On the day we appear to have a bailout deal, perhaps it's worth discussing one of those things that will drive the discussion as we go forward - the politics of how we got here.
As much as I think "how did this happen" and "who can we blame" are not the most useful questions, it's no doubt that there will be a reckoning. We have to account for some of these decisions, if only to figure out how to not repeat them.
Off the mark, two basic theories have appeared - from the left, a simplistic, obvious argument against corporate greed that blames banks, unscrupulous lenders, and the Financial Wizards of Wall Street. It's a sort of standard, anti-big business line that Democrats always trot out, and it generally fits, sort of. Let's save that part, for the moment.
What is the Community Reinvestment Act? It's a Carter-era piece of legislation meant to deal with some 20 years (at the time) of redlining - the historical practice of banks drawing lines and keeping certain people (mainly blacks) out of certain communities. At the time of deep urban decline, and cities across the country struggling with urban blight, forcing banks to go back into neighborhoods they'd abandoned seemed like a necessary step. The CRA basically made investment in all the communities of urban markets a part of bank licensure.
According to the conservative theory, the emphasis on meeting various targets forced banks to offer loans to un-creditworthy customers, who couldn't possibly be expected to repay. This trend was financed, they argue, by Fannie Mae and Freddie Mac, and grew over the years as Fannie and Feddie's management cast their lot with Democrats. In the nineties, President Clinton signed a revision of CRA that they say exacerbated these trends, leading to an overheated loan market, as Fannie and Freddie floated mortgage backed bonds to finance their bad mortgages, and the market demanded ever more bad loans to satsfy demand for mortgage paper.
And now it's all coming apart and Fannie and Freddie have imploded. QED.
It sounds too tidy because... well, it is.
The left has been slightly flummoxed by this argument, leading a lot of people, especially yonger bloggers to find themselves defending the notion of community reinvestment and urban policy. That's a red herring. There's an easier, though admittedly more painful response - which is that the CRA itself was neither all that important, nor all that effective, another example of failed urban planning policy that was well intentioned, but poorly thought out and executed.
First, at the time of Carter's Presidency, the CRA didn't amount to much - it forced banks to open branches in some communities, but the urban blight had eliminated the possibility of making them successful concerns. There were some showy loans to suggest increased involvement in poorer urban communities, and probably most usefully, a rise in affirmative action hirings to show new diversity in the industry. But CRA really didn't lead to a lot of investment. If it had, for one thing, the story of the eighties would be a much different one.
Second by the time Clinton signed the expansion of CRA, it was a little beside the point; the communities in question were, in many cases, gentrifying neighborhoods that had returned to new, chic status. Building new residential properties, developing retail and other outlets, was happening anyway. And as we've noted, the net effect was to gradually raise housing prices in inner cities, pushing the poor and working class out of those neighborhoods, in search of affordable housing.
It's true that there was a push to have people buy homes rather than rent, but that was a generalized push by both Republicans and Democrats, because played well to our general notions of The American Dream. And it's also true that the growth of Fannie Mae and Freddie Mac over the past 15 years has made this crisis so enormous (and reasonable people, on all sides, were complaining about that for a while), but that growth swallowed up all sorts of lending, and minority lending, really, is in many ways the least of the problems.
I was struck, this week, tripping over this post from 18 months ago - describing both what happened, and what could happen next:
However, one other factor was that these [mortgage backed] securities were not well regulated. The buying and selling of the securities were based on assumptions about the underlying loans that gradually began to erode - it became easier to offer "paperless" loans, loans without credit checks, second mortgages on top of initial mortgages to almost anyone. These questionable loans make up the "subprime" market, where interest rates were higher, repayment terms more onerous, and the risk of foreclosure much greater.
It was, basically, a house of cards.
As interest rates have slowly started to rise, and other economic growth has slowed, people with Adjustable Rate Mortgages (ARMs) were the first to feel the heat, followed by the truly awful credit risks, followed by more innocent folks simply caught in bad circumstance or unscrupulous lending. And with the rise in foreclosures came two other ripples: a slowing of home sales, and the crumbling of value in subprime mortgage securities.
It's hard to overplay the seriousness of these events - things as basic as the rating of securities (done by companies like Dun & Bradstreet and Moody's) have come under scrutiny because the mortgage bonds had such high ratings that their failure has undermined confidence in the ratings system. Banks which weren't supposed to have subprime exposure are admitting to billions of dollars of losses. And banks that played on the subprime boom - like New Century - are leading the markets down the drain.
Conservatives are trying to minimize, yet again, the reach of the mortgage mess - statistically, there's little hope that they can cling to their "minority loan theory for too long" - too much of the mortgage crisis is about outer ring suburb and exurb housing developments, and the lines of credit built on second and third mortgages taken by all sorts of people (and none of which, really, has anything to do with CRA). The Fannie and Freddie problems didn't just come from buying up bad mortgages, but endlessly raising the ceiling on mortgages they could own - and arguably the last leap, to $740,000, had as much to do with their capital issues as anything.
That conservatives have decided to push this theory, now, speaks mostly to desperation in the election - absent any set of solutions (since the real solution is probably regulation, along with the bailout we're about to do), all they have is finger pointing and blame shifting. The mortgage mess is clearly part and parcel of the failures of the Bush Administration, but by stringing together a lot of conservative hatreds - Carter, Clinton, urban development, poor black people - they can tell themselves a story they prefer to hear: that they were just standing by and... suddenly... it all fell apart. And it's not their fault.
Truth is, it's all our faults, as I keep trying to suggest. Lefties - just to get back to that anti-corporate line that's being sold - ought to face some hard realities too: that the "little guy" isn't blameless when taking an unaffordable mortgage... or the second one... or the third. That our culture of credit card use, debt and living beyond one's means touches almost all of us, and makes us all part of the story (and, sadly, part of the collapse). But clearly, lax regulation of financial markets, loose monetary policies, and a general favoring of deregulation, were all elements that helped to allow an "anything goes" market succeed. And i's conservative policies that hlped make those things possible.
The really sad part of the "CRA storyline" is both the ugly things it says, again, about how conservatives think about the poor; the cavalier notions - that really fly in the face of their "up by your bootstraps" notions of personal responsibility and drve to succeed - basically assume that poor people are lazy good fornothings out for an easy buck, in this case, the easy mortgage they couldn't afford. But worse, really, is the ugly truth behind that - which is that this country's real need to do more for the working poor, and to really find ways to make housing affordable, and develop urban areas for all, were never all that serious. CRA wasn't ever likely to help enough. And that's more depressing, if you ask me.
As J suggested a ways back - and which I really meant to follow up on sooner, the real test of acceptance of the bailout plan isn't among Wall Street elites, or the well educated voters who have yet to feel severe impacts; it's the working class voters, who are at the breaking point, who are already feeling the foreclosure mess, in their homes, in their communities, and in their part of the economy who will be the real deciders. Banks don't redline anymore, because they don't have to - credit scoring and sophisticated analyses tell them who doesn't matter. But really who even needed that scorecard? The people who don't matter, they know how they've been treated, and they've been speaking... to anyone who cares to listen. The question is... are we?