Roger’s Rules

Who caused the global economic crisis? (Hint: it wasn't George W. Bush)

“Toutes choses sont dites déjà, mais comme personne n’écoute, il faut toujours recommencer.”
–André Gide

I sometimes wonder if The New York Times is secretly in league with the country’s dentists. All the teeth grinding our former paper of record occasions must be good for those in the business of capping and crowning teeth. Consider, to take only the most recent example that comes to hand, the long piece in yesterday’s business section about who or what caused the current economic crisis.

I’ll tell you in a moment who really caused it, but let’s play a game. Your mission, should you choose to accept it, is to guess whom the Times would nominate as the prime mover and scapegoat-in-chief in the global financial dégringolade we’ve been living through. Ready? You have 10 seconds to come up with the answer. . . .

OK. Time’s up. Those of you who said “Ronald Reagan” or “Margaret Thatcher” get honorable mention, but you’re still playing last week’s game. No, it should be obvious to all comers that the only possible answer to any question involving political or economic failure is George W. Bush.

That’s right, folks. It was all George’s fault. Well, if you are Times reader (which is not the same thing as someone who happens to read the Times), you already knew that. Everything is Bush’s fault.

In the great contest to determine the worst Times story ever, many, so many, are called, but few are chosen. To make it to the zenith of awfulness, a Times story must not only be factually distressed, it must also achieve that tone of absolute smugness that perfectly reflects and soothingly reinforces the self-righteous sensitivities of its readership. I wrote about one example last January when the Times, in its best more-in-sorrow-than-in-anger pulpit strains ran a story about the high homicide rates of veterans returning from Iraq. Oh dear. The brutality of war. The awfulness of Iraq. George Bush. It all added up to a psychic catastrophe. Across the US, towns and cities would need to brace themselves for homicidal rampages as returning Vets went berserk.

Alas for the story, it turned out the the homicide rate among Vets was far lower than that of the general population, a titdbit that the Times neglected to mention. At the time, I asked “Why does anyone believe The New York Times about anything, ever?“, a question no one has yet answered to my satisfaction.

But one of the things that made that story about the Killer Vets so perfect a Times story was its tone. Pseudo concern underwritten by smug knowingness. That’s the recipe. Yesterday’s story about how the global economic crisis is all Bush’s fault comes from the same kitchen. It’s an exercise in histrionics, partly. The Times presents the story as it it were staging a Stephen King movie: Title: “The Reckoning.” Episode one: “White House Philosophy Stoked Mortgage Bonfire.” Starring George W. Bush as the incarnation of evil. The story opens with a large picture of the President smiling in front of sign reading in huge letters “A Home of Your Own.” For those slow on the uptake, there is also this epigraph:

“We can put light where there’s darkness, and hope where there’s despondency in this country. And part of it is working together as a nation to encourage folks to own their own home.”

— President Bush, Oct. 15, 2002

The Times allows that “there are plenty of culprits” and mentions “lenders who peddled easy credit, consumers who took on mortgages they could not afford and Wall Street chieftains who loaded up on mortgage-backed securities without regard to the risk.” But–and here comes the gravamen of the piece–“But the story of how we got here is partly one of Mr. Bush’s own making, according to . . .” Well, according to the cheery-picked people the Times assembled in this preposterous, factually-challenged indictment of the the President.

A few months ago in this space, I asked “Who caused ‘the biggest financial crisis since the Great Depression?‘” The answer, in brief, is the utopian policies of left-wing Democrats who required banks to lend money to people who could not–or would not–pay it back.

Let’s go through it again, step by step:

The Root Cause

* According to Senator Chris Dodd (D. CT) the “root cause” of the problem is “the housing foreclosure crisis.”

Not 100% accurate, perhaps–it’s really a credit crisis–but close enough for government work, especially from someone who has just happens to chair the Senate Banking Committee and who, completely coincidentally, has been such a conspicuous beneficiary of preferential mortgages and who, also coincidentally, leads the list of those who have received campaign contributions from Fannie Mae and Freddie Mac. (Guess who comes in 2nd and 3rd?)

* But what caused the housing crisis to which Senator Dodd alludes? The housing “bubble.”

* And what caused the housing bubble? “Sub-prime,” i.e., risky, mortgages; that is, mortgages made to people who, in the normal course of things would have to pay a premium in order to obtain a mortgage (if they could obtain one at all) because

a) they had bad or non-existent credit

b) their income was insufficient or

c) both.

Packaging the American Dream

A home of your own. It’s part of the American dream. Work hard, save up for a down payment, pay your bills on time and, presto, you, too, can buy a home.

For decades the government has done things to help Americans to realize the dream, e.g., graciously allowing citizens to keep some of their own money to help pay for the interest on a mortgage (the official term for this is a “tax deduction,” but I prefer my locution since it emphasizes the fact that it is YOUR MONEY we are talking about).

But what about people who do not work hard (if they work at all)? What about people who have not saved up for a down payment? What about people who do not pay their bills on time (if they pay them at all)? Why shouldn’t they get to live the American dream?

That was the question that led to (drum roll, please)

“The Community Reinvestment Act” (see here for more).

