222 Housing Boom & Bust

In 2002—under the auspices of “compassionate conservatism”—President George W. Bush promoted affordable housing for all Americans, declaring:  “We can put light where there’s darkness, and hope where there’s despondency in this country.  And part of it is working together as a nation to encourage folks to own their own home.”  A year later he proudly signed the “American Dream Downpayment Act,” implementing his aspirations.  Yet thoughtful critics, both academic and congressional, warned against such policies, with Barrons magazine prophetically decrying as spurious any compassion that exposed “taxpayers to tens of billions of dollars of possible losses, luring thousands of moderate-income families into bankruptcy, and risking the destruction of entire neighborhoods. . . .   Free down payments carry catastrophic risks. . .   Transferring the risk of homeownership from buyers to taxpayers does not endow virtue in America.  Giving people a handout that leads them to financial ruin is wrecking-ball benevolence’” (p. 46).  What a memorable phrase—“wrecking-ball benevolence”!  Six years later, looking bewildered amidst the economic meltdown, a baffled Bush asked his Secretary of the Treasury, “How did we get here?”  Amazingly, Thomas Sowell notes, “neither he nor many others in politics and the media saw any connection between their housing crusades and the economic crisis now facing the nation” (p. 100).  

Sowell’s The Housing Boom and Bust, rev. ed. (New York:  Basic Books, 2010) makes this connection and helps us understand the “great recession” of the past three years.  Though politicians such as Barney Frank and Barack Obama feverously blame “corporate greed” and Wall Street “fat cats” and unregulated capitalism, in truth:  “The development of lax lending standards, both by banks and by Fannie Mae and Freddie Mac standing behind the banks, came not from a lack of government regulation and oversight, but precisely as a result of government regulation and oversight, directed toward the politically popular goal of more ‘home ownership’ through ‘affordable housing,’ especially for low-income home buyers.  These lax lending standards were the foundation for a house of cards that was ready to collapse with a relatively small nudge” (p. 57).  

As an economist (who has taught at prestigious universities such as UCLA) and syndicated columnist, Sowell deftly analyzes and explains what actually happened, beginning with “the economics of the housing boom.”  Housing sales skyrocketed during the first half-decade of the 21st century largely as a consequence of risky policies promoted in Washington D.C. (Fannie Mae; Freddie Mac; HUD; the Federal Reserve System) and Wall Street (banks and brokers).  Underlying it all was a “smart growth” process launched in the 1970s that radically restricted land use in some areas, notably California, under the aegis of “preserving ‘open space,’ ‘saving farmland,’ ‘protecting the environment,’ ‘historical preservation’ and other politically attractive slogans” (p. 11).  In fact, “vast amounts of land for which the local inhabitants have paid nothing are nevertheless controlled by them politically for their own benefit, to provide a buffer zone between themselves and less affluent people” (p. 131).  Consequently, one could buy the same house in Houston for a fraction of what was required in San Francisco, so “most of the country was not suffering from skyrocketing housing prices, which were largely confined to particular communities in which there were severe limitations on the building of housing” (p. 16).  Housing prices and risky loans were, consequently, concentrated in these areas.  Add to this the “creative financing” that surged in the 1990s—low (or no) down payment loans, adjustable-rate mortgages, bundling mortgages—and there were soon millions of people “buying homes that they would not be able to afford in the long run” (p. 19).

Much of this resulted from political stratagems promoted by the likes of Barney Frank and Christopher Dodd (most recently co-authors of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the massive financial regulatory mandate imposed by the Obama administration), designed to insure “affordable housing” for everyone.  The Community Reinvestment Act of 1977, hugely expanded by the Clinton Administration in the 1990s, enabled federal agencies to pressure banks and mortgage companies to finance “underserved” groups, especially low income and racial minorities.  When, under Clinton, HUD secretaries Henry Cisneros and Anthony Cuomo were given oversight of Freddie Mack and Fannie Mae—transforming staid conservative loan agencies into depositories for high-risk mortgages—new banking strategies were put in place, ripe for abuse.  And abused they were!  Community activists such as Jesse Jackson extracted millions of dollars from financial institutions fearing any accusation of racial profiling.  Crying out for “social justice,” these activists, including Saul Alinsky disciples such as Chicago’s Gale Cincotta, declared:  “‘We want it.  They’ve got it.  Let’s go get it’” (p. 117).  All told, Sowell calculates:  “Over the years, the sums of money extracted from financial and other business organizations by community activist organizations, using a variety of tactics, have amounted to more than a trillion dollars, according to the national Community Reinvestment Coalition—nearly all of this money being received since 1992” (p. 119).  

