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Larry Summers: A Casualty of the Left’s False ‘Financial Crisis’ Narrative

Sorry, progressives. "Wall Street" bears little of the blame.

by
Tom Blumer

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September 18, 2013 - 12:17 am
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Larry Summers won’t be the next chairman of the Federal Reserve. On Sunday, he informed President Barack Obama that he was withdrawing his name from consideration.

There were plenty of substantive reasons to oppose Summers’ possible selection, not the least of which was his role in creating our current Keynesian policy-driven economic malaise. Of course, the left complains that if only the 2009 “stimulus” had been much larger, something Summers opposed, we’d now be better off. Sure, guys. More Keynesian “stimulus” would only mean we’d now be reeling from even more than the $5.3 trillion in budget deficits and $6.1 trillion in national debt increases accumulated since Barack Obama took office in January 2009.

As I noted last week, key output and employment statistics during the current alleged economic “recovery” more closely resemble what the nation experienced during the 1930s than any of the recoveries seen since World War II. The common factor in both eras? Reliance on large-scale Keynesian stimulus, which in each case stimulated nothing but prolonged misery.

The real reason that Summers, who started out as President Obama’s favorite for the post, didn’t even get to the starting line has nothing to do with merit and everything to do with the left’s determination to preserve its fundamentally false narrative about what caused the financial crisis of 2008. You see, Larry Summers’ biggest sin was that he had a “past role in financial deregulation.” In Leftyland, interstate banking deregulation, with accompanying “Wall Street greed,” is entirely to blame.

The truth is that deregulation is a far distant third on the list of contributors, and would never have been a relevant factor without government regulators’ aggressive handling of the Community Reinvestment Act (CRA) and the conduct of “government-sponsored enterprises” Fannie Mae and Freddie Mac.

In June 2009, John Carney at Business Insider posted the definitive essay on how federal officials’ and regulators’ zealous use of CRA eventually ruined the entire mortgage lending market by forcing the industry to make loans to unqualified buyers. Here are his key points:

… (CRA) evolved over the years from a relatively hands-off law focused on process into one that focused on outcomes. Regulators, beginning in the mid-nineties, began to hold banks accountable in serious ways. Banks responded to this new accountability by increasing the CRA loans they made, a move that entailed relaxing their lending standards.

… the lax lending standards created in response to the CRA … dug a pit that was waiting to get filled when the circumstances were right.

… The regulators charged with enforcing the CRA praised the lowering of down payments and even their elimination. They told banks that lending standards that exceeded that of regulators would be considered evidence of unfair lending. This effectively meant that no money down mortgages were required.

… banks were expected by regulators to relax income requirements. Day labors and others often lack reportable income. Stated-income was a way of resolving the gap between actual income of borrowers and reported income.

… (Ultimately) the CRA required lax lending standards that spread to the rest of the mortgage market.

It is no coincidence that the number of subprime loans, which barely existed before 1995, exploded. Regulators also enthusiastically embraced especially risky “low doc” and “no doc” loans, which came to be known as “liar loans.”

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Top Rated Comments   
Your account is correct but you leave out many, many relevant factors and those people who actually allowed or made this all happen.
Obama was part and parcel of ACORN, the blackmailing group that was constant pressure on the banks.
Clinton and Rubin reworked the CRA to target the National Banks.
Congress passed two laws, Banking and Securities Modernization Acts.
Clinton repealed Glass Stegal by executive order.
Frank and Dodd bulldogged Bush when he attempted to regulate Fan and Fred. This mess was a huge continuation of the S and Ls of the 1980s and was completely owned by the Liberal, Progressive Democrats starting with J. Carter. and ending with Larry Summers and Obama.....
29 weeks ago
29 weeks ago Link To Comment
Usually a bad idea to let others do your thinking for you.
But there's always an exception.
Often it's Thomas Sowell:

...There is usually only a limited amount of damage that can be done by dull or stupid people. For creating a truly monumental disaster, you need people with high IQs. --Sowell

...Intellectuals are unaccountable for what they do, and as a result are unconstrained when it comes to foolishness. --Sowell

...Many of today's problems are a result of yesterday's solutions. --Sowell

...It is hard to imagine a more stupid or more dangerous way of making decisions than by putting those decisions in the hands of people who pay no price for being wrong. --Sowell

