Last week, an old zombie lie was resurrected when the Financial Crisis Commission of Inquiry reached an impasse. The ten member commission is set to issue a report in January on the causes of the financial crisis. The four Republicans on the commission insisted, however, on actually banning the words "Wall Street" "shadow banking" "interconnection" and "deregulation" from the final report and decided to issue their own report instead, when the rest of the commission rejected this absurd demand. According to contemporary right-wing mythology, the financial crisis was caused by the formerly Government-sponsored entities (GSEs) Fannie Mae and Freddie Mac, the Community Reinvestment Act (CRA) of 1977 and, more broadly, liberal government policies aimed at badgering banks and other financial institutions into making home-ownership more accessible for minorities. So naturally, this is what the dissident report argues.
Krugman has pointed out that, on sheer hypocrisy grounds alone, this line of argument is bracing, even by the standards of the contemporary GOP. For example, Peter Wallison, one of the four dissenting Republicans now berating Fannie and Freddie for being too loose in providing mortgages to minorities, said the exact opposite in 2006.
And remember that one of the big ideas that President George W. Bush pushed during his presidency was the concept of an "ownership society," anchored in pushing home-ownership as aggressively as possible to as many people as possible.
Though facts are essentially irrelevant to the contemporary American right, here's a brief checklist of why their arguments, focused on blaming Fannie and Freddie and on government policies aimed at expanding homeownership for minorities, make no sense:
1) The vast majority of subprime loans -- considered to be at the heart of the mortgage-frenzy -- were originated by institutions not subject to CRA oversight. In other words, the vast majority of subprime loans were issued by financial institutions that either were not covered at all by the Community Re-investment act or were issued by financial institutions in geographical areas not covered by the CRA. These loans were made, overwhelmingly, for one reason and one reason only -- the institutions making them thought they were profitable.
And, as Barry Ritholtz points out, the potential profitability of the sub-prime market prompted financial institutions to engage in egregiously irresponsible banking practices, practices which have absolutely zero plausible relationship to federal fair housing legislation generally or the CRA in particular.
In this light, former Fed governor and well-known conservative economist Randall Kroszner has concluded that: "the very small share of all higher-priced loan originations that can reasonably be attributed to the CRA makes it hard to imagine how this law could have contributed in any meaningful way to the current subprime crisis."
2) Subprime loans, though substantial, represent a relatively small fraction of the larger value lost in the bursting housing bubble. According to journalist and former Wall Street Banker Nomi Prins: "Subprime mortgages have been blamed for the financial crisis, but we're spending more than five times more money (in Fed loans, injections, bailouts and guarantees) than the value of every subprime loan in the country combined."
So, not only is CRA not a cause of the subprime meltdown, but the subprime meltdown itself is only a relatively small part of a much larger real estate bubble whose bursting was a key reason for the current economic crisis. (For a good dissection of the mortgage feeding frenzy as it played out at the now failed Washington Mutual, see this New York Times article).
3) Sub-prime mortgages actually governed by CRA did relatively well in the financial crisis -- the rate of loan default in CRA-generated mortgages has been lower than the national average. According to the CEO of the Federal Reserve Bank of San Francisco Janet Yellen, "studies have shown that the CRA has increased the volume of responsible lending to low- and moderate-income households."
4) Freddie Mac and Fannie Mae were followers, not leaders.
This is worth keeping in mind because a key part of the right-wing effort to obfuscate the true source of the current economic crisis is to blame Fannie and Freddie. But it was a lack of regulation at those two institutions that contributed to their serious problems and they, in any event, were not leaders in the mortgage-security frenzy that helped take down the economy -- they were followers -- trailing the private institutions that were most aggressively pushing mortgage securitization in the critical 2002 to 2007 period, during which time Fannie and Freddie lost lost ground in the exploding securitization market.
5) The timing is all wrong.
The CRA was enacted in 1977. President Clinton gave it some enforcement teeth in 1994 and 1995. As of 2002, sub-prime loans represented about ten percent of all mortgage loans. By 2005, that figure had shot up to 25%. More plausible than liberal social policy, the de-regulatory frenzy, begun under Clinton and Greenspan in the late 1990s, and accelerated by an imperative in 2001 and 2002 to cushion the blow of the bursting stock market bubble, contributed to an especially lax regulatory environment, one further perpetuated by the Bush administration's banker-friendly approach to oversight and Greenspan's own refusal to acknowledge that there was a housing bubble. Private-label mortgage securitization exploded after 2002, Fannie and Freddie lost market share (as noted above) and the major oversight institutions, like the Fed, elected to turn a blind eye to the mounting bubble. Dishonest lending practices targeting low-income minorities were an element of this larger process (and were precisely the sort of thing that, had the CRA been more influential than it actually was, would have been harder to pull off), but they were only a piece of a much larger set of developments.
Proponents of the falsehood that Fannie, Freddie and the CRA are the cause of the housing bubble generally ignore these facts because, well, they have to. Some who don't ignore them completely still insist that their argument is right because, basically, these liberal housing policies set a tone that compelled major financial institutions to follow along. Because, you know, it's so easy to bully financial giants to cave in to liberal social policy.
These arguments, of course, serve the purpose of shilling for Wall Street, which is the one unassailable operational directive of the Republican Party. But there is one other benefit to this line of argument: it nicely perpetuates the dog-whistle politics of the contemporary right-wing which, in a nutshell, can be summed up as follows: America is being ruined by minorities and by all those mother-f---ing liberals who want to help them at the expense of the "real" America. I know the right-wing, awash in abject self-pity, likes to scream bloody murder at accusations that racism and intolerance have become so central to their appeals. And if it weren't true that almost every single one of their arguments didn't, in some fundamental way, imply or directly impugn gays, blacks, immigrants or Muslims (and as an added bonus recently, as Glenn Beck has been peddling lately, Jews), as the cause of all of America's ills, they might have a legitimate beef. But as it stands...