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The Subprime Causation Fiasco Continues

The opinions expressed by columnists are their own and do not necessarily represent the views of

Have you ever heard of the Community Reinvestment Act (CRA)? If not, you should have. It is among the factors responsible for the worst housing crisis in America since 1932. CRA was enacted during the Jimmy Carter Presidency. It neither was repealed nor enforced during the Ronald W. Reagan and George H. W. Bush Administrations. President William J. Clinton enforced the law vigorously. CRA forced banks to make loans to people who had little or no ability to liquidate them. This created the subprime market which in turn created the housing bubble. That bubble burst, as all bubbles do, leaving us with a terrible housing crisis. If something similar were to occur in the private sector the wrath of Congress soon would be felt.


CRA ought to be repealed. In any reasonable situation it would be. But it won't because too many powerful interests in Washington want to see it continue as they attempt to manipulate society to fit their ideology. Powerful Members of Congress are talking about strengthening the law. What does that mean? In addition to enforcing CRA, the Clinton Administration set targets for low-income home ownership at the Department of Housing and Urban Development (HUD) and at government-sponsored Fannie Mae and Freddie Mac. The Federal Government had to bail out these entities when the subprime mortgages failed. These institutions were, in the words of a federal official, too large to fail. Just like the insurance giant AIG and various investment firms and banks. But a few investment firms were not too big to fail. Secretary of the Treasury Henry Paulson determined which companies lived and which died.

When Paulson was named Secretary of the Treasury, Myron Ebel, a spokesman for Competitive Enterprise Institute, a free-market think tank, called upon the Senate not to confirm him. Howard Phillips of the Conservative Caucus wanted him fired. They were right. But Paulson alone should not be blamed. The Chairman of the Federal Reserve, Ben Bernacke, and the Chairman of the Securities and Exchange Commission, my old friend Christopher Cox, all had an idea of what was coming yet they said nothing. Paulson will leave office when President Bush leaves in January. The others will remain. President-elect Barack H. Obama should fire all of them, urge Congress to repeal CRA and dismantle Fannie and Freddie. However, given the numerical strength of the Democratic Party in Congress and its base of special interests in diversity mandates CRA probably will not be touched. Would Representative Barney Frank (D-MA) have an incentive to repeal it? How about Senator Christopher J. Dodd (D-CT)? Both have received substantial political contributions from Fannie and Freddie. How about President-elect Obama doing something? Probably not. He was the second largest recipient of political contributions from Fannie and Freddie. All three men have an incentive to maintain the status quo.


Will anything be done to get at the root of the problem? It would take a President or a Congress with unusual courage. We are unlikely to see either for many years. Remember those commercials by President George W. Bush during his 2004 re-election campaign which bragged that Bush had encouraged more home ownership than at any time in American history? Right. At our expense. And by giving more loans which people could not afford to pay back. When Republicans controlled Congress they paid lip service to the problem. They proposed remedial legislation, which Democrats blocked, and they never said a word about it after that.

There is enough blame to go around in this mess. To tackle this serious problem we will need a different kind of President and Congress.

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