Thursday, October 02, 2008


“No one ever went broke underestimating the intelligence of the American people.” That’s the simplified version of H. L. Mencken’s sound bite unfriendly proposition.

As evidence in favor of the maxim, I point to the popular wisdom that “deregulation” got America into its current financial straits—a mess whose local consequences are happily exaggerated by gee-whiz graphs that transform a leveling off of prices into a precipitous drop in the rate of price increase, before proceeding to the really bad news. (Graphs that show the huge ups and halfway downs of actual home prices in San Diego aren’t nearly so exciting.)

Returning to the “blame deregulation” line that Pelosi and press pundits are peddling to a docile public, here are the actual facts:

In 1998 the Federal Reserve Bank of Boston produced a document called “Closing the Gap: A Guide to Equal Opportunity Lending.” This influential policy statement asserted that lending standards in the U.S. were “unintentionally” racially biased and urged lenders to employ new underwriting standards that would expunge this moral blot from their books.

These “new and improved” standards essentially pressured banks to abandon prudent norms that had been employed for decades—debt-to-income ratio, credit history, and ability to make down payments from personal savings. While aimed at minorities, these new rules naturally applied to all borrowers. Ignored in the process was the obvious fact that folks who have bad credit, low income, and little money invested in an asset are more likely to walk away when its value declines.

In 1999, Fannie Mae and Freddie Mac began easing their credit standards, and between 2004 and 2007 these Government Sponsored Enterprises became the biggest purchasers of subprime mortgages. Other lenders, “encouraged” by “fairness” politicians, followed in the steps of Fannie and Freddie—none more aggressively than Countrywide CEO Angelo Mozilo, who was honored by Harvard’s Center for Housing Studies for his “socially conscious” approach to mortgage lending.

When the Bush administration and other Republicans pushed in 2004 to rein in Fannie and Freddie’s irresponsible practices and to expand regulation of these GSEs, they were met with a chorus of Democrat opposition led by that voluble choirmaster, Rep. Barney Frank. (See Their uncritical praise of Fannie and Freddie extended to Fannie CEO, Franklin Raines, the former Clinton budget director whose alleged book-cooking ingenuity netted him a cool $90 million.

Thus, the money kept flowing (especially to the coffers of Democrat Senators Chris Dodd and Barack Obama) as long as prices were going up. When the inevitable happened and prices turned south, then all those homes purchased in Oceanside zip code 92057 by folks who had no business assuming a $500,000 mortgage were transformed into “bad paper” —and Angelo Mozilo was no longer a Harvard hero.

Long story short, it wasn’t deregulation that precipitated the financial seizure we’re now experiencing. It was benighted government lending standards promulgated in the name of fairness and instituted within the framework of K Street cronyism.

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