The fallacies of the last three Presidents, Clinton, Bush, and Obama, came together to cause the devastating financial crisis, costing the American people trillions in lost value of their basic financial assets, from their homes to their retirement accounts. Though these policies had earlier roots, they really sprouted under Clinton, who announced his new National Home Ownership Strategy to great fanfare in a splashy White House ceremony in June 1995. As Stanley Kurtz reported the event for National Review Online:
In his remarks, Clinton emphasized that: "Our homeownership strategy will not cost the taxpayers one extra cent. It will not require legislation." Clinton meant that informal partnerships between [federally established and backed mortgage backers] Fannie [Mae] and Freddie [Mac] and groups like ACORN would make mortgages available to customers "who have historically been excluded from homeownership." In the end, of course, Clinton's plan cost taxpayers an almost unbelievable amount of money.
This is where the subprime mortgage market was born.
Under this new Clinton vision, it became federal regulatory policy to force the nation's financial institutions to abandon traditional lending standards for home mortgages, on the grounds that those standards were racially discriminatory, as African Americans and other minorities could not qualify for mortgages to nearly the same degree as whites and Asians. This overregulation reached the point of forcing lenders to discount bad credit history, no credit history, no savings, lack of steady employment, a high ratio of mortgage obligations to income, undocumented income, and inability to finance down payment and closing costs, while counting unemployment benefits and even welfare as income in qualifying for a mortgage. As Sperry documents so thoroughly, this turned into government-sanctioned looting of the banks.
The Community Reinvestment Act of 1977 (CRA) was only one part of that federal regulatory policy. The CRA required banks to lend throughout the entire geographic area in which they operate, including the poorest neighborhoods, where qualification for credit under traditional standards was quite limited. Based on intense lobbying by the far left activist group ACORN, Clinton expanded this originally toothless regulatory ornament into a great lever to break open bank vaults.
The freedom of banks to operate their businesses in opening new branches, mergers, and lending was held hostage to each bank's CRA rating, which had to reach mandated goals to earn necessary government regulatory approvals. Clinton issued new CRA regulations requiring banks and savings and loan associations to meet quotas for mortgages to borrowers at or below 80 percent of median income in their service areas. He also doubled CRA examinations of banks by adding several hundred bank examiners to enforce tougher CRA rules.
Clinton's HUD contributed with new regulations greatly strengthening CRA requirements, as Wallison explained in The American Spectator in February, 2009:
In 1995, the regulators created new rules that sought to establish objective criteria for determining whether a bank was meeting CRA standards. Examiners no longer had the discretion they once had. For banks, simply proving that they were looking for qualified buyers wasn't enough. Banks now had to show that they had actually made a requisite number of loans to low and moderate income (LMI) borrowers.
But this was just the beginning. Even more powerful were so-called "anti-redlining" regulations, based on liberal mythology that financial institutions just arbitrarily redlined low income and minority neighborhoods for denial of home mortgages, which was considered racial discrimination in violation of the law. Under Clinton's innovations, pursued by his Attorney General zombie Janet Reno, any difference in lending to minorities or low income Americans was racially discriminatory "disparate impact," even if it resulted from mere adherence to traditional lending standards.
Any troglodyte financial institutions failing to get hip with the New Age lending "standards" soon found themselves subject to discrimination suits brought by Justice or HUD, and pilloried as racist in the media. Kurtz quoted a colorful Chicago newspaper report explaining the effect of these new standards, "You've only got a couple of thousand bucks in the bank. Your job pays you dog food wages. Your credit history has been bent, stapled, and mutilated. You declared bankruptcy in 1989. Don't despair. You can still buy a house."
The big problem wasn't caused just by loans to low income borrowers. Once lending standards were trashed for these borrowers, they couldn't be maintained for more creditworthy borrowers. This let more well-heeled speculators in on the scam, now able to qualify for highly speculative mortgages they could not have qualified for previously. That vastly expanded the resulting credit risk vulnerabilities for the financial system.
HUD then broadened the developing disaster to the entire financial community, across the nation and even around the world, through mandatory regulatory quotas on Fannie Mae and Freddie Mac forcing them to drop their traditional lending standards as well for eligibility for securitization. That securitization pooled these vulnerable mortgages and sold shares in them, known as "mortgage backed securities" (MBSs), to other financial institutions. By the time the housing market collapsed, Fannie and Freddie faced three regulatory quota mandates. The first was to devote 56 percent of their mortgage funding to individuals with below-average income. The second required 27 percent of their mortgage funding to be granted to families with incomes at or below 60 percent of area median income. The third required 35 percent of their mortgage funding go to geographic areas deemed to be underserved.
The debasement of mortgage lending standards and massively increased mortgage funding through securitization of the new subprime and other non-prime loans greatly increased demand for housing, which spawned the rise of the housing bubble. Because the capital markets believed, rightly as it turned out, that the bonds issued by Fannie and Freddie to raise money for their mortgage financing were effectively government guaranteed, the two organizations were able to raise huge sums at low interest rates to pump into these mortgages and their securitization. That pumped housing prices beyond sustainability, and exploded the pollution of U.S. and world financial markets to toxic levels.
