Tuesday, January 29, 2013

Setting Us Up For The Next Great Recession

The next great recession in the U.S. is going to look surprisingly like the last one. The exact same policies that led to the 2008 recession are being followed - and indeed, in many cases strengthened - by the Obama administration.

One of the great tragedies of the left taking control of the Presidency and both houses of Congress in 2009 was that the nation never learned the reasons for our economic meltdown. That means the real problems haven't been fixed.

If you listen to Obama and the left, the sole causes of the meltdown were Wall St. greed, the derivatives market, and deregulation - though even that which they complained about, the repeal of the Glass Stegall Act, occurred under Bill Clinton in 1999. The true culprits, subprime lending, the disastrous Community Reinvestment Act that was used to eviscerate lending standards, ostensibly to cure racism, and a historic fraud perpetrated by bond rating agencies in collusion with our government, are never mentioned.

As I pointed out when Dodd Frank was first proposed, the terms of that bill actually strengthened the policies that gave rise to the housing bubble. The effects are now being felt. A month ago, AG Eric Holder bragged about strong arming thousands of bankers for imaginary racism in lending. Now this the other day from IBD:

Despite new evidence the Community Reinvestment Act led to riskier lending and played a key role in the subprime mortgage crisis, the Obama administration is broadening the anti-redlining regulation's authority and scope, spooking bankers.

A recent study by the National Bureau of Economic Research, the nation's pre-eminent economic research group, states that the CRA "clearly" had a major impact on the flood of subprime loans made in the late 1990s and 2000s, which directly led to the housing crisis.

By quietly expanding the regulation, analysts say President Obama is picking up where President Clinton left off in April 1995, when he rewrote rules for what had been a largely toothless law as first drafted in 1977. Through executive orders, Clinton set strict numerical lending targets for banks in "underserved" neighborhoods, while ordering regulators to crack down on alleged bank redlining.

The new rules for the first time mandated that banks use "innovative" or "flexible underwriting practices." Compliance required banks to pass a heavily weighted "lending test" or suffer holds on expansion plans.

The CRA overhaul "has been a disaster," said ex-BB&T CEO John Allison in his recent book on the financial crisis. He argued it's forced "banks to participate in making high-risk housing loans to low-income buyers who would not meet traditional bank lending standards."

Added Allison, who now heads the Cato Institute: "The default rates on these low-income loans are extraordinarily high."

Still, the Obama administration wants banks to step up approval of such low-income mortgages. And it's using the CRA to spur more lending, including:

• Forcing banks through threat of prosecution to expand their CRA assessment areas to include inner-city areas blighted by subprime foreclosures, where they are compelled to invest in new brick and mortar.

Many banks, in fact, are under direct federal orders to open new branches or ATMs in high-risk and unprofitable areas of Detroit, St. Louis and other cities hit hardest by the recession. . . .

• Ordering bank defendants accused of lending bias to underwrite riskier CRA loans at discounted rates.

For instance, Justice has ordered First United Security Bank of Alabama to "ensure that residential and CRA small business loan products are made available and marketed in majority African-American census tracts," while offered on terms "more advantageous to the applicant" than normal.

• Toughening CRA enforcement by bank examiners, . . .

• Broadening CRA examination guidelines to include loan "pricing discrimination," and instructing examiners to take a closer look at improper "steering" of minority borrowers into subprime loans with higher interest rates and fees.

• Using the threat of CRA "noncompliance" and denial of expansion plans to pressure bank defendants into settling "fair lending" cases, while scaring other banks into lending in low-income minority areas where the banks aren't located. . . .

• Pressuring banks to fund HUD's new $7 billion Neighborhood Stabilization Program to earn CRA credits under a new "community development" test.

And it is not just banks. The major bond rating agencies are still giving subprime mortgage backed securities AAA ratings. This is just pure fraud being driven by government policy. People should be in jail over this. But that is not the concern of our government when it comes to the bond rating agencies. They are only being punished when they threaten to downgrade U.S. government debt:

. . . when S&P finally downgraded the US one notch in August 2011, the SEC and Justice Department announced that S&P was under investigation, just two weeks later.

Egan-Jones, a smaller rating agency, has been even more aggressive, downgrading the US credit rating three times in 18 months. And while the federal government may not have imposed Diocletian’s death penalty, they are just as willing to squash dissent.

In a country that churns out thousands of pages of new regulations each week, it’s easy to find a reason to go after someone. As you read this letter, in fact, you are probably in violation of at least a dozen regulatory offenses.

In the case of Egan-Jones, the SEC brought administrative action against the agency within two weeks of their second downgrade. And a few days ago, the case was settled.

I’m sure you have already guessed the ending: Egan-Jones is banned from for the next 18 months from rating US government debt. They’ve effectively been silenced from telling the truth. . . .

We are being set up by the left for our next massive economic meltdown. This is beyond travesty.

No comments: