By PHIL GASPER
Who or what is really to blame for the worst economic crisis since the Great Depression? According to assorted conservative commentators and politicians over the last few months, the answer is political correctness, affirmative action, racial minorities, Blacks, “illegal immigrants,” the poor, predatory borrowers, and too much government regulation. Say what?
It’s true. Variations of these outrageously racist arguments are being peddled by a wide range of right-wing opinion makers from the fringe to the “mainstream.” Let’s start with an example from the fringe. In an article in National Review, far-right attack dog Michelle Malkin argues that the subprime mortgage crisis and the collapse of housing prices is due to (what else?) “the massive illegal alien mortgage racket.” How does Malkin reach this conclusion? “It’s no coincidence,” she writes, “that most of the areas hardest hit by the foreclosure wave—Loudoun County, Va., California’s Inland Empire, Stockton and San Joaquin Valley, and Las Vegas and Phoenix, for starters—also happen to be some of the nation’s illegal-alien sanctuaries. Half of the mortgages to Hispanics are subprime. A quarter of all those subprime loans are in default and foreclosure.”
Of course Malkin does not allow little things like facts to get in the way of her racist rant. First, she equates undocu?mented immigrants with all Hispanics. Second, she ignores the fact that Hispanics were on average less than half as likely as non-Hispanics to hold subprime mortgages. And, third, she fails to mention that the majority of risky subprime loans went to non-Hispanic whites and high-income borrowers.
On the day after Washington Mutual became the biggest ever U.S. bank to fail, another National Review contributor, Mark Krekorian, pointed out that the financial institution had received awards for its successful efforts to diversify its workforce, with special programs to recruit and retain racial minorities and LGBT employees. Krekorian shed no tears for the workers who would now lose their jobs, but instead headlined his post “Cause and Effect?” The fact that a string of other banks and financial companies that didn’t have aggressive affirmative action policies have also collapsed didn’t faze him.
Not to be outdone by Malkin and Krekorian, the equally rabid Ann Coulter wrote a syndicated column in September headlined “They Gave Your Mortgage to a Less Qualified Minority.” Coulter claims that the sub?prime mortgage debacle is a consequence of pressure in the 1990s from the Clinton administration on banks to grant more loans to low-income and middle-income borrowers, and on the government-chartered mortgage companies Fannie Mae and Freddie Mac to buy up more of these loans on the secondary market. According to Coulter: “Instead of looking at ‘outdated criteria,’ such as the mortgage applicant’s credit history and ability to make a down payment, banks were encouraged to consider nontraditional measures of credit-worthiness, such as having a good jump shot or having a missing child named ‘Caylee.’” She concludes that political correctness and affirmative action have “wreck[ed] the financial system.”
While Malkin, Krekorian, and Coulter are rightly regarded as kooks, similar arguments have been made by Neil Cavuto on Fox News and Lou Dobbs on CNN, as well as on the editorial pages of nearly every major U.S. newspaper, including the New York Times, the Washington Post, the Washington Times, the Wall Street Journal, the Boston Globe, the Los Angeles Times, and Investors Business Daily. Influential Washington Post columnist Charles Krauthammer, for example, is one of many conservatives who blame the crisis on the Community Reinvestment Act (CRA) of 1977, which requires banks that receive deposit insurance from the federal government to make loans in the areas from which they receive deposits. The CRA was passed to counter decades of redlining of poor and minority neighborhoods as well as other forms of institutional racism. But according to Krauthammer, the CRA “led to tremendous pressure on Fannie Mae and Freddie Mac—who in turn pressured banks and other lenders—to extend mortgages to people who were borrowing over their head. That’s called subprime borrowing. It lies at the root of our current calamity.”
But this argument simply doesn’t hold water. In the first place, if the CRA was the problem, why didn’t the subprime crisis break out twenty-five years ago? In fact, the explosion of subprime loans that have led to the foreclosure crisis were made between 2002 and 2007, at a time when the CRA was being considerably weakened in its application by the Bush administration. Second, institutions that were never covered by the CRA made the vast majority of the bad loans. In Massachusetts, for example, lenders not subject to CRA regulations made 98.4 percent of subprime loans in 2006. In that same year, twenty-four of the twenty-five top subprime lenders nationwide were not regulated by the CRA.
Finally, the banks and thrifts to which the CRA did apply made far fewer risky loans than the institutions to which it did not, precisely because they were subject to tighter regulations and supervision. Janet Yellen, the president of the Federal Reserve Bank of San Francisco, points out that independent mortgage companies issued subprime loans at more than double the rate of CRA-regulated institutions. And according to Aaron Pressman on businessweek.com, citing a study by the law firm Traiger & Hinckley, “CRA loans carried lower rates than other subprime loans and were less likely to end up securitized into the mortgage-backed securities that have caused so many losses.” Financial analyst Barry Ritholtz concludes “The CRA is not remotely one of the proximate causes of the current credit crunch, housing collapse, and mortgage debacle.”
