The Poor Ate My Homework (and then toppled Wall Street)

October 14, 2008
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In true Rovian style, it only took the Conservative Spin Machine a couple of days to cook up a story pinning the collapse of unregulated free markets on the wild excesses of … wait for it… wait for it… THE POOR!

That’s right, according to the right-wing echo chamber from Rank Limburger to the Palin/McCain campaign, financial markets around the world have seized and $trillions in equity have evaporated because Democrats tried to expand home ownership among lower income and minority folks, beginning in the Carter Administration.

The whole poor-(black)-irresponsible-borrowers-brought-down-Wall-Street argument is so ludicrous at a gut level that you’d hardly think it could gain any traction in the mainstream media. Well, we do appear to be living in a time and place where more than a third of the population think intelligence is a bad thing and facts don’t matter. So here are a few facts to offer the confused and undecided folks around you:

A recent analysis Private sector loans, not Fannie or Freddie, triggered crisis by David Goldstein and Kevin G. Hall, writing for McClatchy Newspapers exposes the right-wing distortions of the crisis:

Federal Reserve Board data show that:

* More than 84 percent of the subprime mortgages in 2006 were issued by private lending institutions.

* Private firms made nearly 83 percent of the subprime loans to low- and moderate-income borrowers that year.

* Only one of the top 25 subprime lenders in 2006 was directly subject to the housing law that’s being lambasted by conservative critics.

The “turmoil in financial markets clearly was triggered by a dramatic weakening of underwriting standards for U.S. subprime mortgages, beginning in late 2004 and extending into 2007,” the President’s Working Group on Financial Markets reported Friday.

The authors go on to explain that, as the subprime frenzy grew, Fannie Mae and Freddie Mac’s share of the mortgage market (and role in the subsequent collapse) shrank.

Between 2004 and 2006, when subprime lending was exploding, Fannie and Freddie went from holding a high of 48 percent of the subprime loans that were sold into the secondary market to holding about 24 percent, according to data from Inside Mortgage Finance, a specialty publication. One reason is that Fannie and Freddie were subject to tougher standards than many of the unregulated players in the private sector who weakened lending standards, most of whom have gone bankrupt or are now in deep trouble.

During those same explosive three years, private investment banks — not Fannie and Freddie — dominated the mortgage loans that were packaged and sold into the secondary mortgage market. In 2005 and 2006, the private sector securitized almost two thirds of all U.S. mortgages, supplanting Fannie and Freddie, according to a number of specialty publications that track this data. Between 2004 and 2006, when subprime lending was exploding, Fannie and Freddie went from holding a high of 48 percent of the subprime loans that were sold into the secondary market to holding about 24 percent, according to data from Inside Mortgage Finance, a specialty publication. One reason is that Fannie and Freddie were subject to tougher standards than many of the unregulated players in the private sector who weakened lending standards, most of whom have gone bankrupt or are now in deep trouble.

Market fundamentalists grasping at straws:

Conservative critics also blame the subprime lending mess on the Community Reinvestment Act, a 31-year-old law aimed at freeing credit for underserved neighborhoods.

Congress created the CRA in 1977 to reverse years of redlining and other restrictive banking practices that locked the poor, and especially minorities, out of homeownership and the tax breaks and wealth creation it affords. The CRA requires federally regulated and insured financial institutions to show that they’re lending and investing in their communities.

These folks would have us believe that a 1977 law lead to the collapse of world financial markets in 2008? Really? Never mind that in the interim, John McCain embraced the financial deregulation that led to the Savings & Loan collapse in the 1980s, costing taxpayers an estimated $124 billion. A great one for learning his lessons, he’s been campaigning for financial deregulation ever since. His good friend and former (now unofficial) economic advisor is Phil Graham, engineer of the Commodity Futures Modernization Act of 2000, also known as the “Enron Loophole.” Gramm was also the genius behind deregulation of derivatives trading, which allowed the private mortgage industry to bundle their toxic subprime wastes into attractive packages.

I could go on, but you get the picture. If you want more, here’s a less technical analysis: MSN Article: Did poor minorities cause the financial crisis?

Bill Moyers also covered the financial crisis in a great interview with George Soros, who knows a few billion things about financial markets.

Bill Moyers Journal Soros Interview video

and transcript of Bill Moyers interview with George Soros.

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