No, "Deregulation" Did Not Cause the Subprime Crisis

No, "Deregulation" Did Not Cause the Subprime Crisis
Shredding an incredibly destructive false narrative.
by John Hayward 10/12/2011

The worst exchange involving the awful moderators of the Washington Post / Bloomberg News debate in New Hampshire came early on, when the Post’s Karen Tumulty actually cut Michele Bachmann off to argue with her, and Bachmann slapped her down. Let us hope this becomes a “teachable moment,” because Bachmann was one hundred percent correct, and it’s far past time to shred the incredibly destructive false narrative Tumulty was pushing.

From Time magazine’s excellent transcript:

TUMULTY: Congresswoman Bachmann, three years after the financial meltdown, Main Street continues to suffer. People have lost their jobs, they've lost their homes, they've lost their faith in the future. But Wall Street is thriving. The banks not only got bailed out by the government, they have made huge profits, they've paid themselves huge bonuses.

Do you think it's right that no Wall Street executives have gone to jail for the damage they did to the economy?

BACHMANN: I think if you look at the problem with the economic meltdown, you can trace it right back to the federal government, because it was the federal government that demanded that banks and mortgage companies lower platinum level lending standards to new lows.

TUMULTY: But the federal government has also deregulated them.

BACHMANN: It was the federal government that pushed the subprime loans. It was the federal government that pushed the Community Reinvestment Act. It was Congressman Barney Frank​ and also Senator Chris Dodd that continued to push government-directed housing goals.

They pushed the banks to meet these rules. And if banks failed to meet those rules, then the federal government said we won't let you merge, we won't let you grow.

There's a real problem, and it began with the federal government, and it began with Freddie and Fannie. If you look at these secondary mortgage companies which the federal government is essentially backing 100 percent, they put American mortgages in a very difficult place.

We had artificially low interest rates, Freddie and Fannie were the center of the universe on the mortgage meltdown, and we had lending standards lowered for the first time in American history. The fault goes back to the federal government, and that's what's wrong with Dodd- Frank.

Dodd-Frank institutionalized all of these problems that were put into effect by the federal government. That's why I introduced the bill to repeal Dodd-Frank. It's the Jobs and Housing Destruction Act.

In the course of wondering why the Occupy Wall Street mob isn’t directing its anger at the politicians who caused the financial crisis, Peter Wallison of the American Enterprise Instutute, writing in the Wall Street Journal, provides some hard numbers to back up Bachmann’s statements. His piece is one of the best primers to the true story of the mortgage meltdown I’ve seen, and deserves to be read in full, but here are the three killer paragraphs:

Beginning in 1992, the government required Fannie Mae​ and Freddie Mac to direct a substantial portion of their mortgage financing to borrowers who were at or below the median income in their communities. The original legislative quota was 30%. But the Department of Housing and Urban Development was given authority to adjust it, and through the Bill Clinton and George W. Bush administrations HUD raised the quota to 50% by 2000 and 55% by 2007.

[…] Research by Edward Pinto, a former chief credit officer of Fannie Mae (now a colleague of mine at the American Enterprise Institute) has shown that 27 million loans—half of all mortgages in the U.S.—were subprime or otherwise weak by 2008. That is, the loans were made to borrowers with blemished credit, or were loans with no or low down payments, no documentation, or required only interest payments.

Of these, over 70% were held or guaranteed by Fannie and Freddie or some other government agency or government-regulated institution. Thus it is clear where the demand for these deficient mortgages came from.

It’s a testament to how furiously the Democrats and their media allies obscured these simple truths that the Dartmouth moderators actually looked surprised when GOP presidential candidates suggested Barney Frank and Chris Dodd should be held accountable for their actions.

The preferred and false narrative of the subprime crisis, which 99% of the “99%” crowd apparently swallows without question, is wholly focused on effects, at the expense of complete ignorance of the causes. It is often pointed out that private financial institutions behaved badly in the world Democrat legislation created. Fair enough – but you absolutely never hear a Democrat put it that way, do you?

The Party’s official stance, pushed universally and without exception since their first panicky narrative-shaping meetings on the eve of the financial meltdown, is that the government bears no responsibility whatsoever for what happened. If they’re willing to discuss Fannie Mae and Freddie Mac at all, their attitude is that wise politicians issued a noble edict – mortgages for everybody! – and evil private bankers screwed it up.

To believe that, you’ve got to believe that the principles of financial prudence observed prior to 1992 were mistaken… and the rather obvious evidence to the contrary makes that difficult for any reasonable person to believe. Far too many Democrat voters give their Party credit for making a reasonable “everybody screwed up” argument that they never actually make, and never stop to ask the very important question of who screwed up first.

They’re also willing to swallow the narrative that the financial crisis is a mind-numbingly complex topic that only politicians and their advisors can understand. On the contrary, as Wallison shows, the basic principles involved are quite simple: the government artificially increased the supply of mortgage money by regulatory fiat, producing a massive housing bubble when millions of shaky mortgage holders went looking for something to buy. By the time the bubble popped, half of all mortgages were “shaky.” The flood of overpriced new housing was created in pursuit of money that didn’t really exist, because the borrowers could never repay their loans. The resulting glut of essentially worthless housing inventory, scattered around the country after the bubble burst, is wreckage that will take a generation to clear up.

Be as angry as you like about the malfeasance of banks that contributed to this hellish outcome. Be particularly mad at those who saw an opportunity to benefit from a system they knew was doomed, and purchased the political clout to keep it going as long as possible. If you think relaxation of a particular regulation made it easier for banks to roll the dice on absurdly risky loans, confident that taxpayers would cover their losses, offer your best argument for tightening that regulation. But don’t let the Democrats and media make a fool of you by forgetting how it all started, and why… or else you will get fooled again.
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To read another article by John Hayward, click here.