Going back to his ACORN days, and through his many years as an ultraleft politician, Obama was a supporter and cheerleader for these very Clinton housing policies. As President, he has been busily reinvigorating them, setting the stage for another housing crisis.
Bush's Cheap Dollar
The Bush Treasury supported a cheap dollar policy, falling for the Keynesian fallacy that a low dollar helps the economy by promoting exports. The central role of the resulting Fed policies in causing the financial crisis was most authoritatively explained by Stanford Economics Professor and monetary policy guru John Taylor in his timely book, Getting Off Track. Taylor begins:
The classic explanation of financial crises, going back hundreds of years, is that they are caused by excesses -- frequently monetary excesses -- that lead to a boom and an inevitable bust. In the recent crisis we had a housing boom and bust, which in turn led to financial turmoil in the United States and other countries. I begin by showing that monetary excesses were the main cause of the boom and the resulting bust.
Economics Professor Lawrence H. White, now of George Mason University, elaborates:
In the recession of 2001, the Federal Reserve System... began aggressively expanding the U.S. money supply.... The expansion was accompanied by the Fed repeatedly lowering its target for the federal funds (interbank short term) interest rate.... The real Fed funds rate was negative... for two and a half years. In purchasing power terms, during that period a borrower was not paying but rather gaining in proportion to what he borrowed. Economist Steve Hanke has summarized the result: "This set off the mother of all liquidity cycles and yet another massive demand bubble."
From early 2001 until late 2006, as White further explains, "the Fed pushed the actual federal funds rate below the estimated rate that would have been consistent with targeting 2 percent inflation," which had been the enormously successful, long term, Reagan Fed policy. Steve Forbes adds, "In 2004, the Federal Reserve made a fateful miscalculation. It thought the U.S. economy was much weaker than it was and therefore pumped out excess liquidity and kept interest rates artificially low."
But low interest rates by themselves do not mean monetary policy is excessively loose. That depends on what market prices are saying, as reflected by the dollar, gold and inflation. The Fed's loose monetary policies during the Bush Administration generated sharp declines in the dollar. The dollar was worth 1.15 Euros near the start of 2002, but declined by close to 50 percent near to 0.6 Euros by the start of 2008. The price of gold soared from $350 near the end of 2002 to almost $1,000 by the start of 2008. Even inflation, defeated 25 years previously, started to come back, increasing from 1.55 percent at the end of 2001, to as high as 5.6 percent in July 2008.
That cheap dollar monetary policy further inflated the housing bubble because it generated flight into real assets to escape the depreciating greenback. Because real estate is an especially long-lived asset, its market value is especially boosted by low interest rates.
When the Fed finally realized it had to rein in its loose monetary policy, or risk soaring inflation, skyrocketing housing prices slowed, flattened out, and then tipped into decline. The steep decline in housing prices produced chaos throughout the financial industry in the U.S., and ultimately the world, as widespread financial assets based on housing collapsed in value. As Taylor concluded, "[The] extra-easy [Fed monetary] policy accelerated the housing boom and thereby ultimately led to the housing bust."
The Crisis in American Media
Lynch argues in his Bloomberg article, "The Community Reinvestment Act can't explain why house prices in the U.K., Ireland, Spain and France doubled earlier this decade and almost doubled in Australia. All have suffered steep losses since then, with Ireland's home prices dropping 38 percent by December 2010 from the 2006 peak."
But this fails to recognize that the Fed managing the world's reserve currency effectively exported its weak currency policy globally. Other countries loosen their monetary policies to avoid the negative short term trade implications of appreciating currencies relative to the dollar. Moreover, the dollar's weakness masks the looseness of their monetary policies, misleading them into even looser policies. Their loose policies pumped up their own real estate bubbles.
Lynch argues further that federal housing policies can't explain the bubble in commercial real estate, which also contributed to the housing crisis. But the Fed's low interest rate, loose monetary policies would have the same effect in creating a bubble in commercial real estate that it had in housing.
Lynch adds that, "Losses on subprime mortgage-backed securities didn't start shaking financial institutions until 2007, three decades after the CRA was introduced and 15 years after affordable housing goals were established for Fannie Mae and Freddie Mac." But this fails to recognize that the CRA was not expanded into a real problem until the Clinton years, and even then it was only one factor in creating the crisis. The regulation carrying out Clinton's undeniable federal policy of trashing traditional mortgage standards was much broader, greatly exacerbated by the Fed's cheap dollar policies as well. This is why the problem extended well beyond CRA regulated institutions, which Lynch also fails to understand.
The crisis in American media now goes well beyond media bias. The real problem is now outright ideological partisanship and activism. Far too much of America's self-professed media are not journalistic enterprises at all. They are political activist organizations posing as journalistic enterprises. In this crisis, Bloomberg News is just another part of the problem.