Having described the phenomena, Sowell succinctly analyzes the problem by distinguishing “enabling causes from impelling causes from precipitating causes” (p. 138).  Easy credit, available on virtually every street corner, was the primary enabling cause.  Impelling the process “were growing pressures from government regulatory agencies for mortgage lenders to reduce their lending requirements,” allowing most anyone who wanted a home to acquire one (p. 139).  The primary precipitating factor was the abrupt fall in housing prices, especially impacting those speculators (“flippers”) who banked on rapid, booming home values, resulting in the tsunami of defaults, leaving us amidst the ruins of lost savings and battered IRAs.  “Few things,” Sowell laments, “blind human beings to the actual consequences of what they are doing like a heady feeling of self-righteousness during a crusade to smite the wicked and rescue the downtrodden” (p. 162).  Declaiming themselves champions of social justice, politicians and community activists polished their images in the light of a pandering press and acted “like scavengers, able to extract large sums of money from banks and other institutions by raising claims of discrimination, whose power to delay government approval of bank mergers and other business decisions made pay-offs to these activists the only prudent course for those accused” (p. 162).  

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Paul Sperry, former Washington bureau chief for Investor’s Business Daily, begins The Great American Bank Robbery:  The Unauthorized Report about What Really Caused the Great Recession (Nashville:  Thomas Nelson c. 2011) with a somber note:  “It is official:  According to the Federal Reserve Board, the financial crisis has wiped out $14 trillion in American household wealth—an amount equal to the entire gross domestic product, and the worst loss of wealth since the Great Depression.  This equates to an average loss of more than $123,000 per household.  Yet Americans didn’t lose it.  It was taken” (p. xi).  And it was taken not by “predatory lenders”—the “fat cats” maligned by President Obama—but “by Washington social engineers and housing-rights-activists who used lenders to integrate them into the economic mainstream—regardless of their financial wherewithal” (p. ix).  In fact, the data indicate that the government, not Wall Street, was responsible for more than two thirds of the risky loans that caused the financial collapse.  

Leading the charge to close the “mortgage gap” by expanding the Community Reinvestment Act in the ‘90s was President Bill Clinton.  He issued executive orders, appointed activists to key bureaucratic posts in HUD, Fannie Mae and Freddie Mac, and used Janet Reno’s Department of Justice to further his agenda.   In 1995, and again in 2000, HUD pressured Fannie and Freddie to reduce their underwriting standards and approve loans they would have earlier rejected.  Clinton “plunged Fannie and Freddie into the subprime market and turned them into the twin towers of toxic debt they are today” (p. 10).  He “undercut traditional rules for lending” and “created an easy credit orgy” that resulted in the 2008 crash.  Before the crash, however, “Clinton’s top regulators boasted that their policies helped create both the primary and secondary markets for subprime loans” providing “minorities a ‘good option’ to buy houses and refinance debt.  Clinton himself at the time bragged about plundering banks for record hundreds of billions of dollars in loans for minority communities, before falling silent as those loans defaulted” (p. 4).  In retrospect, “Clinton’s brawnier CRA created a multitrillion-dollar shakedown industry that as devastated the financial industry.  The graveyard of banks bullied into making unsafe loans by ACORN and its clones piles higher and higher” (p. 153).  

At the time Republican Senator (and former economics professor) Phil Gramm, then chairman of the Senate Banking Committee, warned that Clinton’s policies enabled agitators “to blackmail banks for ‘kickbacks and bribes’” (p. 134).  And sure enough, fearing punitive measures from the federal government, banks “pledged billions of dollars in urban loans to ACORN and other radical community organizers to make them go away” (p. 134).  Consequently, Sperry calculates, “community organizers have shaken the banking industry down for an eye-popping $6.1 trillion . . . in total CRA agreements and commitments to poor and minority communities” (p. 134).  