As for Fannie Mae and Freddie Mac, they largely reacted to developments that they certainly did not initiate. Fannie and Freddie don’t directly issue loans but buy up mortgages from private lenders in order to allow them to lend more. Between 2005 and 2007, the two companies began buying up risky mortgages in a reckless fashion that led to their downfall earlier this year, but they didn’t create the underlying crisis. As Dean Baker of the Center for Economic and Policy Research point out: “Fannie and Freddie jumped into the junk mortgage market because they were trying to keep pace with the private issuers of mortgage-backed securities. Fannie and Freddie made a conscious decision to dive into the junk in order to protect their market share, which was being seriously eroded by the aggressive tactics of private giants like Citigroup and Merrill Lynch.” As Baker puts it, the two GSEs (Government Sponsored Entities) “were followers, not leaders. They didn’t cause the [housing] bubble and the subprime craziness. This train had already left the station. Fannie and Freddie’s crime was going along for the ride.”
It is also not true that most subprime loans were made to minorities or low-income borrowers. According to an industry report from ComplianceTech, the vast majority of subprime loans issued in 2006 were made to non-Hispanic whites and upper-income borrowers. In fact, fewer than 8 percent of subprime mortgages that year went to low-income borrowers, even though, as a study reported in the International Herald Tribune last year demonstrated, “America’s black and Hispanic borrowers were far more likely to be steered into high-cost subprime loans than other borrowers, even after controlling for factors such as income, loan size and property location.” In other words, far from being undeserving recipients of affirmative action, many minorities who should have received prime loans were channeled into the subprime market to increase the profits of unscrupulous lenders. So much for the notion of “predatory borrowing” (a term coined by right-wing economics professor and New York Times business columnist Tyler Cowen in an op-ed published at the beginning of this year).
Of course the racist scapegoating made its way into the U.S. presidential campaign, with John McCain picking up the attacks on the CRA as a way to divert attention away from the real causes of the crisis. As he told one reporter: “There were people who predicted that the Community Reinvestment Act might lead to reckless and unsound lending practices just to sort of fill a—you know, an amount of—I don’t like to use the word ‘quota,’ but certain percentages of a—of a home—of the bank’s lending practices.”
But the “reckless and unsound lending practices” were caused not by the CRA but by the workings of the capitalist system itself, unconstrained by any serious regulations. In response to the collapse of the stock market bubble in 2000, then Federal Reserve chairman Alan Greenspan slashed interest rates, leading directly to the creation of the housing bubble. That same year, Congress passed the Commodities Futures Modernization Act, which exempted complex financial instruments known as derivatives from regulation, with overwhelming bipartisan support. As Ritholtz notes, “By taking the refs off of the field and erroneously expecting market participants could self-regulate, the powers that be in D.C. gave the players on Wall Street enough rope to hang themselves with—which they promptly did.”
Back at the Federal Reserve, Alan Greenspan continued to throw gasoline on the fire. In 2004, in a speech to the Credit Union National Association, he told a standing-room-only crowd that “the household sector seems to be in good shape.” Explicitly praising the virtues of adjustable rate mortgages, Greenspan added, “American consumers might benefit if lenders provided greater mortgage product alternatives to the traditional fixed-rate mortgage.” Eager to rake in even greater profits, the lenders were only too willing to oblige.
As the housing bubble grew, private lenders with little or no government oversight began offering more and more loans with zero percent down payments, interest-only payment plans (which did not reduce the principal), and adjustable rather than fixed rates. The risk didn’t matter to them, because the mortgages were quickly sold off on the secondary market and then bundled into derivatives, which agencies like Moody’s, Standard & Poor’s, and Fitch rated as AAA. As property values continued to rise, mortgage companies switched to automated underwriting systems that allowed them to process large numbers of applications in very little time. They got so sloppy that sometimes they did not even verify borrowers’ income or payment history. One internal bank memo was titled “How to Get an ‘Iffy’ Loan Approved at JPM Chase.”
The frenzy continued because capitalism works like an extended game of chicken. If a lending institution was too cautious, it risked losing market share and profits to its more aggressive rivals, with the danger of being bought up or driven out of business. So the crazy shell game continued until the real estate bubble finally burst, bringing down the whole house of cards. What has failed is American-style capitalism itself, but right-wing politicians and pundits who have spent decades praising the virtues of the market can scarcely admit this now, making it necessary to search for scapegoats.
The divide-and-rule tactics that are being used today are following the same playbook described by Karl Marx in Britain in the 1870s. Marx compared the treatment of Irish workers in England to the racism directed toward “Negroes in the former slave states of the U.S.A.” He argued that conflicts between English and Irish workers were “artificially kept alive and intensified by the press, the pulpit, the comic papers, in short, by all the means at the disposal of the ruling classes. This antagonism is the secret of the impotence of the English working class, despite its organization. It is the secret by which the capitalist class maintains its power. And the latter is quite aware of this.” In nineteenth-century Britain, these tactics proved very successful. In twenty-first-century America, it’s up to antiracists to ensure that they don’t work again.