Get your money for nothin' and your houses for free!

Early on in this year's credit crunch, I started hearing about the Community Reinvestment Act and its effect on America's housing market. I started doing some research into this matter and man is my head spinning. I can't believe we let it go this long and we are now at the brink of the total collapse of the credit markets and NO ONE is asking to repeal the CRA. Let me start at the beginning and see if I can make this understandable. Much of the following information comes from a great paper by Vern McKinley who wrote about the CRA for the CATO Institute. McKinley has worked for The Fed, FDIC, Resolution Trust Corporation, and the Treasury Deparment. He seems like a qualified authority on the subject. I also found a lot of information on Wikipedia's entry titled Community Reinvestment Act.

Back in 1977, Sen. Proxmire (D-Wisc.) thought we needed to do away with the practice of "redlining" in granting loans. "Redlining" is the practice of denying loans or other services due strictly to someone living in a certain area of a city. On the surface, the idea of doing away with "redlining" is a good one. But the cautions we had from the beginning have come to fruition. The idea was to ensure that if a bank took deposits from a certain area of the city that they were giving back in the form of loans to people in that same community. McKinley states that, "Opponents of the bill feared that one day banks would be required to make unsound loans to meet their local credit quotas." Yes, ladies and gentlemen, there were in fact people aware of the dangers of this legislation waaaayyyy back in 1977! I suspect they could not have foreseen the levels to which the government was involved however. Let's move on.

So, ultimately the CRA (along with a battery of other legislation aimed at ending discrimination in home loans) was passed with a variety of government agencies tasked with enforcement. At this point, the banks were simply asked to provide paperwork to the various agencies detailing their level of community involvement. And conversely, the public was allowed to make comment on banks as well. This is similar to the way things are done in broadcasting. TV and radio stations are required to file certain paperwork and hold public hearings to show their community service to the FCC. The agencies would give the various financial institutions a rating based on the information they had as a result of the various filings. Enforcement would come from the agencies in the form of denying approval for mergers, acquisitions, etc. This went on for many years with little or no real enforcement, however.

So Sen. Proxmire wasn't satisfied. In 1989, at a public hearing, Sen. Proxmire said the inner-city neighborhoods were "starving for credit." As a result of these hearings, the agencies overseeing the CRA filed a joint policy statement strengthening enforcement of the CRA. After the requisite round of new legislation, the regulating agencies were now required to write an evaluation of the banks' CRA compliance. It wasn't enough to simply give them a rating, now we have to have a written evaluation. With all this attention on the CRA, the Fed decided it was time to flex their muscle. They denied their first bank acquisition! (Awwww, who's a good little regulatory agency, you're almost all grown up now!) Once the genie's been let out of the bottle, it's going to be hard to get that sucker back in. Now the federal government knows they can dictate the behavior of banks. (Just in case they were unclear on that issue)

In 1992, the Boston Fed undertook a study to find out what was causing the disparity in lending rates, with respect to race. It turns out that there is NO overt discrimination in lending. That, in fact a whopping 97% of minorities with the same credit as whites got the same loans. Despite this, there was still a great disparity in the number of loans. So OBVIOUSLY, the discrimination here is far more subtle than we realized. (It would have nothing to do with the disparity in incomes, would it? Hmmm, maybe we should address that issue.) So under the Clinton administration, they decided that there would be all new standards for complying with the CRA and enforcement would be much stricter. Enter Janet Reno and the Justice Department. Now, banks weren't just worried about satisfying the various regulatory agencies. Now they had to worry about being PROSECUTED!! Apparently, Janet Reno thinks that not giving loans to people who don't qualify is ILLEGAL! Her exact quote is this, "we will tackle lending discrimination wherever and in whatever form it appears. No loan is exempt, no bank is immune. For those who thumb their nose at us, I promise vigorous enforcement.” That my friends is a threat!

