top congressional Democrats, including Representative Barney Frank (Massachusetts), Senator Christopher Dodd (Connecticut), and Senator Charles Schumer (New York), among others, repeatedly ignored warnings of pending disaster, insisting that they were overstated, and opposed efforts to force Freddie Mac and Fannie Mae to comply with usual business and oversight practices.9 And the top executives of these corporations, most of whom had worked in or with Democratic administrations, resisted reform while they were actively cooking the books in order to award themselves tens of millions of dollars in bonuses.10
EVENT 3: A by-product of this government intervention and social engineering was a financial instrument called the “derivative,” which turned the subprime mortgage market into a ticking time bomb that could magnify the housing bust by orders of magnitude. A derivative is a contract where one party sells the risk associated with the mortgage to another party in exchange for payments to that company based on the value of the mortgage. In some cases, investors who did not even make the loans would bet on whether the loans would be subject to default. Although imprecise, perhaps derivatives in this context can best be understood as a form of insurance. Derivatives allowed commercial and investment banks, individual companies, and private investors to further spread – and ultimately multiply – the risk associated with their mortgages. Certain financial and insurance institutions invested heavily in derivatives, such as American International Group (AIG).11
EVENT 4: The Federal Reserve Board’s role in the housing boom-and-bust cannot be overstated. The Pacific Research Institute’s Robert P. Murphy explains that “[the Federal Reserve] slashed rates repeatedly starting in January 2001, from 6.5 percent until they reached a low in June 2003 of 1.0 percent. (In nominal terms, this was the lowest the target rate had been in the entire data series maintained by the St. Louis Federal Reserve, going back to 1982)…. When the easy-money policy became too inflationary for comfort, the Fed (under [Alan] Greenspan and the then new Chairman Ben Bernanke at the end) began a steady process of raising interest rates back up, from 1.0 percent in June 2004 to 5.25 percent in June 2006….”12 Therefore, when the Federal Reserve abandoned its role as steward of the monetary system and used interest rates to artificially and inappropriately manipulate the housing market, it interfered with normal market conditions and contributed to destabilizing the economy.
1 Howard Husock, “The Trillion-Dollar Shakedown that Bodes Ill for Cities,” City Journal, Winter 2000.
2 Stan Liebowitz, “The Real Scandal,” New York Post, Feb. 5, 2008.
5 Howard Husock, “The Financial Crisis and the CRA,” City Journal, Oct. 30, 2008.
6 Liebowitz, “The Real Scandal.”
7 Husock, “The Financial Crisis and the CRA.”
9 Editorial, “Fannie Mae’s Patron Saint,” Wall Street Journal, Sept. 10, 2008; Joseph Goldstein, “Pro-Deregulation Schumer Scores Bush For Lack of Regulation,” New York Sun, Sept. 22, 2008; Robert Novack, “Crony Image Dogs Paulson’s Rescue Effort,” Chicago-Sun Times, July 17, 2008.
10 Office of Federal Housing Enterprise Oversight, “Report of the Special Examination of Freddie Mac,” Dec. 2003; Office of Federal Housing Oversight, “Report of the Special Examination of Fannie Mae,” May 2006.
11 Lynnley Browning, “AIG’s House of Cards,” Portfolio.com, Sept. 28, 2008.
12 Robert P. Murphy, “The Fed’s Role in the Housing Bubble,” Pacific Research Institute blog.
The government links from footnote 10 have been purged (and I COUNT on left-leaning “news” sources to purge stories that reveal the left for what it is), but there is plenty of evidence that a) Fannie and Freddie were firmly in the hands of Democrats; b) that Democrats and Fannie/Freddie at least twice resisted reforms by President Bush and Republicans; and c) that Fannie and Freddie executives – who were deeply involved with Democrat activism – actively cooked the books to obtain huge bonuses prior to the disastrous crash. We can also demonstrate d) that Barack Obama and Chris Dodd were involved with corrupt Fannie and Freddie (and Obama and Dodd were also receiving large contributions from corrupt Lehman Bros. even as Obama was getting a sweetheart mortgage deal from corrupt Tony Rezko while Chris Dodd was getting sweetheart mortgage deasl from corrupt Countrywide) right up to the tops of their pointy little heads.
When one examines the actual factors that led to the housing mortgage meltdown (as Mark Levin documents), when one examines the Democrat’s patent refusal to even accept that there was even a problem with Fannie and Freddie – much less allow any regulation – prior to the ensuing disaster, and when one examines the record to see which politicians were receiving money from the parties most responsible for the disaster, there is clearly only one party to blame: the Democrat Party.
And they are right back to all their old tricks. It was rampant and insane spending that got us into this financial black hole – and they want MORE on top of MORE spending. Meanwhile, Democrats such as Barney Frank are hard at work trying to create the NEXT massively destructive housing bubble, ACORN is trying to seize houses from rightful owners in the name of the “poor,” liberals are making moral hazard that rewards recklessness and irresponsibility and punishes frugality and responsibility official government policy , even as the Obama administration is creating “solutions” to the foreclosure issue that have abjectly failed.