* The original Community Reinvestment Act was signed into law in 1977 by Jimmy Carter. Its purpose, in a nutshell, was to require banks to provide credit to “under-served populations,” i.e., those with poor credit.

The buzz word was “affordable mortgages,” e.g., mortgages with low teaser-rates, which required the borrower to put no money down, which required the borrower to pay only the interest for a set number of years, etc.

* In 1995, Bill Clinton’s administration made various changes to the CRA, increasing “access to mortgage credit for inner city and distressed rural communities,” i.e., it provided for the securitization, i.e. public underwriting, of what everyone now calls “sub-prime mortgages.”

Bottom line? It forced banks to issue something on the order of $1.5 trillion in sub-prime mortgages.

$1.5 trillion, i.e., one and a half thousand billion dollars in sub-prime,i.e., risky, mortgages, in order to push this latest example of social engineering.

But wait: how did it force banks to do this? Easy. Introduce a federal requirement that banks make the loans or face penalties. As Howard Husock, writing in City Journal way back in 2000 observed: “Bank examiners would use federal home-loan data, broken down by neighborhood, income group, and race, to rate banks on performance. There would be no more A’s for effort. Only results—specific loans, specific levels of service—would count.” Way back in 1994, for example, Barack Obama sued Citibank on behalf of a client who charged that the bank “systematically denied mortgages to African-American applicants and others from minority neighborhoods.”

* In 1997, Bear Stearns –- O firm of blessed memory –- was the first to get onto the sub-prime gravy train.

* Fannie Mae & Freddy Mac — were there near the beginning, too.

Anatomy of a bubble

Step 1. The intoxication: “My house is worth millions!” From 1995 – 2005, the number of sub-prime mortgages skyrocket. So did the house prices.

Step 2. The hangover: “Oh my God, my house isn’t selling. What went wrong?”

Why didn’t someone try to stop it?

Someone did: “The Bush administration today recommended the most significant regulatory overhaul in the housing finance industry since the savings and loan crisis a decade ago,” The New York Times, September 11, 2003.

But someone intervened to stymie the Bush administration. Who? The New York Times reports:

Supporters of the companies said efforts to regulate the lenders tightly under those agencies might diminish their ability to finance loans for lower-income families. . . . “These two entities — Fannie Mae and Freddie Mac — are not facing any kind of financial crisis,” said Representative Barney Frank of Massachusetts, the ranking Democrat on the Financial Services Committee. “The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing.”

Why didn’t someone else ring the alarm?

Someone else did. In 2005, John McCain co-sponsored the “Federal Housing Enterprise Regulatory Reform Act,” which among other things provided for more oversight of Freddie & Fannie. The bill didn’t pass. Guess who blocked it?

The bill was reintroduced in 2007. But again, no luck. Fannie Mae and Freddie Mac had friends in the Senate:

* Chris Dodd, a recipient of “sweetheart” loans from a Freddie and Fannie backed company.

* The junior senator from Illinois, i.e., Barack Obama, who turned to Jim Johnson, former head (1991-1998) of Fannie Mae, to help advise him on whom to pick for the vice-presidential slot on his ticket. From 1985 to 1990, incidentally, Johnson was managing director of Lehman Brothers. Remember them?

* You might also want to check out one of Barack Obama’s other advisors: Franklin Raines, former CEO of Freddie Mac: see here , for example, or here, or here. (And thanks again to this great video for the outline I précis above.)

The dog that didn’t bark.

Perhaps the most amazing thing about the Times‘s little drama that casts George Bush as the protagonist of our economic tragedy is not what’s in it but what isn’t. You will search in vain for the name “Barney Frank” or the phrase “Community Reinvestment Act.” But telling the story of our economic crisis with out those elements is like staging Macbeth without Macbeth or the witches.

There is a great refusal in operation here, a refusal to face up to facts. Thomas Sowell touched on this in a typically percipient column a few months ago when he wondered, not without exasperation, whether facts still mattered in our political life. The current economic crisis seems to have benefitted Democrats. But how could that be? Sowell reminds us of some forgotten facts:

Fact Number One: It was liberal Democrats, led by Senator Christopher Dodd and Congressman Barney Frank, who for years –- including the present year -– denied that Fannie Mae and Freddie Mac were taking big risks that could lead to a financial crisis.

It was Senator Dodd, Congressman Frank and other liberal Democrats who for years refused requests from the Bush administration to set up an agency to regulate Fannie Mae and Freddie Mac.

It was liberal Democrats, again led by Dodd and Frank, who for years pushed for Fannie Mae and Freddie Mac to go even further in promoting subprime mortgage loans, which are at the heart of today’s financial crisis.

Alan Greenspan warned them four years ago. So did the Chairman of the Council of Economic Advisers to the President. So did Bush’s Secretary of the Treasury, five years ago.

Yet, today, what are we hearing? That it was the Bush administration “right-wing ideology” of “de-regulation” that set the stage for the financial crisis. Do facts matter?

None of this is new. But Gide was right: although everything has already been said, no one was listening, so it is always necessary to start over again. Go into your local bank. Look around. Somewhere you’ll see posted on the wall a notice advising customers that the bank’s lending practices follow the dictates of the Community Reinvestment Act and that federal bureaucrats regularly stop by to make sure the bank is abiding by its ruinous stipulations. When will it stop?