October 10, 2010 |A street sign marks Wall Street, New York’s financial hub. US President Barack Obama on Saturday urged senators to pass a comprehensive overhaul of the US financial system that would include a new agency to protect consumers from Wall Street’s excesses.Photo Credit: AFP/File – Timothy A. ClaryLIKE THIS ARTICLE ?Join our mailing list:
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AlterNet is proud to present this excerpt from senior writer Joshua Holland’s new book, The Fifteen Biggest Lies about the Economy (And Everything Else the Right Doesn’t Want You to Know about Taxes, Jobs, and Corporate America).
Perhaps the most pernicious right-wing lie of late is that the Wall Street hustlers who came close to bringing the global economy to its knees in 2008 were just innocent victims of government-sponsored programs that forced them to lower lending standards in a misguided effort to increase home ownership among the poor (read: dark-skinned).
It’s an alluring story line for those who are ideologically predisposed to blame “inner city” people instead of MBAs in suits roaming the executive suite. It’s also patent nonsense—a Big Lie that has nonetheless become an object of almost religious belief for some on the Right.
Jeb Hensarling, a notably obtuse Republican back-bencher from Texas, wrote that “the conservative case is simple”:
The [Community Reinvestment Act] compelled banks to relax their traditional underwriting practices in favor of more “flexible” criteria. These subjective standards were then applied to all borrowers, not just low-income individuals, leading to a surge in lower-quality loans. . . . Blame should [also be] directed at Fannie [Mae] and Freddie [Mac], and their thirst for weaker underwriting to help meet their federally mandated “affordable housing” goals. . . . This distortion has had seismic consequences as market participants, wrongly believing GSE-touched loans were sanctioned by the government and therefore safe, began to rely on a government mandate as a substitute for their own due diligence.
This tale has everything a conservative could want—Big Government overreach, well-intentioned but out-of-touch liberals causing devastating unanticipated consequences with their social tinkering, and even their favorite bogeyman, ACORN, and other low-income housing advocates that have pushed for increased home-ownership among the poor.
The narrative gained steam with an influential op-ed in the Wall Street Journal by Peter Wallison, a fellow with the American Enterprise Institute (who, according to his bio, “had a significant role in the development of the Reagan administration’s proposals for the deregulation of the financial services industry”). Wallison found that “Almost two-thirds of all the bad mortgages in our financial system, many of which are now defaulting at unprecedented rates, were bought by government agencies or required by government regulations.”
The data shows that the principal buyers were insured banks, government sponsored enterprises (GSEs) such as Fannie Mae and Freddie Mac, and the FHA—all government agencies or private companies forced to comply with government mandates about mortgage lending.
The sleight-of-hand here is pretty straightforward. The U.S. government regulates lenders and provides deposit insurance to banks, which means that a large chunk of all home loans—good, bad, and in between—have some connection to a government program. It’s like saying that the government is responsible for pollution because the EPA regulates industrial emissions.