I just started reading "Freefall"by Joe Stiglitz(Nobel prize winner in economics) and he wrote about the conservatives in our country trying to blame the government and poor people for the entire financial collapse in 2008. They have difficulty blaming the financial markets for the great recession so why not go after the big, old government and the folks who have low incomes due to our nation's income disparity.Conservatives told us the government wanted to increase home ownership and the banks were just following orders. They blamed Fannie Mae and Freddie Mac(two private companies that had started as government agencies) and the infamous Community Reinvestment Act(CRA) which encourages banks to lend to undeserved communities. The CRA was started in the late seventies and I remember it well. Banks discriminated against poor people(mostly people of color) and red lined areas where they wouldn't give loans for any business or home. They actually circled areas and refused to give loans even when many of they citizens could pay. Everyone in that red lined area,regardless of income, was told to find other means to raise capital.The Bronx was falling apart at this time due to this strategy and discrimination. These areas were told "it's just business".As usual, the congress had to step in and encourage, through legislation, the banks to provide loans to people who were eligible under strict guidelines.
This litany of defenses is sheer nonsense. AIG's almost $200 billion bailout was based on derivatives(credit default swaps...see earlier blog)--banks gambling with other banks. The banks didn't need any push for egalitarian housing to engage in excessive risk taking.Nor did the massive over investment in commercial real estate have anything to do with government ownership policy.The default rates on CRA lending were actually comparable to other areas of lending. The most telling point though is that Fannie Mae and Freddie Mac's mandate was for "conforming loans", loans to the middle class. The banks jumped into sub prime mortgages,an area where Freddie Mac and Fannie Mae were not making loans at the time.
Advocates of home ownership meant permanent,long term ownership.The banks were putting someone in a home for a few months and then tossing them.They packaged these loans and securitized them with AIG insuring them. They didn't care if they could afford the high interest and transaction fees. No government official would have given the OK to predatory practices the banks practiced. Eventually,Fannie Mae and Freddie Mac(private companies with government guarantees) joined the fun and short lived profits by buying numerous securitized mortgages. With these purchases,they actually helped many of the banks from bigger losses.
More from Freefall in the days to come.
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