Highly Strung

October

8

This entry was posted on Wednesday, October 8th, 2008 at 7:10 am by Matt Davies.
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10 Responses to “Highly Strung”

1. edwin October 8th, 2008 at 10:23 am

   The Government-Created Subprime Mortgage Meltdown
   by Thomas J. DiLorenzo professor of economics at Loyola College in Maryland

   The thousands of mortgage defaults and foreclosures in the “subprime” housing market (i.e., mortgage holders with poor credit ratings) is the direct result of thirty years of government policy that has forced banks to make bad loans to un-creditworthy borrowers. The policy in question is the 1977 Community Reinvestment Act (CRA), which compels banks to make loans to low-income borrowers and in what the supporters of the Act call “communities of color” that they might not otherwise make based on purely economic criteria.
   The original lobbyists for the CRA were the hardcore leftists who supported the Carter administration and were often rewarded for their support with government grants and programs like the CRA that they benefited from. These included various “neighborhood organizations,” as they like to call themselves, such as “ACORN” (Association of Community Organizations for Reform Now). These organizations claim that over $1 trillion in CRA loans have been made, although no one seems to know the magnitude with much certainty. A U.S. Senate Banking Committee staffer told me about ten years ago that at least $100 billion in such loans had been made in the first twenty years of the Act.
   So-called “community groups” like ACORN benefit themselves from the CRA through a process that sounds like legalized extortion. The CRA is enforced by four federal government bureaucracies: the Fed, the Comptroller of the Currency, the Office of Thrift Supervision, and the Federal Deposit Insurance Corporation. The law is set up so that any bank merger, branch expansion, or new branch creation can be postponed or prohibited by any of these four bureaucracies if a CRA “protest” is issued by a “community group.” This can cost banks great sums of money, and the “community groups” understand this perfectly well. It is their leverage. They use this leverage to get the banks to give them millions of dollars as well as promising to make a certain amount of bad loans in their communities.
   A man named Bruce Marks became quite notorious during the last decade for pressuring banks to earmark literally billions of dollars to his organization, the “Neighborhood Assistance Corporation of America.” He once boasted to the New York Times that he had “won” loan commitments totaling $3.8 billion from Bank of America, First Union Corporation, and the Fleet Financial Group. And that is just one “community group” operating in one city – Boston.
   Banks have been placed in a Catch 22 situation by the CRA: If they comply, they know they will have to suffer from more loan defaults. If they don’t comply, they face financial penalties and, worse yet, their business plans for mergers, branch expansions, etc. can be blocked by CRA protesters, which can cost a large corporation like Bank of America billions of dollars. Like most businesses, they have largely buckled under and have surrendered to their bureaucratic masters.
   Consequently, banks in every community in America have been forced to hold a portfolio of bad loans, euphemistically referred to as “subprime” loans. In order to compensate themselves for the added risk of extending these loans, many lenders have increased the lending fees associated with mortgage loans. This is simply an indirect way of doing what banks always do – and what they must do to remain solvent: charging effectively higher rates of interest on riskier loans.
   But this is discriminatory!, complained the “community organizations.” Thus, if one browses the ACORN web site, one can read of their boasts of having “predatory lending laws” passed in numerous states which outlaw such fees, prohibiting banks from protecting themselves from the added risk involved in making forced loans to “subprime” borrowers.
   These are price control laws, and price controls always cause shortages. Normally, banks would respond to such laws by extending fewer riskier loans. But in this case the banks are forced to continue making the marginal loans by their bureaucratic masters at the Fed and the other three federal bureaucracies mentioned above. So-called predatory lending laws therefore force the banks to “eat” the losses. This is undoubtedly a contributing factor to the bankruptcy of dozens of mortgage lenders over the past year.
   Then of course there is the issue of the Fed’s monetary policy having created the housing bubble, characterized by a spectacular escalation of real estate values in every American city over the past decade or so. This created a further problem for the financial institutions that are victimized by the CRA. They are forced to make a certain amount of bad loans, but because of the Fed-created explosion in housing prices, many thousands of subprime borrowers no longer qualified, by a long stretch, for conventional mortgages based on their incomes.
   The only way these borrowers could qualify for their mortgage loans (even ignoring their bad credit ratings) was to take out adjustable rate mortgages, some of which had astonishingly low first-year rates in the 3 percent range, and sometimes lower. This is what has largely fueled the subprime mortgage meltdown – the inability of thousands of subprime borrowers to afford their mortgages now that their rates have adjusted upward. Thus, the combination of the Fed’s enforcement of the CRA (with the help of political pressure groups like ACORN) and its post 9/11 monetary policy in general are the reasons for the bursting real estate bubble and the “subprime” mortgage meltdown.
   Don’t expect to read about this in the “mainstream media,” however, which generally views groups like ACORN as heroic champions of the poor, laws like the CRA as anti-discrimination laws, and places all of the blame for the subprime mortgage meltdown on greedy capitalists, especially mortgage brokers. Encouraged by such reporting, the odious Senator Charles Schumer of New York has promised federal legislation that will reign in these miscreants, while the Bush administration is proposing an indirect bank bailout by having the Federal Housing Administration cover many of the bad “subprime” loans. This will create what economists call a “moral hazard” by encouraging even more bad loans to be extended in the future. Every banker in America will be glad to extend loans (at high rates of interest) to the most uncreditworthy borrowers if he thinks there is no possibility of default with the FHA effectively guaranteeing the loan.

