Monday, July 19, 2010

Getting Tired Of Ringing The Bell

Over the weekend, Obama yet again blamed our economic mess on the "failed policies" of the Bush administration. About a week ago, Congress passed massive new financial regulation predicated on the canard that Wall St. was at the heart of the economic melt-down. Congressional Republicans ceded this narrative to Obama and the left in 2008 and have failed utterly to reclaim it since. The reality of it all, as I have pointed out ad infinitum on this blog - and as I documented in detail in the post Hurricane Sup-Prime - the cause of our economic melt-down was evisceration of lending standards by Democrats on the basis of racial politics. They introduced a racial component into what had been color-blind lending standards. They took the easy - and disastrous - route to solving a problem of home ownership for minorities that could and should have been handled very differently.

The Weekly Standard revisits the issue in their review of the IMF's former chief economist, Raghuram Rajan's new book, Fault Lines: How Hidden Fractures Still Threaten the World Economy:

. . . This is an account of what ails us that is radically at odds with the familiar tale of greedy bankers in $5,000 suits. “Almost every financial crisis has political roots,” Rajan writes. The credit market—at least as regards housing—was distorted by government policy, not by a sudden and mysterious escalation in “greed.” The trends that shook the world economy came out of Fannie Mae and Freddie Mac, out of the Federal Housing Administration, and out of their “regulator,” the U.S. Department of Housing and Urban Development.

By 2000, HUD required that low-income loans make up 50 percent of Fannie and Freddie’s portfolios. Out of “compassionate conservatism,” perhaps, the Bush administration raised that mandate to 56 percent. Rajan cites Fannie Mae’s former chief credit officer, Edward Pinto, who notes that, by 2008, “the FHA and various other government programs were exposed to about $2.7 trillion in subprime and Alt-A loans, approximately 59 percent of total loans to these categories.” Peter Wallison of the American Enterprise Institute found that government-mandated loans accounted for two-thirds of “junk mortgages.”

Another way of looking at this problem is provided in a study done by Rajan’s Chicago colleagues Atif Mian and Amir Sufi. They found that, if you look at the period between 2002 and 2005, the number of mortgages obtained in a given ZIP code “is negatively correlated with household income growth.” In other words, lenders preferred un-creditworthy borrowers to creditworthy borrowers. In a market governed by “greed” and undistorted by government pressure, such a result would make no sense.

Perhaps the greatest failing of Republicans in the last century has been their failure to get this message out to the public. It has directly resulted in the election of the same people who destroyed our economy in the first place to the position of complete control of Congress and the Presidency. It has allowed these people to pass a radical legislative agenda that doesn't merel fail to address the root causes of our financial meltdown, but actually adds more fuel to the fire. I am getting tired of ringing this bell. When will our Congressional Republicans begin doing so? The fate of our nation in 2012 may depend on it.

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