Barney Frank’s Confession

Remember my arguments about the cause of the recession?

Now compare what I wrote almost a year ago with Barney Frank’s confession in this video.

Word-for-word, he’s saying almost exactly what I wrote! He doesn’t specifically name the CRA, but talks extensively about the policies which Clinton’s 1995 expansion of the CRA created. I never thought I’d be saying this, but I completely agree with Barney Frank on the cause of the crisis.

On the other hand, we begin to differ again when it comes to the proposed solution. I say abolish Fannie and Freddie and end federal involvement in the housing market. He says abolish Fannie and Freddie and replace it with something entirely government-owned, and this time he’ll use policies that won’t fuck it up because he’s learned his lesson.

So there you have it: once the facts line up, it all comes down to a difference in faith in the government.

EDIT (8/5/11): But of course, Barney Frank’s faith is horribly misplaced.

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Should America Bid Farewell to Exceptional Freedom?

Representative Paul Ryan of Wisconsin gave this speech on March 31st:

Last week, on March 21st, Congress enacted a new Intolerable Act. Congress passed the Health Care bill – or I should say, one political party passed it – over a swelling revolt by the American people. The reform is an atrocity. It mandates that every American must buy health insurance, under IRS scrutiny. It sets up an army of federal bureaucrats who ultimately decide for you how you should receive Health Care, what kind, and how much…or whether you don’t qualify at all. Never has our government claimed the power to decide when each of us has lived well enough or long enough to be refused life-saving medical assistance.

This presumptuous reform has put this nation … once dedicated to the life and freedom of every person … on a long decline toward the same mediocrity that the social welfare states of Europe have become.

Americans are preparing to fight another American Revolution, this time, a peaceful one with election ballots…but the “causes” of both are the same:

Should unchecked centralized government be allowed to grow and grow in power … or should its powers be limited and returned to the people?

Should irresponsible leaders in a distant capital be encouraged to run up scandalous debts without limit that crush jobs and stall prosperity … or should the reckless be turned out of office and a new government elected to live within its means?

Should America bid farewell to exceptional freedom and follow the retreat to European social welfare paternalism … or should we make a new start, in the faith that boundless opportunities belong to the workers, the builders, the industrious, and the free?

We are at the beginning of an election campaign like you’ve never seen before!

We are challenged to answer again the momentous questions our Founders raised when they launched mankind’s noblest experiment in human freedom. They made a fundamental choice and changed history for the better. Now it’s our high calling to make that choice: between managed scarcity, or solid growth … between living in dependency on government handouts, or taking responsibility for our lives … between confiscating the earnings of some and spreading them around, or securing everyone’s right to the rewards of their work … between bureaucratic central government, or self-government … between the European social welfare state or the American idea of free market democracy.

What kind of nation do we wish to be? What kind of society will we hand down to our children and future generations? In the coming watershed election, the nature of this unique and exceptional land is at stake. We will choose one of two different paths. And once we make that choice, there’s no going back.

This is not the kind of election I would prefer. But it was forced on us by the leaders of our government.

These leaders are walking America down a new path … creating entitlements and promising benefits that model the United States after the European Union: a welfare state society where most people pay little or no taxes but become dependent on government benefits … where tax reduction is impossible because more people have a stake in the welfare state than in free enterprise … where high unemployment is accepted as a way of life, and the spirit of risk-taking is smothered by a tangle of red tape from an all-providing centralized government.

True, the United States has been moving slowly toward this path a long time. And Democrats and Republicans share the blame. Now we are approaching a “tipping point.” Once we pass it, we will become a different people. Before the “tipping point,” Americans remain independent and take responsibility for their own well-being. Once we have gone beyond the “tipping point,” that self-sufficient outlook will be gradually transformed into a soft despotism a lot like Europe’s social welfare states. Soft despotism isn’t cruel or mean, it’s kindly and sympathetic. It doesn’t help anyone take charge of life, but it does keep everyone in a happy state of childhood. A growing centralized bureaucracy will provide for everyone’s needs, care for everyone’s heath, direct everyone’s career, arrange everyone’s important private affairs, and work for everyone’s pleasure.

The only hitch is, government must be the sole supplier of everyone’s happiness … the shepherd over this flock of sheep.

Am I exaggerating? Are we really reaching this “tipping point”? Exact and precise measures cannot be made, but an eye-opening study by the Tax Foundation, a reliable and non-partisan research group, tells us that in 2004, 20 percent of US households were getting about 75 percent of their income from the federal government. In other words, one out of five families in America is already government dependent. Another 20 percent were receiving almost 40 percent of their income from federal programs, so another one in five has become government reliant for their livelihood.

It continues. I urge every American to read the entirety of the article and ask yourself the rhetorical questions posed in it. Paul Ryan is a smart man- he had Obama on his toes at the Health Care Summit  and he’s the one who exposed the deceitful gimmicks used by the Democrats to get the answer they wanted from the CBO. I don’t agree with everything in Rep. Ryan’s proposed solution, but he is right that we are at the tipping point, where we have a choice between a nation built on individual freedom and a nation hanging from the precarious limb of government support. We are approaching the end of an era, and it’s up to all of us to decide what the future will look like.

I, for one, choose freedom.

On Greed and Recessions

Whenever I try to discuss the causes of this recession that we’re in, I always get the same answer: Greed did it. Banks and corporations got greedy and started offering risky loans to people who couldn’t pay them off in the hopes of making a profit off the poor. It was predatory.