She backed up her threats by suing the banks in federal court and forcing them to comply with huge financial packages aimed at revitalising their local neighborhoods. The Clinton administration then started making proposals that were more quota based. So that no matter what conditions existed in the local community, they had to have a certain number of CRA loans to pass the Clinton Administration's strict standards. This was a sort of financial affirmative action. But don't take my words for it. Listen to HUD Secretary Andrew Cuomo talk about this affirmative action in a video discovered by Naked Emperor News. (At the end of the comments by Cuomo, there's a clip from Hannity's show giving a much more succinct history of the CRA.) What I find interesting in this video is Cuomo actually saying that the discrimination is so subtle, it's institutionalized.

So now you have the Clinton administration demonizing the banking industry and threatening them if they don't make all these bad loans. Not to mention the various community organizations (can you say ACORN?) that have started to sue the banks under the CRA (remember the part about the public being able to comment on the banks?). What are the banks supposed to do? So they start making all these bad loans but still have to find a way to make money. That's where Freddie Mac and Fannie Mae come in.

Freddie and Fannie are designed to buy mortgages, insure them, and pay the banks the value of the mortgage. They would then bundle these mortgages into morgage-backed securities and investors would invest in them. Freddie and Fannie would keep a fee for insuring them and everyone was happy. The problem was that they soon realized they were being saddled with too much bad debt. They couldn't keep up with the flow of these CRA loans because of the restrictions on them. So the restrictions were lifted and in 2000 Fannie Mae expected that 50% of their business was going to be CRA loans! 50%!! (I think we've found the source of the problem!) Now, mind you, not all of these loans end up in default. Just a larger percentage.

With home loans going out the door at a record pace, housing becomes in shorter supply, which artificially drives up the price. As these CRA loans started to default, the prices of the houses started to come down, and that reduced the incentive for people to try and work out a repayment schedule. The house they bought wasn't worth what they paid so how could they refinance? And the rest is history.

The best part is now that the banks have done what they were threatened to do, the phrase of the day is "predatory lending." Congress is trying to blame the banks for making all these bad loans. Well, during the Bush years (2000-present), Republicans in Congress have tried to reform the rules and put the power of lending back into the hands of the banks. But when the Republicans tried to INCREASE regulations on Fannie and Freddie, they were lambasted by House Democrats. Take a listen from this video posted by Naked Emporer News.

I briefly mentioned ACORN earlier. Their contribution to this mess shouldn't be overlooked. ACORN was suing the banks and lobbying Congress to get more of these loans in the hands of people who really couldn't afford them. One of the catch phrases you might hear in the videos is "affordable housing." Not sure if anyone is aware of this, but housing is only affordable if you can pay for it. Just being able to get a loan and move in is not the end of the story. Well one of ACORN's lawyers has become very famous recently. He's been on all the network news shows and made several appearances on talk shows and has been traveling around the country talking about his plans for the economy. YUP, you got it! Barack Obama is one of the lawyers who helped ACORN sue the banks. And now he's in charge of fixing this mess. Would I be too cynical to say that I don't think repealing the CRA is high on his list of "to do's?"

They just can't wait

Op-Ed Columnist - We Found the W.M.D. - NYTimes.com

Time For Him To Go

Well, I guess we know what the talk around the water cooler is at the New York Times. There seems to be a theme running through the op-ed page at this once proud journal. Unfortunately, their hatred for all things Republican/Conservative has overwhelmed them. Here you have two columnists dreaming about the new Obama posse. . .er I mean administration. Apparently, it's not enough for them to win, now they want to change the Constitution so they can get their guy in NOW, DAMN IT!!!

As you will see, they are very concerned about the looming financial crisis and what a horrible job Bush is doing handling it. They need Obama and they need him NOW, DAMN IT!!! Never mind that Bush has kept Obama totally in the loop, or that Obama's pick for Treasury Secretary has been intimately involved in the ongoing bailout strategy, even before he was nominated. No, they are completely blinded by their hatred for Republicans in general and Bush in particular.

