Maybe the problem is not capitalism, or a failure of the "free market" economy, but the failure of political interference in a free market economy. Congress passed legislation, signed by Carter, like the Community Reinvestment Act, which gave community activists and organizers the right to stop a banks growth if the bank didn't make loans available to unqualified borrowers. This legislation forced banks to lend to uncreditworthy borrowers, mostly in minority areas. Banks were forced to give loans to people with bad histories of creit because of policies like this, which specifically stipulated that "a banks activities must help meet the credit needs of the local communities in which the banks are chartered," otherwise those banks wouldn't be able to expand lending, add new branches, or merge with other companies. Congress did this to increase homeownership and make credit more available to minorities and the poor. They thought the loans would be paid off when rising home values led borrowers to access their equity through refinancing, while others sold and moved up. However, this didn't happen.
Banks knew that the majority of these loans would fail, but it was the price they had to pay in order for their bank to expand and grow. By doing this, banks did overleverage and take risks they shouldn't have, but you could say it wasn't all from greed or untrustworthy lenders, instead it was also brought about through political pressure. Basically, banks didn't necessarily want to give loans to people who couldn't afford them, but politicans told them to to give the loans to minorities. The number of mortgages extended to Hispanic applicants jumped by 87.2 % from 1993 to 1998, according to Harvard University's Joint Center for Housing Studies. During that same period the number of African Americans who got mortgages to buy a home increased by 71.9 % and the number of Asian Americans by 46.3 %.
The banks who didn't give out more loans to minorities were seen as racist, as evident in the CRA ratings, which measured how diverse a bank's portfolio is. In July 1999, the Department of Housing and Urban Development proposed that by the year 2001, 50 % of Fannie Mae's and Freddie Mac's portfolio be made up of loans to low and moderate-income borrowers. In 1998 alone, 44 % of the loans Fannie Mae purchased were from these groups. So loans was given under political pressure and millions of these loans, as predicted, failed. Now we are in the situation we are in today.
It should also be noted that in 1992 President Clinton pushed for more rules requiring lenders to give loans to unqualified borrowers. In 1993, President Clinton's comptroller of the currency, Eugene Ludwig, told the Senate Banking Committee that "We have to use every means at our disposal to end discrimination and to end it as quickly as possible," in response to the administration's suport for this practice. So in the name of diversity, banks made a huge amount of loans that would otherwise not been made. Because of Congress's support, loans increased from $35 billion in loans in 1994, to $1 trillion by 2008.
In 2003 President Bush recomended a significant reglatory overhaul in the housing finance industry, but the democrat controlled Congress stopped him. One democrat, Rep. Baney Frank, with strong ties to Fannie Mae and Freddie Mac went so far as to say "Fannie Mae and Freddie Mac are not facing any kind of financial crisis" and that"the more people exaggerate these problems, the more pressure there is on the companies, and therefore the less we will see in affordable housing." During this time, Fannie and Freddie grew heavily involved in "community development," giving money to local housing rights groups and trying to avoid groups, such as ACORN, for whom Obama once worked for in Chicago, who went after banks to make these loans.
Since 1989, Fannie Mae and and Freddie Mac have spent an estimated $140 million on lobbying in Washington. They contributed millions to politicians, mostly Democrats, including Senator Chris Dodd (No. 1 recipient) and Barack Obama (No. 3 recipient). This is why warnings, such as the 2005 warning by John McCain, and even attempted legislature by Bush have failed in Congress. In 2005, McCain said "If Congress does not act 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." Too bad no one listened to him.
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2 comments:
Michelle, you bring up some valid points. I have no idea who put all the blame on Prez G-Dub, but it clearly is an issue that has gone unaddressed by Democrats and Republicans alike for quite some time.
Are the politicians to blame? To a certain extent, yes. Are the lenders to blame? Yes, they in some cases tricked investors who put their trust in them into investing in a mortgage they couldn't afford.
I however believe that the lion's share of the blame rests on the shoulders of the American consumer. For too long, people have purchased things they cannot afford. While I understand the concept of conspicious consumption, people must learn financial responsibility the hard way. People need to try to live less lavishing, pay their credit card bills in full, and not be so naive as to think a lender has their best interests in mind. The consumers should have done their research and read the fine print, because banks are businesses, and like all businesses, they exist to make money. These irresponsible individual's are getting bailed out by the government using my family's and my tax dollars.
I just went to a meeting regarding JAMS reform and heard from a school official that next year there will be a 5% increase in tuition. The greed of AU and a troubled economy will probably force some people to attend different universities. I came here because I wanted to major in International Relations and DC was the best place for me to intern and pursue my career aspirations. My family has been careful with money, but it seems like there is little incentive in our culture to save. My family's investment in my future meant that FAFSA determined I barely qualified for any aid. Now not only have these idiots with giant houses gotten financial aid for their kids, but they are causing havoc in the stock market (which my main college fund is linked to), and I personally have no idea if I will be able to complete my undergraduate degree here at AU.
Lots of people are at fault in this economic mess, and I couldn't care less about partisan politics regarding this matter. What I care about is why the government is helping people with these mortgages on McMansions they can't afford. I personally feel like the government is being a nanny-state in offering these people any assistance. Considering AU is a ridiculously expensive school, I cringe at the thought of the politicians I vote for even considering helping these people I feel have screwed my family and other responsible families who want to send their children through college or have elderly relatives they need to take care of. The banks must be accountable for their dubious practices, but it is the irresponsible individuals who live beyond their means I believe who are driving this nation's economy into the ground.
I actually completly agree with you! I didn't know that AU was even considering a 5% tuition increase, I don't know if I'll be able to sfford to go here the next 3 years either. My family also didn't qualify for financial aid with the FASA so my parents are paying full price, and like yours,a big part of helping to pay for it is through the stock market.
I am a huge believer in only spending what you have so I also agree with you that consumers are mostly to blame for the financial crisis. People who knew they couldn't afford to pay back their loans shouldn't have gotten them. I truly think it is greed that got us into this, and unfortunately it looks like the government will have to help the people who helped to screw us over in order to restabilize the economy.
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