But that doesn’t make sense to me. You see, greed is a constant. Greed is what leads banks to want to find people who will actually pay off their loans. Subprime loans are dangerous, and most banking institutions would be very cautious about offering them, absent of any external stimulus. So if banks were always greedy, why were so many risky loans issued all of a sudden? Why had subprime loans never crashed the market before? Something had to have changed to cause such a massive upset of the economy.

Something did change, and it wasn’t greed.

In 1977, US President Jimmy Carter signed into law the Community Reinvestment Act (CRA), a vague declaration of the power of the federal government to oversee and regulate financial institutions and ensure they uphold their “continuing and affirmative obligation to help meet the credit needs of the local communities in which they are chartered.” The act makes clear that race and sex of loan recipients may used as factors in determining whether or not financial institutions are “meet[ing] the credit needs of the local communities.” Essentially, affirmative action in financial loans and mortgages was established to be enforced at the federal level.

In 1995, President Bill Clinton asked CRA regulators to revise their standards to make them more consistent and “focused on results.” This meant establishing specific quotas that lending institutions had to fill in order to receive passing ratings under the CRA. Up to 50% of an institution’s rating would be based on the quantity, effectiveness, and “innovation” of loans to low- and moderate-income individuals and neighborhoods. At the time, the Cato Institute, a libertarian think-tank adamantly warned of the dangerous consequences of the proposed regulations. Most notably, Cato Institute Chairman William A. Niskanen testified that, “The proposed regulation would override any concern about bank soundness,” in its emphasis on helping poor communities. Essentially, banks would be required to provide many overly risky loans (many of them subprime) to people who couldn’t necessarily pay them back in order to meet CRA quotas.

Debate continued through Clinton’s second term as to the real effect of the CRA on financial institutions. Republicans complained that the Act was detrimental, whereas Democrats claimed it wasn’t going far enough. Thus, as a compromise, Congress passed the Gramm-Leach-Bliley Act, expanding the authority of the CRA to other types of financial holding institutions while requiring “a comprehensive study of CRA to focus on default and delinquency rates, and the profitability of loans made in connection with CRA.” This study would be delivered to Congress in March 2000.

The study concluded that nearly 50% of CRA-related home purchase or refinance loans were either unprofitable or barely profitable, compared to 28% for non-CRA loans. This, of course, would be due to the riskiness of the loans being issued. Clinton’s solution to this foreseeable unprofitability was to urge Fannie Mae and Freddie Mac, two government-sponsored mortgaging enterprises (GSEs) which had come under the CRA requirements with the passage of the 1999 Act, to start collecting these risky loans. This was meant to both increase the number of CRA loans available and to provide some insurance for CRA-regulated financial institutions by pooling risky mortgages (similar to the way the FDIC insures savings). Once the full scope of the problem was revealed in the March 2000 report, Fannie Mae and Freddie Mac redoubled their efforts.

And here we have the recipe for disaster. The CRA had filled the veins of the financial lending industry with these risky subprime loans, this poison, which Fannie Mae and Freddie Mac, the liver and kidneys of the system, were gathering up and trying to neutralize. All it took was a small shrug in the housing market to make enough of those bad loans in Fannie Mae and Freddie Mac turn to poison and kill these protective organs. With the liver and kidneys gone, the rest of the body suffered as people bankrupting from the Fannie Mae and Freddie Mac disaster defaulted on loans from other banks. Hence, we had the bank crash, and later, the automaker crash as large-investment segments of the economy fell apart.

So really, it wasn’t greed that caused this recession that we’re in now. It was humanitarianism. It was affirmative action. It was the government’s attempts to redistribute wealth by applying harsh regulations with the CRA.

This wasn’t the first time government regulation and interference in the market caused a recession. Tariffs throughout the 1920’s weakened the US economy by pushing away trading partners and decreasing gains from overseas trade. Finally, speculation started to become pessimistic in September 1929, as Senate committee debates over the Smoot-Hawley Tariff Act became public. This Act would drastically increase tariffs and protectionist measures, effectively placing a 60% tax on any farmer who bought equipment from overseas. The next month, the stock market crashed. In June 1930, despite the pleading of economists and businessmen such as Henry Ford and partners of J. P. Morgan, Hoover signed the bill into law, and US foreign trade started rapidly declining. Nations around the world responded by putting tariffs on their own goods to counter the effects of US tariffs. The Great Depression had begun.

The government cannot be trusted to take control of an economy for what it believes to be “the greater good.” When innovation and individual choice is allowed to flourish, we succeed together. When law forces us into bad choices, even when some realize how bad it could be, that is what causes us to fail together.

EDIT 4/10/16: The 2011 Financial Crisis Inquiry (FCI) Report includes a dissenting view (page 441-538) that fully corroborates my description of events as written here in 2009. Alternate link. Apparently, the majority opinion in that report tries to absolve the CRA of any responsibility, citing this paper by Fed economists Neil Bhutta and Glenn Canner to claim that “only 6% of subprime loans were in any way related to the CRA.” However, that paper completely ignores the role of the GSEs in creating an expansive market for subprime loans through their attempts to insure CRA-regulated institutions by buying up risky assets. This role is a historical fact, proven by the quote from HUD on page 497 of the 2011 FCI report, rendering the conclusions of Bhutta and Canner entirely baseless.