April 21, 2010

Financial Reform: A Test of the Tea Party's Character

Some of the popular ideological voices of the Right (Limbaugh, Hannity, Perino) are again charging that the Community Reinvestment Act was responsible for the subprime mortgage meltdown and its attendant nationwide financial crisis.  To wit, they argue that the government, via CRA legislation, forced banks to lend money to low income people who could not afford their mortgages. As a consequence, foreclosures increased dramatically, eventually causing the financial meltdown and follow on recession that we are all living through now.  Its a neat little story.  There is only one, teensy, weensy little problem.  Its false. Let me be more plain.  Its a lie.  I also happen to think its a lie that relies on a stereotype of poor black and latino people for its potency.

Of late, I have made the case that Tea Party movement folks are unfairly described as obviously racist. At the same time I have been warming to the idea that the Tea Party by virtue of their anti-government stance are likely in the larger scheme of things to simply become the dupes of a corporatist agenda.   The financial reform debate offers the opportunity to assess the Tea Party's rationality and to observe the character of the  movement relative to issues of prejudice and race.
The Test of Rationality: The charge that CRA regulations caused the financial meltdown is false. Limbaugh, Hannity and Perino, all of whom pride themselves and those who listen to them as being informed, have no excuse not to know this charge to be false.  Because it makes a good political talking point, they regurgitate the falsehood.  Speaking plainly, they lie about the facts.  Lets examine them. In 2009, two Federal Reserve Bank economists studied the data to test the claim. They explain:

The current crisis is rooted in the poor performance of mortgage loans made between 2005 and 2007. If the CRA did indeed spur the recent expansion of the subprime mortgage market and subsequent turmoil, it would be reasonable to assume that some change in the enforcement regime in 2004 or 2005 triggered a relaxation of underwriting standards by CRA-covered lenders for loans originated in the past few years. However, the CRA rules and enforcement process have not changed substantively since 1995

Got that? Loans made between 2005 and 2007 are the ones that caused all the trouble.  If CRA were the cause of the problem, it would have been a change to its regulatory scheme made prior to the time period the problem subprime loans were originated.  However, CRA has been essentially the same since 1995.  The economists then make another important point, even more compelling than the first.

....independent nonbank lenders, such as mortgage and finance companies and credit unions, originate a substantial share of subprime mortgages, but they are not subject to CRA regulation and, hence, are not directly influenced by CRA obligations. Source

In case you missed it: the majority of subprime loans were issued by nonbank lenders that are not subject to CRA.  The lenders who made bad loans with high fees and interest rates to risky borrowers and then turned around, packaged them up and sold them off, those lenders were not forced to do anything.  They did it because it was profitable.

Combine the above with the originate-to-distribute model of complex instruments (securitization), investment banks playing carry trade (mismatched funding durations) with their balance sheets, relying on short term funding from money-market funds, and inadequate risk management models and you get the disaster we got.

 A national study of the performance of banks covered by the Community Reinvestment Act (CRA),  shows that these banks were much less likely than other lenders to make the kinds of risky, high-cost home purchase loans that helped fuel the foreclosure crisis. The average interest rate for CRA loans was much lower than other lenders. CRA banks were more than twice as likely as other lenders to keep the loans they write instead of selling them off to the highest bidder. The problem with subprime lending was that independent, unregulated lenders pushed inappropriate loans to some poor borrowers, but mostly to many American middle-class and wealthy consumers who could not qualify for loans under more stringent standards from non bank lenders (ie, not depositories-mortgage companies, finance holding companies, etc.) not covered by CRA. These loans were then sliced and diced into mortgage-backed securities by Wall Street investment houses that sold them to the financial institutions of the world. Then Wall Street started betting against these securitized debt obligations with credit default swaps and other complex instruments.

In summary, the notion that CRA caused the financial crisis is a lie not backed by the evidence, of which there is an ample amount. That information is readily available, you merely need go look for it.  Rush, Hannity and Perino could do so, but why let facts get in the way? So the rationality test for the Tea Party is whether or not they are going to simply roll with the lie because it serves as more fuel for their anti-Obama, anti-government crusade, or actually operate based on the facts. If the Tea Party repeats this lie, their credibility as an authentic grassroots movement will in my mind be immediately suspect and they will be revealed as primarily motivated by anti-administration fervor.

The Test of Character: How the Tea Party responds to this lie will also give us the opportunity to examine the Tea Party's character as it relates to the issue of prejudice and race.  The CRA lie draws its greatest potency from the fact that it plays into a stereotype image of poor minorities getting loans they didn't deserve for homes they could not afford.  Its an unspoken but heavily suggested narrative undertone to this lie of blacks and latinos getting something for nothing at the expense of whites.  Bounce around the interwebs and look at the comments left from those who believe this lie and its clear that they presume that these CRA loans went to minorities living in the inner cities of America. So not only is this a lie, but its a lie with a nasty little racial undertone to it.  Is the Tea Party going to roll with that too? Or will they demonstrate enough discernment to reject this malicious falsehood and refuse to regurgitate the stereotype that fuels this lie?

Lastly, if the Tea Party establishes itself as against financial reform, when reform is urgently needed, its going to be hard to see that as anything but irrational opposition to the Obama administration, simply because they proposed it. If that turns out to be the case, the Tea Party will reveal itself to be little more than the unwitting dupes of corporatists.