Sunday, April 24, 2016

The CRA Conspiracy Theory and Why It is Hooey

Did Bill Clinton cause the housing bubble?   If so, why did George Bush do nothing in eight years in office to prevent it from bursting?  The answer is, of course, Bill Clinton didn't cause the housing bubble.

I my last posting, I talked about Real Estate market bubbles - and they do exist.  You may recall one or two people losing their life savings a few years back.  Or, right, that was more than 18 months ago, so it never happened.

There is one thing that didn't cause the market meltdown of 2008, and that was the so-called "Community Re-Investment Act" passed under the Clinton Administration more than a decade earlier.

In case you haven't heard this crazy theory, it goes like this.   In 2008, the American financial market collapsed, reaching its nadir right about the time President Obama was inaugurated in February 2009  (and the markets have been going up since!).  Gas was $5 a gallon right before the election, and George Bush had to push through a bailout program (not Obama, Bush!) to keep the economy from falling apart entirely.   Eight years of Bush deficits, tax cuts, and laissez-faire regulatory approaches had come home to roost.  And it didn't look good for the Republicans, who took a drubbing in the 2008 elections.  So they had to come up with a story.

It took a few years, but they finally invented one, which started making the rounds around 2011 or so.   According to them, the problem wasn't that Americans were high as a kite on inflated real estate values and were buying and flipping and over-mortgaging themselves.   Oh, no, we can't say that, because those are the core middle-class and upper-middle-class white voters they want to court with promises of the low taxes which caused half the problems with deficit spending.

Similarly, we can't blame Wall Street or the Banks for making shitty "liar's loans" with nothing down and optional payments and then packaging them as grade-A mortgage-backed securities insured by reverse default credit swaps.  No, no, we can't do that, as that would mean offending the donor base of the GOP.

So.... who to blame?   Well, duh, black people, of course!  And Bill Clinton (boo! hiss!) because we all hate him, right?   So they dig up this "Community Reinvestment Act" that was passed to prevent banks for "redlining" neighborhoods and refusing to write mortgages in poor neighborhoods.   According to this Carl Rove Approved Fox News Talking Point(tm), the problem was all these black folks buying their inexpensive homes and then defaulting on their mortgages.

There are a number of holes in this story, of course.  To begin with, think about all the weepy stories the media put on the television from 2011-2014 about homeowners losing their homes.   How many of them were black?  Yea, that.  The poster boy for being "forced from your home" was usually a middle-class white couple who over-extended themselves.  Like these folks, for example.

And there was outright fraud.  Not on the part of the banks, but by organized rings of criminals who were buying and selling homes to straw-men buyers and sellers and then profiting the proceeds of the inflated prices (all paid by the banks).   It is a fairly complicated scam, and I tried to explain it in this posting.   Most people don't get it.  They think the banks committed the fraud somehow - when in fact, they lost their shirts on these fraudulently obtained loans.

You see, it wasn't black folks getting the liar's loans and buying million-dollar (or even half-million-dollar) homes, but rather middle-class people like you and me - the kind the GOP wants to court.   The folks I saw on the ground in Ft. Lauderdale playing the buy-and-flip game were white as a ghost.   And this is not unexpected - we white folks make up about 70% of the country.

Warren Buffet said it best:

"...there were a vast number of things that contributed to it.   The basic cause, you know, embedded in psychology - partly in psychology and partly in reality in a growing and finally pervasive belief that house prices couldn’t go down and everyone succumbed –- virtually everybody succumbed to that. But that’s –- the only way you get a bubble is when basically a very high percentage of the population buys into some originally sound premise and - it’s quite interesting how that develops - originally sound premise that becomes distorted as time passes and people forget the original sound premise and start focusing solely on the price action.

So every - the media investors, the mortgage bankers, the American public, me, my neighbor, rating agencies, Congress - you name it - people overwhelmingly came to believe that house prices could not fall significantly.  And since it was biggest asset class in the country and it was the easiest class to borrow against, it created probably the biggest bubble in our history." FCIC Interview of Warren Buffett, May 26, 2010

But the GOP came up with a more compelling narrative - blame the black folks.   Certain white folks like to hear this narrative - that "all their tax dollars" are going to pay ungrateful blacks who are "welfare queens" for life, even though President Clinton signed into law a welfare reform bill that made it impossible to collect welfare for more than five years.

The problem with the Community Reinvestment Act narrative is that it fails to address one salient point:  It was passed during the Clinton Administration, and the Bush Administration had over eight years to address this issue, if it indeed was one.  But they didn't.  And today, it still is the law, but for some reason, we are not seeing huge defaults by black people today - just as we didn't in the past.   It is just a made-up story so white folks can blame blacks and Democrats for what is essentially a problem created largely by middle-class white folks, namely the insane greed people had over housing - just as in Thomas Wolfe's time.

The other problem with the story is that it only appears on right-wing conspiracy sites and even then, only a few years after the Real Estate meltdown.  For some reason, no one in the GOP saw this coming until it was too late, and even then, not until about three years after the nadir.   Sorry, but I don't buy it.  It is just a story, told to people to blame Democrats for the horrific Bush Presidency - where we invaded the wrong country, rang up a shitload of debt, and then collapsed the economy - and in the process created ISIS.  Even George Bush seems embarrassed by his own Presidency.  You should be too.

(And yes, Obama has rung up even more debt since then - but he inherited a destroyed economy.  George Bush inherited the budget surpluses of the Clinton era.  What was his excuse?)

Yet I know a lot of people who try to sell me this story, convinced it was true, even though they really weren't "there" in the market and saw what was going on firsthand.   All they know is, they over-mortgaged their house and now are upside-down on the loan, and it is a lot more convenient to blame black people for this mess than their own greed and stupidity in over-mortgaging their own homes.

And maybe the same thing will happen in Canada.   If the Chinese economy slows down, maybe some Chinese will sell their houses - or walk away from over-mortgaged nightmares.   And we can blame the yellow man for our own greed and stupidity.   Hey, why not?  It is easier than blaming ourselves for our own malfeasance.

No one put a gun to anyone's head and said, "Buy this overpriced house, even though it is cheaper to rent it!"

No one put a gun to anyone's head and said, "Take out this liar's loan with optional payments and a interest reset!"

No one put a gun to anyone's head and said, "Take out a second or third mortgage and refinance your house to pay off short-term debts!"

No one forced middle-class Americans to do these things.  It was the conspiracy of 330 million people who all thought their houses were now gold mines and they were all going to be rich - without thinking about how that could work out when all their neighbors believed the same thing.

And maybe in Canada, the same thing is going on right now.