Supporting, and profiting from, the Clinton policies of the ‘90s was a young “community organizer” in Chicago with close ties to the Association of Community Organizations for Reform Now (ACORN), Barack Obama, whose “fingerprints are on the subprime scandal” (p. 37).  He was tutored by John McKnight, the Northwestern University professor who recommended him for admission to Harvard Law School. Implementing the strategies of Saul Alinsky, McKnight now directs the National People’s Action and trains street agitators to coerce banks to underwrite housing in minority neighborhoods.  Moving from Chicago to Washington, Obama determined to amplify, through executive orders, the Community Development Act far beyond Clinton’s goals.  Still more, claiming the financial crash was due to poorly regulated financial institutions, Obama established (through the Dodd-Frank Act) “the Consumer Financial Protection Bureau, a huge new federal bureaucracy that will, among other things, police lenders’ underwriting for ‘traditionally underserved consumers,’ and punish companies who do not do enough of it” (p. 45).  Rather than reverse the policies that precipitated the Great Recession, the president and his party have resolved to expand them!  “Overhauling the banking system without fixing Fannie and Freddie is like fighting terrorists without attacking the jihadist ideology motivating them.  All that’s changed with passage of the Dodd-Frank Act—which should be renamed the Fannie-Freddie Protection Act—is the size of government’s hand in the economy, now bigger than ever” (p. 216).  

This should awaken us, Sperry argues, to this reality:  “This country is in very serious danger of transitioning from an entrepreneurial economy to a parasitic economy—whereby race racketeers, grievance mongers, and street agitators (or as the First Lady euphemistically calls them, ‘social entrepreneurs’) along with group-identity politicians to such the lifeblood out of the real entrepreneurs in private industry” (p. 206).  Personifying the gravity of the danger is Elizabeth Warren, the Interim director of Obama’s Consumer Financial Protection Bureau.  A professor at Harvard Law School, she appeared in “Michael Moore’s market-bashing film, Capitalism:  a Love Story” and “is an anti-business crusader who favors nationalizing banks and capping the interest rates they can charge consumers” (p. 211).  To Sperry, she represents the “guilt-ridden country club radicals with their Ivy League pedigrees, who exploit underprivileged minorities and enlist them as foot soldiers in their romantic revolution for ‘social justice’ as atonement for their own privileged family status” (pp. 211-212).  They’re doing an inside job, not cracking safes but still looting the national treasury under the guise of remaking the world.    

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In Architects of Ruin (New York:  HarperCollinsPublishers, c. 2009) Peter Schweizer explains How Big Government Liberals Wrecked the Global Economy—and How They Will Do It Again If No One Stops Them.  He rejects, as patently untrue and self-serving, assertions by Congressman Barney Frank and New York Times’ columnist Paul Krugman that only the federal government can clean up and prevent the mess created by the unregulated private sector—what George Soros brands “free market fundamentalism.”  Au contraire, argues Schweizer:  American capitalism is, in fact, already tightly regulated; there was no deregulation during the decade leading up the Great Recession; and government agencies energetically policed and intimidated financial institutions.  

The title of chapter one sets the tone for Schweizer’s tome:  “The Robin Hood Agenda:  How a Gang of Radical Activists and Liberal Politicians Set the Stage for the Biggest Bank Heist in History.”  Their agenda rested “on the Marxist premise that all accumulated wealth is ipso facto an unjust expropriation of collective resources” (p. 39).  The progressive Robin Hoods were frequently community activists and lawyers working with organizations such as Operation PUSH and ACORN who sued banks,  accusing them of racist policies—i.e. red-lining loans in minority communities.  In a typical case, two plaintiffs received a total of $60,000 while their lawyers collected $950,000 of the million dollar out-of-court settlement.  “The charge of racism in banking launched a movement in the 1970s that has utterly transformed the American financial system” (p. 5).  

Targeting banks (the most vulnerable link in the capitalist system) was a basic strategy of Saul Alinsky, who spoke much of “helping people” but actually sought to gain access to power—taking it from the Haves and giving it to the Have-Nots.  Alinsky deeply appealed to a whole generation of young radicals—Caesar Chavez and Jesse Jackson, Hillary Clinton and Barack Obama.  Less well-known, but especially important, was a Chicago housewife, Gale Cincotta, who made forcing banks to subsidize “affordable housing” her life’s work.  She organized the National People’s Action on Housing and sponsored a conference in Chicago that galvanized much national attention.  In time she brought together and coordinated an alliance of some 60 community organizations, all dedicated to changing the lending policies of area banks.  Congressional liberals, including Senator William Proxmire (its primary promoter), were impressed by her endeavors and ultimately passed the Community Reinvestment Act (CRA) in 1975.  