He isn't just talking about economists, either.
Their reasons stink as usual, but the left maybe got it right in the end.
Yellen, BTW, seems to be yet another dull, androgynous chick from O's stable of goofy mares, so forgive those of us who don't jump for joy.
30 weeks ago
30 weeks ago Link To Comment
All Comments   (16)
All Comments   (16)
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No mention of Glass-Stegal in your article......why???
29 weeks ago
29 weeks ago Link To Comment
Summers is no fool. Why would he offer himself up as a convenient scapegoat for "Da Won's" mistakes?
29 weeks ago
29 weeks ago Link To Comment
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29 weeks ago
29 weeks ago Link To Comment
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29 weeks ago
29 weeks ago Link To Comment
Wall Street has been monetizing every asset in America since 1978.

Vulture capitalism has been a very bi-partisan project, but this post makes it much clearer why the GOP thought Romney had any chance of being elected.

29 weeks ago
29 weeks ago Link To Comment
Your account is correct but you leave out many, many relevant factors and those people who actually allowed or made this all happen.
Obama was part and parcel of ACORN, the blackmailing group that was constant pressure on the banks.
Clinton and Rubin reworked the CRA to target the National Banks.
Congress passed two laws, Banking and Securities Modernization Acts.
Clinton repealed Glass Stegal by executive order.
Frank and Dodd bulldogged Bush when he attempted to regulate Fan and Fred. This mess was a huge continuation of the S and Ls of the 1980s and was completely owned by the Liberal, Progressive Democrats starting with J. Carter. and ending with Larry Summers and Obama.....
29 weeks ago
29 weeks ago Link To Comment
The democrats were chomping at the bit to get EVERYBODY to purchase a house, which is part of the American dream, supposedly, and in turn, they take credit for and in turn get votes to keep them in power. The democrats never want to take the blame for the cavities, they just want the credit for the sweet taste.
29 weeks ago
29 weeks ago Link To Comment
I'm not sure anyone is letting the big lenders off the hook. The CRA basically twisted their arms. However, when they saw the potential profit (with no downside) to putting out junk as good paper, the amount of actual twisting required was very light indeed.
29 weeks ago
29 weeks ago Link To Comment
The biggest subprime lenders simply disappeared. They melted away and no real attempt was made to bring them to justice.

The CRA empowered community groups to block banks from doing business in areas if they didn't comply, but banks often simply opened a checkbook to buy off ACORN or any other objectors. Mortgage lenders didn't care about the CRA they don't care about poor people or some obligation to stop redlining.

What created liar loans and other balloon type payment structures were sales and marketing people. The demand was high for loans and the spiraling housing prices mitigated the fear of foreclosure.
29 weeks ago
29 weeks ago Link To Comment
Allowing below-grade securities with unknown origins to be repackaged as AAA products didn't help, particularly when the banks selling those products were paying the bills of the ratings agencies that were labeling the goods. Dumb and dumber.
29 weeks ago
29 weeks ago Link To Comment
The problem with demonizing the CRA is that it just doesn't reflect the changes that happened in the housing and mortgage market. It completely removes any culpability from the largest subprime lenders like Countrywide or the Investment Banks like Merrill Lynch and Lehmann.

It's beyond reason to assume that the likes of Goldman Sachs, Chase, Wells Fargo - Wall Street juggernauts that hire the best and brightest academics and hold billions of capital - were rolled over by a bunch of community organizers.
30 weeks ago
30 weeks ago Link To Comment
What a strange comment. Of course they weren't rolled over. Who is saying that they were? The CRA and the government set the rules and pushed everyone in that direction and this enabled all of the sharpies in the business to figure out how to make lots of money without taking any personal risks. Are you suggesting that people in the business were duty bound to exercise restraint and save the government from their own stupid policies? Where else does this happen? Give me some examples. This is why we must have free markets without government meddling. Or, if the government wants all people to have access to mortgages, then they ought to be honest about it and tell those who pay taxes that they are risking their hard earned money to make this happen. Instead they make stupid policies in the name of "fairness" and then shift the blame to the free market players when everything inevitably blows up.
29 weeks ago
29 weeks ago Link To Comment
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