NY Times and the housing crisis

The housing crisis according to the NY Times.

It hurts the immigrants.

It hurts the elderly.

But how did it happen? Certainly there are numerous writers and editors at the NY Times, but the overall impression I received after reviewing articles for the past hour is that the Republicans are at fault for having lax oversight of Fannie Mae and Freddie Mac. In an editorial this past September, the Editorial Board felt it compelling to blame Bush and the Republicans for the current economic mess and gave the Democrats a complete pass.

Now, I have no love for the Republicans and agree with Professor Thompson on the decline of the party. They are no longer the small government leaning, protector of individual rights that they once were (or at least approached better than any other party). However, us to blame the Republicans for the entire housing bubble begs the question, what policies led to the crisis.

While I am no expert on the current crisis nor an expert in economics, I do understand the basics well enough to realize that cause and effect can be traced if you follow the bouncing ball (in this case the historic trail).

So what is the major problem today? Too many defaults on home loans. And as the number of defaults increase, the housing prices continue to fall. As housing prices fall, more home owners with low down payments realize their home values are lower than their mortgage. Some of these home owners go into default because they cannot afford to sell.

These risky loans were not always available. Traditionally, banks stayed away from these loans. What changed?

As many liberals argue, some reductions in banking regulation during Bush's administration caused changes in banking practices, which ultimately led to today's financial mess. However, this does not make sense. In all the history of business markets, I have never witnessed a total collapse of an industry due to deregulation. At worst, I have seen problems arise when its only a partial deregulation, causing conflicting pressures on industry that takes some years to figure out, as during the energy crisis in California a few years back. But never have I witnessed an industry collapse due to total deregulation. In fact I have seen just the opposite.

Did, in fact, the partial deregulation conflict with existing policies that perpetuated the financial collapse? The deregulation helped spur growth in banks initially, but the banks were still being pressured with policies established years earlier. What were they? The answer lies in the NY Times stories.

Fannie Mae Seeks to Ease Home Buying 1994
"President Clinton is tentatively scheduled to attend the announcement. The Administration is urging that loans be more broadly available to poor and lower-middle-income Americans."

Fannie Mae eases credit to aid mortgage lending 1999
"Fannie Mae, the nation's biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people and felt pressure from stock holders to maintain its phenomenal growth in profits."

Indeed, going back even further, the Community Reinvestment Act (CRA) of 1977 encouraged more lending to poor and minorities. Essentially, affirmative action for mortgages. NY Times has gone to bat for this act, and here, and here.

To be clear, I think it is stupid for banks to ignore qualified minorities and poor individuals from obtaining mortgages. Its the bank's mistake to make, but stupid none-the-less.

However, CRA pushed banks to make riskier loans than they normally do. It encouraged banks to make loans to applicants that did not meet minimal mortgage standards. And while there were safe guards established to limit the effects of this increased risk, the banking culture changed. Banks began taking greater and greater risks, with the thought that Fannie Mae and Freddie Mac would cover their butts if the housing market started to crumble. But that changed with the meltdown of Fannie Mae and Freddie Mac. Now the banks' saftey net was destroyed, and the risky loans they were habitated into taking starting eating them from the insides. And the rest is history.

The NY Times would like to claim that the Republicans are to blame for everything. They are wrong, although I will not give the Republicans a complete pass. They could have tried to overturn CRA. In the end, the fault lies with the failed philosophy of the politicians, a mixture of altruism, tribialism, and socialism. Both Republicans and Democrates fall victim to theses philosophies.

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