Though little noticed at the time, it laid the foundation for America’s financial collapse three decades later.  Alan Greenspan, testifying before the House Committee on Oversight and Government Reform in October 2008, said:  “‘It’s instructive to go back to the early stages of the subprime market, which has essentially emerged out of the CRA” (p. 45).  Subprime lending “increased twentyfold between 1993 and 2000” (p. 71), becoming a major lever wielded by President Clinton to “embark on a massive social engineering program that would, in the hallowed name of civil rights, dramatically undermine the lending standards of banks all over the country.  He thereby set into motion a series of events that would shake the financial foundations of the country—and the world—sixteen years later” (p. 47).  

Add to the expansion of the CRA Clinton’s take-over of Freddie Mac and Fannie Mae—government agencies established during the Great Depression and heretofore “steady, even boring entities that simply served to lubricate the mortgage market so that middle-class Americans would find it easier to get a loan” (p. 77).  Such GSEs (government sponsored entities) are unique inasmuch that they “are private companies but are implicitly guaranteed by the federal government (that is, by us taxpayers)” (p. 79).  Once controlled by President Clinton they began to “redistribute wealth by taking on the affordable housing mission” (p. 80).  They—assisting lenders such as Countrywide Credit, the “largest lender to Hispanics and blacks in the country” (p. 94)—sucked up the subprime loans issued by banks and sold them to Wall Street institutions.  The big players in this highly politicized process naturally rewarded their allies.  Sweetly lucrative spots on the boards of directors of Countrywide and similar institutions were given prominent politicians—Henry Cisneros, following his stint at HUD; Nancy Pelosi’s son; California Governor Jerry Brown’s sister.  Fannie and Freddie, in their “private” role also gave generously to the political campaigns of friendly politicians—e.g. Kit Bond, Christopher Dodd, Barack Obama, Rahm Emmanuel.  And the fall-out of all this nearly defies comprehension.  “Today Fannie and Freddie are behemoths of debt and, as such, prime incubators of the economic crisis.  If you add together the mortgages they hold and the mortgages they have sold to investors around the world and on which they have offered a payment guarantee, these two companies hold potential liabilities of some $5 trillion.  . . . .  In effect, these two government-sponsored entities have liabilities equaling about half the current U.S. national debt” (p. 104).  

Suitably encouraged (or coerced) by the government, a litany of lending agencies—Wells Fargo, Washington, Countrywide, et al.—quickly entered the subprime mortgage business.  Some of them were led by “do good capitalists” such as Robert Rubin, a close friend of Bill Clinton, who envisioned themselves as part of a great societal transformation.  “Together, these two groups—the Washington and Wall Street branches of the emerging boomer overclass—forged a new form of liberal state capitalism” (p. 123).  Jon Corzine, accumulating a fabulous fortune working for Goldman Sachs before successfully running for senator and then governor of New Jersey, always identified himself as “a child of the ‘60s” and proved himself reliably liberal, championing “affirmative action, same-sex marriage, gun control, and universal health care” (p. 124).  Corzine and Rubin (and their financial institutions) prospered in the ‘90s, in part, because the federal government issued bailouts for countries such as Mexico and South Korea, Thailand and Indonesia, lest they default and endanger Goldman Sachs, Citibank, et al.  Such bailouts “made sure not only that the banks and investment houses were protected but that they made a nice return on their investments.  This is the essence of state capitalism:  the profits go to the financial firms, the losses are covered by taxpayers” (p. 138).  

Our Ruling Class assumed that their risky financial adventures would be covered by the federal government—as long as their businesses were “too big to fail.”  Less concern was evident for the ordinary folks who were borrowing money to buy houses.  People with no prospects of repaying them were granted loans on houses, and one cannot but wonder at such flagrant violations of common sense, but the Clinton social agenda mandated them and for a brief time “the number of minority homeowners soared” (p. 71).  In time, inevitably this “massive experiment in socially engineered housing equality created a whole new class of debtors in America.  And by far the greatest victims were the very people Clinton was trying to help” (p. 73).  Sadly enough:  “The mortgage crisis—and especially the meltdown of minority neighborhoods—is directly related to well-meaning efforts by liberals in government to tilt the housing market in their favor” (p. 159).  Joining the ranks of most revolutionaries they failed to heed the law of unintended consequences.