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Are minorities to blame for the subprime mess?

“The right blames the credit crisis on poor minority homeowners. This is not merely offensive, but entirely wrong.”

From this opinion piece in Newsweek, I’m astounded at how far the right will take the revisionist history. Please take a gander at this:

We’ve now entered a new stage of the financial crisis: the ritual assigning of blame. It began in earnest with Monday’s congressional roasting of Lehman Brothers CEO Richard Fuld, and continued on Tuesday with Capitol Hill solons delving into the failure of AIG. On the Republican side of Congress, in the right-wing financial media (which is to say the financial media), and in certain parts of the op-ed-o-sphere, there’s a consensus emerging that the whole mess should be laid at the feet of Fannie Mae and Freddie Mac, the failed mortgage giants, and the Community Reinvestment Act, a law passed during the Carter administration. The CRA, which was amended in the 1990s and this decade, requires banks—which had a long, distinguished history of not making loans to minorities—to make more efforts to do so.

The thesis is laid out almost daily on The Wall Street Journal editorial page and in the National Review. Washington Post columnist Charles Krauthammer provides an excellent example, writing that “much of this crisis was brought upon us by the good intentions of good people.” He continues: “For decades, starting with Jimmy Carter’s Community Reinvestment Act of 1977, there has been bipartisan agreement to use government power to expand homeownership to people who had been shut out for economic reasons or, sometimes, because of racial and ethnic discrimination. What could be a more worthy cause? But it led to tremendous pressure on Fannie Mae and Freddie Mac—which in turn pressured banks and other lenders—to extend mortgages to people who were borrowing over their heads. That’s called subprime lending. It lies at the root of our current calamity.” The subtext: if only Congress didn’t force banks to lend money to poor minorities, the Dow would be well on its way to 36,000.

I’m not sure I could coherently express my indignation. Fortunately, I don’t have to, because Mr Gross does it for me (thank you, as I’m almost speechless right now):

Let me get this straight. Investment banks and insurance companies run by centimillionaires blow up, and it’s the fault of Jimmy Carter, Bill Clinton, and poor minorities?

These arguments are generally made by people who read the editorial page of The Wall Street Journal, and ignore the rest of the paper—economic know-nothings whose opinions are informed mostly by ideology and, occasionally, by prejudice. Let’s be honest. Fannie and Freddie, which didn’t make subprime loans but did buy subprime loans made by others, were part of the problem. Poor congressional oversight was part of the problem. Banks that sought to meet CRA requirements by indiscriminately doling out loans to minorities may have been part of the problem. But none of these issues is the cause of the problem. Not by a long shot. From the beginning, subprime has been a symptom, not a cause. And the notion that the Community Reinvestment Act is somehow responsible for poor lending decisions is absurd.

The rest of the piece explains in rather big strokes some of the issues with the current economic mess in a way that makes it comprehensible to the novice (me). The last line, though, summarizes my feelings:

Lending money to poor people doesn’t make you poor. Lending money poorly to rich people does.

No shit.

11 Comments »

  • Yesterday I was at an airport listening to sale guy loudly explain to his friend “poor people are part of the economy, but they don’t *stimulate* the economy. people like us who pay taxes *stimulate* the economy.”

    I think that sums it up. When the “economy” is more about how rish people are taxes than it is about performing labor for compensation, well, we’re screwed.

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  • Emmy
    October 10
    7:14 pm

    I don’t know that there is any single cause of this economic crisis, particularly since it seems to be a worldwide phenomenon. I sincerely doubt that broke black people in America are the cause of Iceland on the verge of national bankruptcy, or Japan’s Nikkei dropping 30%.

    As for the subprime mess…people who purchased houses they couldn’t afford are as much to blame as greedy lenders who gave them the money to do it and then sold their mortgage off to another bank, thus absolving themselves of risk. Yes, the CRA did put some pressure on banks to lend equally, after an investigation showed that a white family was more likely to get approved for a housing loan over an equally qualified minority family. That was not an open invitation to get greedy and set up waterfall operations to anyone who asked for a loan.

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  • As for the subprime mess…people who purchased houses they couldn’t afford are as much to blame as greedy lenders who gave them the money to do it and then sold their mortgage off to another bank, thus absolving themselves of risk.

    I’ve said it before, I don’t know jack about the economy.

    But this makes sense. People-regardless of race- trying to live outside their means, going after things they can’t afford led to problems. Banks lending people more money than they could afford to pay led to problems. Greedy companies that already pay their CEOs staggering salaries yet continue to milk every last nickle and dime led to problems. Gas prices.

    There is no one guilty party.

    edited…

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  • Um no, does anyone remember that foreclosures started the subprime mess?

    So between poor people and rich house flippers lets google at who had the most foreclosures…

    “Many blame subprime lending for our current real estate crisis, but rampant speculation, even by those with great credit, played a leading role,” observed Sean O’Toole, Founder and CEO of ForeclosureRadar.com. “The subprime market took the first hit as those borrowers had the least to lose when they walked away. Now that nearly half of foreclosures represent non-owner occupied properties, it is clear that speculators are walking away too.

