Democrat's $1 Trillion Mistake

So, who's to blame for the current mortgage mess?  If you believe the current media narrative, capitalism itself is to blame.  Not content to blame just the GOP or Bush, Democrats are going after the big prize - the conservative ideology that advocates free markets.  

Progressive socialists like Barack Obama and Bernie Sanders are absolutely giddy about this crisis.  This affords them the perfect opportunity to shove the word FAILURE in the face of any conservative that ever advocated for de-regulation, including John McCain. 

Here's Obama declaring the mortgage mess is the "Final Verdict" that free markets have failed:

Just a month ago, Democrats were worried that American voters might be souring on their Progressive/socialist agenda like the French and Germans did when they recently elected pro-U.S., pro-market leaders like Sarkozy and Merkel, respectively.  U.S. voters were beginning to blame Democrats for the struggling economy when they saw Democrats clinging to their extreme environmentalism and denying even a vote on lifting the ban on offshore drilling. 

This anti-democratic posture by Democrats provided the GOP a chance to blame Democrats for the bad economy.

What a difference a month makes. 

Now, capitalism itself is on trial and it's losing badly.  I, for one, will stand up and defend free markets and using the Audacity of Reason, remind voters of the facts:

1. In 1977, Democrat President Jimmy Carter and the Democratic Congress passed the Community Reinvestment Act (CRA).  This act forced banks to "provide credit, including home ownership opportunities to under-served populations".
2. In 1993, Democrat Bill Clinton asked his Treasury Secretary to come up with reforms to increase the expand the CRA.
3. In 1997, Democrat Bill Clinton increased the market share of these CRA loans from almost zero to almost 15%.  Fannie's and Freddie's combined portfolios went from about $200 billion to over $1 trillion during Clinton's term in office - a five fold increase. 
4. In 2005, Bush attempted to reform Fannie Mae and Freddie Mac (GSEs) but he was rejected along party lines despite warnings by Federal Reserve Chairman Alan Greenspan. 

I urge everyone to read all of Chairman Greenspan's Senate testimony on April 6, 2005, but I'll include his prescient conclusion below:

"Without restrictions on the size of GSE balance sheets, we put at risk our ability to preserve safe and sound financial markets in the United States, a key ingredient of support for homeownership."

Still, Bush was President.  Why didn't he do more?  Bush's #1 priority, after 9/11, was keeping U.S. safe.  Because Democrats chose to undermine the War on Terror and the Iraq War, Bush had to sacrifice other priorities to win support from Democrats to get national security legislation passed and keep us safe.  Had Democrats chose to support the President on national security matters, as was the custom in years past, we would have had real changes at Fannie and Freddie to limit the risk to our overall economy. 

Why did Clinton, back in 1993, seek to force banks to lend to people that our banks would not have otherwise lent money to?  Here's how Clinton's Comptroller, Gene Ludwig, described the basis for how the Clinton team decided to "reform the CRA":

"Before we made a single decision on proposing reform, we turned to the people to ask what the people thought what the people needed. We walked through South Central Los Angeles, in a predominantly minority neighborhood in New York City to see with our own eyes and to listen with our own ears to what should be done. We talked with representatives of the Navajo Nation; to bankers, large and small banks, inclusive; to poor people in rural North Carolina and elsewhere. (What) we saw and what we heard shaped this reform package."

How did the Clinton seek to enforce compliance with the CRA?  In 1993, Treasury Secretary Lloyd Bentsen explains here:

"In a nutshell, what we're proposing to do is to make it easier for lenders to show how they're complying with the Community Reinvestment Act. ...the changes we're proposing are important because banks now have a very clear, quantitative standard by which their compliance can be judged. And that is very important to banks when it comes to ask regulators to approve mergers, new branches and the like."

Under Bill Clinton and a Democratic Congress, the CRA was reborn and inserted into the very fabric of our financial markets.  Yes, some institutions were happy to make money doing CRA loans but they would not have made them if the Clinton Administration hadn't forced them to in order to get new branches and mergers approved.  How do I know that?  Because before Clinton, CRA loans were almost non-existent. 

This is a $1 trillion mistake by the Democrats that has finally come home to roost

Now, there is a $700 billion plan to bailout financial institutions that are having a hard time pricing all the bad CRA mortgage-related assets on their balance sheets.  It could cost a $1 trillion or more.  Whatever the cost, it's not a failure of free markets or capitalism - it is a failure of the "mixed economy" that Ayn Rand warned about 40 years ago.

It is the affirmative action / socialist ideology that Democrats want to shove down your throat with stealth and guilt all wrapped up in the purposely ambiguous euphemism "Change We Need".

Yes, substandard lending had some GOP support along the way but make no mistake - it would have never happened if Republicans were in charge.  Conservatives advocate smaller government and merit-based financial decisions.  Liberals advocate for more government and financial decisions based on "fairly spreading the wealth".  For 12 years, during Reagan and Bush 41, the CRA was meaningless. 

If the banks and Wall Street were so greedy, why didn't they pursue substandard lending before Clinton? 

Because it did not make business sense - they would have lost money.  Only after the Clinton Administration "made it easier" to prove compliance with the CRA and back up the loans with implicit guarantees from Fannie and Freddie, did private banks jump on board.  Banks were asked to demonstrate they were doing "their share" of substandard lending to minorities or else the feds would not approve mergers or new branches. 

Of course, it was a mistake to package these loans into financial instruments traded around the world but can you really blame a German or Japanese bank for buying a product that had the allure of "U.S. Mortgage Obligations"?  It probably never occurred to the German banker to ask if some of the mortgages were made without verification of income???

Congress did everything it could to grow Fannie, Freddie and CRA loans.  This was a whopper of a mistake.  A $1 trillion mistake by Clinton and the Democrats.  The question is will the public hold them accountable or believe Obama's propaganda that evil-unregulated-free-markets is to blame for this mess? 

We'll see November 4, 2008.