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Instability in the financial markets, corporate
welfare and shameless race-baiting

By Scott Tibbs, October 9, 2008

Last month, as Republicans and Democrats were "working together" (which always worries me) on a measure to provide $700 billion in corporate welfare to bail out failed financial institutions, I came across a couple articles that laid the blame for the financial instability on one flawed policy of the Clinton Administration, changes made to the Community Reinvestment Act. This policy encouraged more home loans, and many loans went to people who could not afford to pay them back. The defaults on these loans have been at least partially to blame for the volatility in the financial markets that we are witnessing at the moment.

The bailout itself was troublesome for a lot of reasons that have been explored in detail elsewhere and articulated by conservatives in the U.S. House of Representatives who were critical of the plan. In general, when Republicans and Democrats start "working together" on a significant matter of public policy (especially one as expensive as this one) taxpayers should worry that we are about to get hosed by Washington.

When I posted the articles on a local community forum, Greg Travis (husband of failed Monroe County Commissioner candidate Sophia Travis) accused me of "racism" and has been squealing about my alleged "racism" ever since. This is little more than character assassination from someone who claimed to have looked up property ownership records nearly a decade ago and then questioned my credibility on issues surrounding property rights when he found that I did not (at the time) own property.

The "racism" smear is laughable. I'm not racist, and Greg Travis (husband of failed Monroe County Commissioner candidate Sophia Travis) knows it. His screeching about it is pure partisan desperation with personal vendetta mixed in. For government to encourage the banking industry to give loans to people who can't pay them back, regardless of skin pigmentation, is bad economic policy. It is sad that Travis would make a racial issue out of it, but it is always easier to demonize the opposition than honestly deal with a public policy issue.

It is a sad commentary on the state of political discourse in this country when one cannot discuss matters of public policy with even the slightest connection to race without accusations of "racism" being thrown about. This kind of shameless race-baiting enables and gives cover to real racists, because people who hear repeated false claims of "racism" become weary and distrustful of future claims. For the sake of little more than political gain and personal vindictiveness, Greg Travis (husband of failed Monroe County Commissioner candidate Sophia Travis) has used a tactic that enables racists and minimizes the experiences of those who have truly been the victim of racism. Greg Travis (husband of failed Monroe County Commissioner candidate Sophia Travis) should be ashamed of himself, but of course he is not. After all, this is typical behavior for him.

The two articles in question, plus a third from the Wall Street Journal, are quoted and linked below.

It all started, innocently enough, in 1994 with President Clinton's rewrite of the Carter-era Community Reinvestment Act.

Ostensibly intended to help deserving minority families afford homes — a noble idea — it instead led to a reckless surge in mortgage lending that has pushed our financial system to the brink of chaos.

Fannie and Freddie, the main vehicle for Clinton's multicultural housing policy, drove the explosion of the subprime housing market by buying up literally hundreds of billions of dollars in substandard loans — funding loans that ordinarily wouldn't have been made based on such time-honored notions as putting money down, having sufficient income, and maintaining a payment record indicating creditworthiness.

With all the old rules out the window, Fannie and Freddie gobbled up the market. Using extraordinary leverage, they eventually controlled 90% of the secondary market mortgages. Their total portfolio of loans topped $5.4 trillion — half of all U.S. mortgage lending. They borrowed $1.5 trillion from U.S. capital markets with — wink, wink — an "implicit" government guarantee of the debts.

Source: Investor's Business Daily, September 22, 2008

Many monumental errors and misjudgments contributed to the acute financial turmoil in which we now find ourselves. Nevertheless, the vast accumulation of toxic mortgage debt that poisoned the global financial system was driven by the aggressive buying of subprime and Alt-A mortgages, and mortgage-backed securities, by Fannie Mae and Freddie Mac. The poor choices of these two government-sponsored enterprises (GSEs) -- and their sponsors in Washington -- are largely to blame for our current mess.

How did we get here? Let's review: In order to curry congressional support after their accounting scandals in 2003 and 2004, Fannie Mae and Freddie Mac committed to increased financing of "affordable housing." They became the largest buyers of subprime and Alt-A mortgages between 2004 and 2007, with total GSE exposure eventually exceeding $1 trillion. In doing so, they stimulated the growth of the subpar mortgage market and substantially magnified the costs of its collapse.

It is important to understand that, as GSEs, Fannie and Freddie were viewed in the capital markets as government-backed buyers (a belief that has now been reduced to fact). Thus they were able to borrow as much as they wanted for the purpose of buying mortgages and mortgage-backed securities. Their buying patterns and interests were followed closely in the markets. If Fannie and Freddie wanted subprime or Alt-A loans, the mortgage markets would produce them.

Source: Wall Street Journal, September 23, 2008

The painful readjustments in the housing market are a direct result of failed government policies that fueled the housing bubble. A political bias that favored home ownership (through the tax code and programs such as the Community Reinvestment Act, coupled with the implicit — now explicit — federal guarantee of the government-sponsored enterprises Fannie Mae and Freddie Mac, led to a housing boom fueled by loans that were often not worth the paper they were written on. At the same time, ratings agencies, under the auspices of the SEC, vouched for the quality of these loans, allowing them to be bundled into new financial instruments and sold around the world. The Federal Reserve aided and abetted these distortions with loose monetary policies that distorted price signals, artificially boosted investments in the housing sector, and ultimately throughout the financial services sector as mortgages were securitized and repackaged for sale across the globe.

Despite the publicly voiced concerns of many of us — both in and out of government — about Fannie and Freddie, the GSEs’ defenders in Congress turned a blind eye to the inherent weaknesses in the system. The financial system held together as long as housing prices continued to increase. As the housing market weakened, it became evident that the value of mortgages underlying the new financial instruments was too low to meet the necessary financial obligations. As the true market value became evident, the market for these mortgage backed securities (originated by Fannie and Freddie) dried up as investors triggered a flight to safety. Considering the fact that many of these firms were leveraged by as much as 30-to-1, the retrenchment was severe.

Source: National Review, September 29, 2008