2. Matt Davies October 8th, 2008 at 12:50 pm

   Edwin,
   I still do not believe the CRA was responsible for the current Mortgage crisis.
   Now let’s please try and do this rationally, without all your name-calling and hysteria okay? We get that you don’t appreciate the content of my cartoons. It is our mutual right to disagree with one another. Let’s move on.

   I could respond in kind, and cut and paste post volumes of stuff that discredits the “CRA caused it all” charge, but knowing your political proclivities you will probably dismiss it out of hand without reading, so I thought I’d try a different tack.

   According to a September 22nd Wall Street Journal Editorial (in which they lambaste Democrats and government for their role in the current economic crisis – These are your compatriots Edwin) the CRA was listed fifth on the list of what they perceive to be the causes. I personally disagree with much of what they say, but not all. Their first point is the most relevant IMHO. In this editorial, CRA frankly appears to have been thrown in as an afterthought.
   Here’s their order of blame:
   1) The Federal Reserve
   “The original sin of this crisis was easy money. For too long this decade, especially from 2003 to 2005, the Fed held interest rates below the level of expected inflation, thus creating a vast subsidy for debt that both households and financial firms exploited. The housing bubble was a result, along with its financial counterparts, the subprime loan and the mortgage SIV.”

   2) Fannie Mae and Freddie Mac.
   “Created by government, and able to borrow at rates lower than fully private corporations because of the implied backing from taxpayers, these firms turbocharged the credit mania. They channeled far more liquidity into the market than would have been the case otherwise, especially from the Chinese, who thought (rightly) that they were investing in mortgage securities that were as safe as Treasurys but with a higher yield.”

   3) A credit-rating oligopoly.
   “Thanks to federal and state regulation, a small handful of credit rating agencies pass judgment on the risk for all debt securities in our markets. Many of these judgments turned out to be wrong, and this goes to the root of the credit crisis: Assets officially deemed rock-solid by the government’s favored risk experts have lately been recognized as nothing of the kind.”

   4) Banking regulators.
   “In the Beltway fable, bank supervision all but vanished in recent years. But the great irony is that the banks that made some of the worst mortgage investments are the most highly regulated. The Fed’s regulators blessed, or overlooked, Citigroup’s off-balance-sheet SIVs, while the SEC tolerated leverage of 30 or 40 to 1 by Lehman and Bear Stearns.”

   5) The Community Reinvestment Act.
   “This 1977 law compels banks to make loans to poor borrowers who often cannot repay them. Banks that failed to make enough of these loans were often held hostage by activists when they next sought some regulatory approval.”

   They closed with this:
   “Our point here isn’t to absolve Wall Street or pretend there weren’t private excesses. But the investment mistakes would surely have been less extreme, and ultimately their damage more containable, if not for the enormous political support and subsidy for mortgage credit.”

   I personally find it hard to swallow that an act written 32 years ago was solely responsible for the bubble created between 2002-2007. I also think easy money was made available to way too many people outside the CRA loan structure who also couldn’t afford to pay. The voracious investment appetite for mortgage securities, the mortgage bankers willingness to supply them, a lax securities ratings process, a decade of the easing of banking regulations, the not-very-clever people who took out loans they couldn’t afford and the belief that it would never end are all to blame. As the old saying goes: “when the economic tide goes out, you get to see who was swimming naked.” It appears almost everyone was swimsuit-less in this case.

3. MikeinAlbany October 8th, 2008 at 3:07 pm

   Another culprit is a product called the adjustable-rate mortgage. Borrowers who were attracted to the American Dream by low interest rates had that dream crushed when the rates went up. So many of these mortgages were sold that the market could not bear it when the rate hikes caused too many defaults at a time. What would have happened if all those subprime mortgages had fixed-rate mortgages instead? I suspect that many of the dominoes that fell over the last two years might still be standing now.

