It's easy for the uninformed to look at the current financial turmoil and, blinded by the complexity, just grab for the most convenient explanation--"Wall Street greed!" "Republican disdain for regulation!" "Capitalism and markets don't work!" etc. Unfortunately, if you've been listening to the media at all the last few days, it's apparent that many Congressman are among the uninformed, a truly scary thought at a time when sage leadership will be critical. Witness Speaker Pelosi's brilliantly timed tirade yesterday as one example.
The Boston Globe's Jeff Jacoby finds another in this piece, casting a critical eye on Congressman Barney Frank's statement, "The private sector got us into this mess." Nice try, Congressman:
Because while the mortgage crisis convulsing Wall Street has its share of private-sector culprits -- many of whom have been learning lately just how pitiless the private sector's discipline can be -- they weren't the ones who "got us into this mess." Barney Frank's talking points notwithstanding, mortgage lenders didn't wake up one fine day deciding to junk long-held standards of creditworthiness in order to make ill-advised loans to unqualified borrowers. It would be closer to the truth to say they woke up to find the government twisting their arms and demanding that they do so - or else.
The roots of this crisis go back to the Carter administration. That was when government officials, egged on by left-wing activists, began accusing mortgage lenders of racism and "redlining" because urban blacks were being denied mortgages at a higher rate than suburban whites.
The pressure to make more loans to minorities (read: to borrowers with weak credit histories) became relentless. Congress passed the Community Reinvestment Act, empowering regulators to punish banks that failed to "meet the credit needs" of "low-income, minority, and distressed neighborhoods." Lenders responded by loosening their underwriting standards and making increasingly shoddy loans. The two government-chartered mortgage finance firms, Fannie Mae and Freddie Mac, encouraged this "subprime" lending by authorizing ever more "flexible" criteria by which high-risk borrowers could be qualified for home loans, and then buying up the questionable mortgages that ensued.
All this was justified as a means of increasing homeownership among minorities and the poor. Affirmative-action policies trumped sound business practices. A manual issued by the Federal Reserve Bank of Boston advised mortgage lenders to disregard financial common sense. "Lack of credit history should not be seen as a negative factor," the Fed's guidelines instructed. Lenders were directed to accept welfare payments and unemployment benefits as "valid income sources" to qualify for a mortgage. Failure to comply could mean a lawsuit.
As long as housing prices kept rising, the illusion that all this was good public policy could be sustained. But it didn't take a financial whiz to recognize that a day of reckoning would come. "What does it mean when Boston banks start making many more loans to minorities?" I asked in this space in 1995. "Most likely, that they are knowingly approving risky loans in order to get the feds and the activists off their backs . . . When the coming wave of foreclosures rolls through the inner city, which of today's self-congratulating bankers, politicians, and regulators plans to take the credit?"
Frank doesn't. But his fingerprints are all over this fiasco. Time and time again, Frank insisted that Fannie Mae and Freddie Mac were in good shape. Five years ago, for example, when the Bush administration proposed much tighter regulation of the two companies, Frank was adamant that "these two entities, Fannie Mae and Freddie Mac, are not facing any kind of financial crisis." When the White House warned of "systemic risk for our financial system" unless the mortgage giants were curbed, Frank complained that the administration was more concerned about financial safety than about housing.
Now that the bubble has burst and the "systemic risk" is apparent to all, Frank blithely declares: "The private sector got us into this mess." Well, give the congressman points for gall. Wall Street and private lenders have plenty to answer for, but it was Washington and the political class that derailed this train. If Frank is looking for a culprit to blame, he can find one suspect in the nearest mirror.
It's a damn shame that people still experience a recoil at the mere utterance of "Enron," but Fannie and Freddie—with their own accounting mega-scandals followed by their subprime bender—just seem to get a pass in the media and popular opinion, as do pols like Barney Frank and groups like ACORN that inevitably screw the pooch in their efforts to re-engineer society into something kinder, gentler, and way more collectivist.
And given all of this, it's downright nauseating to have the Speaker Pelosi say this yesterday in her infamous floor speech prior to the vote: "I must recognize the outstanding leadership provided by Chairman Barney Frank, whose enormous intellectual and strategic abilities have never before been so urgently needed, or so widely admired."
Uhhhhh....maybe we should give him another problem to focus on instead?
Scroll down to see my colleague Anthony Randazzo's excellent, ongoing coverage of the financial meltdown.