President Obama says the Occupy Wall Street protests show a "broad-based frustration" among Americans with the financial sector, which continues to kick against regulatory reforms three years after the financial crisis.
"You're seeing some of the same folks who acted irresponsibly trying to fight efforts to crack down on the abusive practices that got us into this in the first place," he complained earlier this month.
But what if government encouraged, even invented, those "abusive practices" - that would make Obama and the Democrats the ultimate in hypocritical, anti-business, pandering, pathetic liars wouldn't it?
Set the Way Back coordinates to 1994. That year, the federal government declared war on an enemy — the racist lender — who officials claimed was to blame for differences in homeownership rates, and launched what would prove the costliest and stupidest social crusade in U.S. history. The full-court press was predicated by a Boston Fed study showing mortgage lenders rejecting blacks and Hispanics in greater proportion than whites.
It took private analysts, as well as at least one FDIC economist, little time to determine the Boston Fed study was terminally flawed. In addition to finding embarrassing mistakes in the data, they concluded that more relevant measures of a borrower's credit history — such as past delinquencies and whether the borrower met lenders credit standards — explained the gap in lending between whites and blacks, who on average had poorer credit and higher defaults.
The author of the 1992 study, hired by the Clinton White House, claimed it was racial "discrimination." But it was simply good underwriting.
When these missing data were factored in, it became clear that the rejection rates were based on legitimate business decisions, not racism.
But in deference to flawed social policies and out-right vote pandering, Clinton forged on, laying the foundation for the worst financial depression and crisis since the Great Depression.
At President Clinton's direction, no fewer than 10 federal agencies issued a chilling ultimatum to banks and mortgage lenders to ease or remove prudent credit practices for lower-income minorities or face investigations for lending "discrimination" and suffer the related adverse publicity. They were threatened with denial of access to the all-important secondary mortgage market and stiff fines, along with other penalties. The Justice Department sued them for lending discrimination and branded them as racists in the press.
The threat was codified in a 20-page "Policy Statement on Discrimination in Lending" and entered into the Federal Register on April 15, 1994, by the Inter-agency Task Force on Fair Lending. Clinton set up the little-known body to coordinate an unprecedented crackdown on alleged bank redlining, and set in motion the Second Great Depression.
The regulatory missive, which had the effect of law, advised lenders to bend "customary" underwriting standards for minority home buyers with poor credit. "The agencies will not tolerate lending discrimination in any form," the document warned financial institutions.
These actions, based on social policy rather than sound business practices are ate the root of the current home mortgage and financial crisis in America.
For the first time, Washington's bank regulators put racial lending at the top of their checklist. Banks that failed to throw open their lending windows to credit-poor minorities were denied expansion plans by the Fed in an era of frenzied financial mergers and acquisitions. HUD threatened to deny them access to Fannie Mae and Freddie Mac, which it controlled.
"Applying different lending standards to applicants who are members of a protected class is permissible," it said. "In addition, providing different treatment to applicants to address past discrimination would be permissible.
To that end, lenders were directed to "make changes in marketing strategy or loan products to better serve minority segments of the market." They were also advised to "change commission structures" to encourage brokers and loan officers to "lend in minority and low-income neighborhoods" under the new lax requirements — a practice Countrywide Financial, the poster boy of the subprime scandal, perfected. The government now condones the practice it once encouraged as "predatory".
HUD also pushed Fannie and Freddie, which in effect set industry underwriting standards, to buy sub-prime mortgages, freeing lenders to originate even more high-risk loans.
"Lenders should ensure that their loan processors and underwriters are aware of the provisions of the secondary market guidelines that provide various alternative and flexible means by which applicants may demonstrate their ability and willingness to repay their loans," the policy statement decreed. "Fannie Mae and Freddie Mac will purchase mortgages exceeding the suggested ratios" of monthly housing expense to income (28%) and total obligations to income (36%).
It warned lenders who rejected minority applicants with high debt ratios and low credit scores to "be prepared" to prove to federal regulators and prosecutors they weren't racist. "The Department of Justice is authorized to use the full range of its enforcement authority." they admonished.
It took a little more than a decade for the negative effects of the assault on prudent lending to be felt. By 2006, the shaky subprime mortgages began to default. In 2008, the bubble exploded.
And these flawed policies are still alive today. Obama is building on the fair-lending infrastructure Clinton put in place.Attorney General Eric Holder has launched a witch hunt vs. "racist" banks. The newly created Consumer Financial Protection Bureau (a jack-booted, anti business, vote-pandering machine) has vowed to "enhance fair-lending enforcement" under the auspices of the existing flawed legislation.
I'm not absolving bankers of acting greedily, but that fact was a symptom, rather than the cause of our current predicament. The evidence is compelling that the crisis evolved chiefly from government mandates and threats to increase lending to applicants who could not afford the loans in order to promote social policy and gain votes.
Occupy wall street? It would be better to occupy the headquarters of the DNC. At least we would be focused on the root of the problem.