4. edwin October 8th, 2008 at 3:30 pm

   Dear Mr. Davies;

   It would indeed be refreshing to have a discourse at a high intellectual level less venomous inuendos. But, Mr. Davies it is often true that,“turnabout is fair play.”
   To many your caricatures are generally not provocative, but offensive and intellectually insulting as, by your perception, were my initial comments. The question is—- were they valid? Fair and objective journalists realize where the line of insensitivity and intolerance exists and project a balanced view of issues. Yes, I agree that you have every right to project a radical leftist point of view. I do not agree that in doing so you should persist in such an agenda so that it demeans and disrespects those who hold opposite points of view.
   If one believes that as in science there are also no absolutes in journalism to satisfy the individual who insists on objectivity, research is readily available in libraries, various publications and the internet. In that regard you may find the introductory paragraph of Howard Husock’s article and a digest of his publication referenced below regarding the current CRA debate legitimate sources of information.
   Howard Husock is director of Public Policy Case Studies at Harvard’s John F. Kennedy School of Government.

   The Trillion-Dollar Bank Shakedown That Bodes Ill for Cities

   The Clinton administration has turned the Community Reinvestment Act, a once-obscure and lightly enforced banking regulation law, into one of the most powerful mandates shaping American cities—and, as Senate Banking Committee chairman Phil Gramm memorably put it, a vast extortion scheme against the nation’s banks. Under its provisions, U.S. banks have committed nearly $1 trillion for inner-city and low-income mortgages and real estate development projects, most of it funneled through a nationwide network of left-wing community groups, intent, in some cases, on teaching their low-income clients that the financial system is their enemy and, implicitly, that government, rather than their own striving, is the key to their well-being.

   America’s Trillion-Dollar Housing Mistake
   The Failure of American Housing Policy

   For more than seven decades, American government has acted to provide housing for the poor. In America’s Trillion-Dollar Housing Mistake, Howard Husock explains how, as with so many anti-poverty efforts, low-income housing programs have harmed those they were meant to help while causing grave collateral damage to cities and their citizens. Public housing projects, Mr. Husock writes, are only the best-known housing policy mistakes. His book explains how a long list of lesser-known efforts—including housing vouchers, community development corporations, the low-income housing tax credit, and the Community Reinvestment Act—are just as pernicious, working in concert to undermine sound neighborhoods and perpetuate a dependent underclass. He exposes the false premises underlying publicly subsidized housing, above all the belief that the private housing market inevitably fails the poor. Exploring the link between private housing markets and individual self-improvement, he shows how new and expensive public efforts are merely old wine in new bottles. Instead he argues for the deep but unappreciated importance to American society of economically diverse urban neighborhoods, and he demonstrates the historic and continuing importance of privately built “affordable” housing, from the brownstones of Brooklyn to the bungalows of Oakland and, in the present day, houses built through Habitat for Humanity. Bearing witness in the tradition of Jane Jacobs, Mr. Husock describes and laments the deadening effects of public and subsidized housing on the economies and vitality of American cities.

5. jp October 8th, 2008 at 8:06 pm

   Matt—
   Is there any way to limit, say, the word count of postings to this blog, to discourage certain people from mindlessly cutting-and-pasting huge (frequently irrelevant) postings from other blogs into this here blog?

   Regarding today’s ‘toon: I assume you know that “swinging from a rope”, at least in the US, has the general connotation of hanging, or lynching.

   -jp

6. Matt Davies October 8th, 2008 at 8:24 pm

   Jp,
   Unfortunately, I think the answer is no but I’ll look into it.

   And yes, except the rope is usually around the neck in the case you are describing, no? Around the ankle is more akin to being caught in a trap. In the US.

7. Matt Davies October 9th, 2008 at 10:12 am

   Edwin,
   As I’m sure you have noticed, I am a political cartoonist. I engage in no act of pretense at being a fair, balanced and objective journalist. If I offend right wingers, racists and other mean people with my blatant bias and anti-establishment humor, I have done my job satisfactorily.
   Moreover, I (and I’m sure many of the other readers of this blog) find it highly amusing that you appear to cling to the pretense of objectivity and espouse the virtues of research and analysis, yet you seemingly “research” for only writings and opinions that back up your own very rigid point of view.
   You have not endeared yourself (or your point of view) with the humor, good nature or even a proper argument that is necessary to allow for anyone to take you seriously. If you post your opinion in good faith, It’ll be read and, if you’re careful with your words, perhaps listened to. However, If you robotically cut and paste something you found on the internet instead of posting a link, I will delete it, because it’s annoying to my readers.

8. MikeinAlbany October 9th, 2008 at 5:19 pm

   Anybody who disagrees with a neo-con is a radical.

9. jp October 9th, 2008 at 10:03 pm

   Edwin,

   After Obama is elected as our next president (heck, even David Brooks has thrown in the towel), we will all see that Matt is an equal-opportunity lampooner.

   As a political cartoonist, his job is to lampoon whoever is in power, whether Republican’t or Democrap, and he has demonstrated this over the years (for those who have followed Matt’s work over the years).

   -jp

10. Lord Baltimore October 10th, 2008 at 7:27 am

    Well said, JP.

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