I Always Knew Poor People Were to Blame
I admit I have been playing catch up lately, but I was surprised to see that none less than the WSJ, the NY Post's Stan Leibowitz and country crooner Hank Williams Jr. are now blaming the economic meltdown on.... poor people.
The theory goes something like this. According to conservatives, the Community Reinvestment Act (CRA) forced banks to make bad loans to poor people. Poor people, being shiftless and lazy, defaulted on those loans left the poor banks wanting. In many ways, this is an old story. Part and parcel of the supply side movement has always been a fascination with perverse incentives. That is, the economic gurus of the last twenty years have consistently argued that any attempt to help the poor can only fail and take the rest of us down with it. I have always thought of this theory as saying, "We'd love to help, but we just can't."
This particular application of what is now mainstream economic doctrine is really fraught with peril. First, nothing in the CRA mandates that banks apply anything other than their usual credit standards to the loans they make. The CRA did not invent interest only loans or loans that covered downpayments or 100% of the purchase price. Those were the creation of banks seeking to expand market share.
Second, the CRA only covers banks and thrifts. They account for only about 25% of the subprime loans at the bottom of this mess. Third, the CRA certainly does not suggest that it is a wise policy to parcel high risk loans together and sell them as a mortgage backed security. That was a creation of investment banks.
Lastly, the CRA was the invention of the Carter Administration, so it is over thirty years old. During those thirty years, we somehow managed to avoid a major economic meltdown caused by high risk mortgages. This suggests to me that the CRA is probably not the culprit. Maybe we should look for something that actually happened in the last thirty years... like deregulation of the securities market, throwing out Glass Steagall, jettisoning traditional mortgage underwriting standards, the growth in the selling or mortgages, and allowing such a precipitous run up in in home prices. Poor people and their advocates had little to do with any of these.
This may sound like an arcane argument, but the larger point is important. If we are going to build an America in which we move forward together and inwhich we actually recognize the public interest, we are going to have to do away with the old supply side saw that helping the least among us only hurts them and us. The argument is false and prevents us from reaching our potential as a community. We are also going to have to face up to the reality that our current situation is not the creation of the least powerful among, but the most powerful among us. Pointing the finger elsewhere does us little good.
The theory goes something like this. According to conservatives, the Community Reinvestment Act (CRA) forced banks to make bad loans to poor people. Poor people, being shiftless and lazy, defaulted on those loans left the poor banks wanting. In many ways, this is an old story. Part and parcel of the supply side movement has always been a fascination with perverse incentives. That is, the economic gurus of the last twenty years have consistently argued that any attempt to help the poor can only fail and take the rest of us down with it. I have always thought of this theory as saying, "We'd love to help, but we just can't."
This particular application of what is now mainstream economic doctrine is really fraught with peril. First, nothing in the CRA mandates that banks apply anything other than their usual credit standards to the loans they make. The CRA did not invent interest only loans or loans that covered downpayments or 100% of the purchase price. Those were the creation of banks seeking to expand market share.
Second, the CRA only covers banks and thrifts. They account for only about 25% of the subprime loans at the bottom of this mess. Third, the CRA certainly does not suggest that it is a wise policy to parcel high risk loans together and sell them as a mortgage backed security. That was a creation of investment banks.
Lastly, the CRA was the invention of the Carter Administration, so it is over thirty years old. During those thirty years, we somehow managed to avoid a major economic meltdown caused by high risk mortgages. This suggests to me that the CRA is probably not the culprit. Maybe we should look for something that actually happened in the last thirty years... like deregulation of the securities market, throwing out Glass Steagall, jettisoning traditional mortgage underwriting standards, the growth in the selling or mortgages, and allowing such a precipitous run up in in home prices. Poor people and their advocates had little to do with any of these.
This may sound like an arcane argument, but the larger point is important. If we are going to build an America in which we move forward together and inwhich we actually recognize the public interest, we are going to have to do away with the old supply side saw that helping the least among us only hurts them and us. The argument is false and prevents us from reaching our potential as a community. We are also going to have to face up to the reality that our current situation is not the creation of the least powerful among, but the most powerful among us. Pointing the finger elsewhere does us little good.
posted by Jack Reed at 2:23 PM
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