George W. Bush did not cause our current economic crisis. Want some names? Try Barney Frank, Chris Dodd, and others, all in pursuit of “equality”:
Below are excerpts of an editorial written by another of our frequent readers. This person has a deep knowledge of financial markets and an obvious grasp of the facts behind our current economic crisis. It begins with a reference to an article indicating that several financial services firms are being required by the government to publicly release the number of personnel by race and gender throughout their businesses:
I just want to take a minute to make a wider philosophical and economic comment on this article, as this is the early stage of exactly how the most recent economic crisis started. Don’t believe that? Read on…
For whatever reason (I use the word ‘whatever’ kindly because I think everyone on this email chain can surmise the reason), there has been a tendency in our contemporary society to place an extreme focus on a conceived notion of equality based on headline numbers. For example, simply wait for these statistics to be released for the chorus of “Ohh, only X% of your senior executives are minorities. This is obvious evidence of unfairness and discrimination.” Notice that the members of this chorus will not ask for the evaluation of other potential causes for this distribution (other than unfairness and discrimination) that could include interest (number of applications/candidates), effectiveness (revenue per employee), aptitude (average SAT scores, or average rank of university attended), or any other regrettable but explainable factor that does not fit within the narrative of wanton societal prejudice.
How does this have anything to do with the economic crisis you are probably wondering? Well, the least told story of the entire crisis is as follows: as some of you may know, the economic crisis was catalyzed by a small area within finance that has been now cited repeatedly by the news media known as “subprime” lending. Subprime residential home lending to be specific (i.e. giving less-than-financially-secure people money in order for them to buy a home). Still wondering how this article about Goldman Sachs releasing its staff’s races has anything to do with it?
Essentially what happened is around 1998 the government reacted to news similar to what the Goldman numbers will almost undoubtedly show: that minorities, as a headline number, were receiving what was decided to be too small of a portion of the overall number of home loans being given out. What questions the government didn’t ask was the same ones as above, namely “what would be the reason for this other than racism?” Instead, the government concluded that it HAD to be discrimination. The government then mandated that banks make a certain percentage of loans to minorities, in effect forcing banks to give out more and more and more subprime loans to “correct” the number of minority mortgages as a percentage of total to the level the government had decided it “should” be.
Now, banks are in the business of making money, and they make money by giving out loans, so it goes without saying that, before this intervention, banks were making loans to everyone they thought they could. Nobody here needs a lesson on the fact that a dollar of profit is green and not black, white, or any other color.
So what was happening post-1998 (and really coming into full effect in 2004 – the year when the really really bad loans started) is, the government was forcing banks to give loans to people who the banks earlier decided were not financially stable enough to be getting loans. These “subprime” people defaulting on their mortgages is exactly what precipitated the entire economic crisis.
Amazingly, these very same politicians who created these mandates requiring these loans to be made then turned around and labeled these loans that they themselves required as “reckless” and “predatory” lending committed by the banks! It sounds like a bad joke but this is in fact exactly what happened.
I thought this was an important point to raise.
Detailed background, in case you are interested:
In 1998-1999, a couple of studies were published and some very loud voices started to be raised in objection to the fact that minorities appeared to be less common recipients of home mortgages. Once again, the focus was on headline statistics that showed, at the aggregate level, minorities received fewer mortgages, were more likely to get declined credit, less likely to own a home, etc. Instead of asking the very obvious economic and financial question of why this was happening (banks, are, after all, in business to make money, and the way banks make money is by giving people loans), participants in this issue concluded that this was the obvious result of institutional racism and prejudice (see Cuomo coin the term “institutionalized discrimination” in the first 20 seconds of this video here: How The Democrats Caused The Financial Crisis: Starring Bill Clinton’s HUD Secretary Andrew Cuomo And Barack Obama; With Special Guest Appearances By Bill Clinton And Jimmy Carter).
Nobody asked the questions “are the people in question not getting loans because they aren’t creditworthy? Because they have no savings and can’t afford a down payment on a house? Because they are unemployed?” More on this later. Instead of asking these questions, these “participants” (most prominently, on the political side, Andrew Cuomo and Barney Frank) decided the statistical imbalance meant the entire system was racist, and it was up to them to fix it. Let’s break down what they did in a basic way:
Since the overall percentage of minorities receiving home loans appeared too low relative to the population size, the solution was to mandate that what they believed was the “correct” percentage of minorities receiving loans.
How did they do this? Well, in broad strokes, the mortgage system boils down to this: businesses (includes banks) make loans, the government buys or insures the loans, and the loans get sold to investors. So essentially the government operates as the middleman between businesses making loans and investors buying loans. When I say the “government” I am referring mainly to two entities at the time controlled, funded, and regulated by Barney Frank in his capacity as the Chairman of the House Financial Services Committee and Andrew Cuomo in his capacity as the Housing and Urban Development Secretary; you may have heard these names before in the news: Fannie Mae and Freddie Mac.
What Barney Frank and Andrew Cuomo did is say that Fannie Mae and Freddie Mac had to buy or insure a certain % of minority mortgages relative to total mortgages. That is, subprime mortgages were required to constitute a number that Frank and Cuomo decided was the right number of total mortgages made. Since now banks could only sell a certain number of good/prime loans to the government in proportion to the bad/subprime ones, many began dredging the bottoms of the housing market trying to get anyone they could to sign up for a subprime loan to satisfy the government’s requirement to buy these loans. This is how “liar loans” (aka no-doc or low-doc loans), “pick-a-pay” (aka option ARM) and many of the other now pejorative loan products were created – to be sold to fill the government’s minority loan mandate.
Without boring anyone with the technicals, what these products essentially did is allow for people to qualify for mortgages (by not requiring down payments, by reducing the need to prove income, by lowering the initial monthly rate, etc) who were not getting them before.
In retrospect, it makes complete sense why these people weren’t getting loans before and why banks had to go to the end of the earth and invent all of these new types of loans just to get people to borrow – these “subprime” borrowers couldn’t afford loans and that’s why they were such a low percentage of loans – the banks were exercising good judgment! Of course, that is the question nobody asked before the government started requiring loans to be given to this demographic.
To the extent you are interested in reading more background on Andrew Cuomo and Barney Frank’s political mandate and its effects can be found at the following links (as well as in Robert Shiller’s Animal Spirits book):