Sunday, October 12, 2008

Truth Behind the Banking Collapse

When Ed Morrissey use to author his own blog (the Captain's Quarters) I was an avid reader. I'm a little disappointed he moved to Hot Air. While Hot Air can be a source of useful information, it also can be a little shrill.

But he has a post today that is a must read. He has a video from 1998 of Andrew Cuomo, Housing and Urban Development Secretary under Clinton.
Here's the transcript:
CUOMO: To take a greater risk on these mortgages, yes. To give families mortgages that they would not have given otherwise, yes.

Q: [unintellible] … that they would not have given the loans at all?

CUOMO: They would not have qualified but for this affirmative action on the part of the bank, yes.

Q: Are minorities represented in that low and moderate income group?

CUOMO: It is by income, and is it also by minorities? Yes.

CUOMO: With the 2.1 billion, lending that amount in mortgages — which will be a higher risk, and I’m sure there will be a higher default rate on those mortgages than on the rest of the portfolio...
Morrissey adds:
Here, in fact, is the genesis of the problem, the ideology that created the monster. Cuomo, the Clinton administration, and Congress believed they had the right and the power to determine acceptable risk for the lenders, rather than lenders determining it for themselves in a free market.
Now, if you bring this argument up to an Obama supporter, they will argue that these mortgages make up a small fraction of the total mortgages. So while they did contribute to the problem, they can't be blamed for the entire collapse. This is true. Morrissey covers that topic as well:
That was the political arrogance at the heart of the collapse. However, the CRA was more a sideshow than the actual problem. When Congress decided that enforcement alone wouldn’t generate enough mortgages to boost their political fortunes, they had Fannie Mae and Freddie Mac eliminate the risk entirely for lenders through the purchase of the subprime loans. Without that risk and with almost-guaranteed short-term profits of subprime loans, lenders went wild while Fannie and Freddie repackaged them as quasi-government bonds for investors.
And there in lies the real problem. Everybody--OK, most people--want to own a house; not everyone can afford one. When you make it possible for people that ordinarily wouldn't qualify for a loan to be able to do so, two things happen:
  1. You take on a greater risk for these loans, which is exactly what happened.
  2. You increase the competition for houses. People who would qualify without this government meddling suddenly find themselves competing with offers from people that needed the questionable loans to participate. This drives house prices up and as we all know economic bubbles are destined to burst.
Morrissey concludes:
The Democrats decided, as Michelle says, that mortgages were a civil right, and wouldn’t cost the American taxpayers a dime. How well is that working out, America? And now, the question you have to ask yourselves is this: Do you want the nation’s economic policies run by Obama, Pelosi, Reid, Dodd, and Frank for the next two years?
Unfortunately it looks like we are going to have them at the helm, regardless of how much we want or don't want it.

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