    Let us all remember the words of Our Lady of Political Commentary Tina Fey ~

    Y’know we’re gonna take every aspect of the crisis and look at it and then we’re gonna ask ourselves what would a maverick do in this situation and then y’know we’ll do that.

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  • Throwmearope
    October 10
    9:59 pm

    There were people buying homes they couldn’t afford. But the banks and Wall Street firms were borrowing 30 times (thirty– 3 – 0) times their net worth. That is to say if they were worth 3 billion, they borrowed 90 billion (all this with a B folks) dollars. But they blame the poor because they got busted. These credit default swaps were nothing more nor less than a gigantic gamble. And the whole world lost.

    If you’re interested PRI’s This American Life has a fabulous explanation of the whole mess here:

    http://www.thislife.org/Radio_Episode.aspx?episode=355

    (Sorry, technologically impaired, can’t do hot link, my bad.)

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  • From Mother Jones…

    Sen. Phil Gramm. Eight years ago, as part of a decades-long anti-regulatory crusade, Gramm pulled a sly legislative maneuver that greased the way to the multibillion-dollar subprime meltdown. Yet has Gramm been banished from the corridors of power? Reviled as the villain who bankrupted Middle America? Hardly. Now a well-paid executive at a Swiss bank, Gramm cochairs Sen. John McCain’s presidential campaign and advises the Republican candidate on economic matters.

    Gramm’s long been a handmaiden to Big Finance. In the 1990s, as chairman of the Senate banking committee, he routinely turned down Securities and Exchange Commission chairman Arthur Levitt’s requests for more money to police Wall Street; during this period, the sec’s workload shot up 80 percent, but its staff grew only 20 percent. Gramm also opposed an sec rule that would have prohibited accounting firms from getting too close to the companies they audited—at one point, according to Levitt’s memoir, he warned the sec chairman that if the commission adopted the rule, its funding would be cut. And in 1999, Gramm pushed through a historic banking deregulation bill that decimated Depression-era firewalls between commercial banks, investment banks, insurance companies, and securities firms—setting off a wave of merger mania.

    BUT THAT’S NOT ALL!

    Clearing the way for that California price gouging, Gramm, as a powerful Texas senator in 2000, slipped an Enron-backed provision into the Commodities Futures Modernization Act that exempted from regulation energy trading on electronic platforms.

    Then, over the next year, Enron – with Gramm’s wife Wendy serving on its board of directors – worked to create false electricity shortages in California, bilking consumers out of an estimated $40 billion.

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  • Emmy
    October 10
    10:14 pm

    lolz, Teddypig…people who bought more houses then they could afford and then weren’t able to flip them, or had to sell them at a loss fall under my “people who purchased houses they couldn’t afford”.

    Really, the people I feel bad for are the renters, who paid their rent on time and ended up getting evicted when the owner didn’t pay the mortgage and got foreclosed on. I applaud the sheriff in Chicago, who has declared a moratorium on foreclosure evictions, since banks weren’t even telling renters that they were going to be evicted. Police were showing up to kick people out of a house whose rent they had faithfully paid on time each month, and they had no idea they were supposed to move. The owners took off with rent money and security deposits and are nowhere to be found.

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  • Following Phil Gramm is like playing six degrees of multi-billion dollar tax ripoffs.

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  • Following Phil Gramm is like playing six degrees of multi-billion dollar tax ripoffs.

    To tell you the truth, I think he’s the shit that got away with the toilet.

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  • Sparky
    October 11
    12:45 pm

    Argh the sheer UGH! I do not have the words! Of all the disgusting useless scum – blame the disaster caused by rich (predominantly) white men in ivory banks on poor minoritieS?!

    This was caused by these banks thinking credit was money. This was caused by them throwing out money without even the slightest consideration. This was caused by companies playing a shell game with money, keeping it moving so no-one could see that there wasn’t actually any money there. This was caused by the ROUTINE valuing of intangible assets in high finance (and it continues from stocks to loans) at vastly above their actual value. This was caused by people handing out loans when they should have known better. This was caused by an economic system that has lead to the average inflation-adjusted wage of the working class shrink.

    It’s caused by vast companies and banks assuming they are “too big to fail” and that they can do anything with other people’s money, rake in vast profits for the execs no matter what they do. The sad thing, is, they’re right. They’ve got their bailouts. Most of the execs have still got their happy billions and the system will continue as normal until the next bubble, the next overwhelming credit crunch or the next insane way these find-the-queen merchants have found of making the appearance of money by keeping it moving until we’re too dazzled to see how little there actually is

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  • Well, it’s not only the Wall Street Journal and the financiers trying to get their nuts out of the fire who are blaming minorities and the Democrats who–how dare they, socialist pigs!–wanted to… hold on, allow me to quote:

    The goal of this rule change was to help the poor — which especially would help members of minority groups. But how does it help these people to give them a loan that they can’t repay? They get into a house, yes, but when they can’t make the payments, they lose the house — along with their credit rating.

    They end up worse off than before.

    and

    This was a Congress-caused crisis, beginning during the Clinton administration, with Democrats leading the way into the crisis and blocking every effort to get out of it in a timely fashion.

    (Nevermind that Congress was Republican dominated at the time)

    Anyone interested can read Orson Scott Card’s rant here.

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