Too me, they sound like a bunch of spoiled brats. They want their new toy for Christmas and they want Christmas to come in October. Friedman even goes so far as to suggest they suspend the big parties and the fancy coronation. . .er I mean inauguration and go straight to the swearing in. "Just get me a Supreme Court justice and a Bible," says Friedman. Well, in the immortal words of Kevin Spacey in that great movie "Midnight in the Garden of Good and Evil," "that is not going to happen - definitely NOT!" There is NO WAY the Dems are going to miss a bash like this. Think of all the great funk and R&B music we're going to get to hear this year!

To me, this hints at something far more ominous than the looming financial problems. These people are willing to set aside the Constitutional provision for the peaceful transition of power just to get their guy in a couple of weeks early. This is the problem with setting the government/President up as the be all/end all of their lives. Without the right person in office the economy will continue to flounder, they speculate. That is why it is so dangerous to have the government involved in the economy. It has failed everywhere it has been tried. The only fix for this economy is the painful process the free market will inevitably exact on these failing industries. No one is looking ahead to the brave new world we will have when the pain is over. Someone or something will have to take the place of these companies to provide the services or products that they do. We need to let these processes take their time and work their way through. Besides, I STILL don't think it's as bad as their telling us.

Dear President-elect Obama: Here's How to Get the Economy out of the Ditch - Knowledge@Wharton

Dear President-elect Obama: Here's How to Get the Economy out of the Ditch - Knowledge@Wharton

This article was sent to me by my dear wife. I think I agree with her that there are some good ideas that should be followed. They are advocating tax cuts on both the marginal tax rates and corporate tax rates. There is one caveat though. The Wharton economists hit on the problem themselves when they say, "Government could do a lot of harm if it gets involved in ways that aren't perfect." Since there's no way to know if government is doing the right thing until the damage is done, throwing a lot against the wall and seeing what sticks is not a very good idea.

Let's look at recent history. This year we had rebates sent out to a selection of American taxpayers, and a $700 billion bailout package passed by Congress. Last time I checked, no one is dancing in the streets claiming, "Hooray! The bailout worked!" Quite the opposite. The banks who got the money sat on it. The people who got rebate checks spent it mostly on gasoline. Meanwhile, the stock market is at an all-time low (not really, but I thought a little hyperbole was appropriate here) and the only sector of the economy that is still flourishing is the oil companies, despite oil prices going down by more than 50%! If anyone is a believer in the saying "Past is prologue" need only look at recent history to see how we should address the current situation.

The Wharton economists suggest some form of tax cut or rebate for middle-income taxpayers, "without driving the federal deficit to unmanageable depths." I hope they aren't suggesting that tax cuts cause deficits. EVERY time we have cut taxes in this country over the last 50 years, revenue has increased. The problem has always been a Congress who can't spend the money fast enough. Of course, that is an oversimplification of why deficits have gone up. There have been some good reasons for allowing the deficits to rise due to issues of national security and the like. For example, in the 80's, Reagan was trying to rebuild the military and started the arms race believing the Soviets wouldn't be able to keep up with our spending due to the limitations of their economic system. He was right and we won the Cold War. Their economy collapsed while ours flourished. Many economists refer to the time from the middle to late 80's as the longest period of peacetime recovery in history. In this case, these deficits would fall under what the Wharton economists refer to as, "perfectly rational to run a deficit to get through hard times." Reagan inherited a flagging economy and used his economic training (yes, Reagan was an economist) to do the right thing and unleashed the power of the American economy: capitalism! He reduced the marginal taxes from a high of 70% down to 28%. This is the easiest way to "Do No Harm" as the Wharton economists warn. You put the power in the hands of the American people.

Just within the last few years, Bush lowered taxes for everyone and lowered the capital gains tax. This encouraged investments and as a result, the value of the stock market DOUBLED! between 2001 and 2007. Obviously, most of those gains are gone as a result of the current crisis but there is no mistaking the dramatic effect tax cuts have on the economy. In fact, this chart shows the dramatic rise in revenues after the 2003 tax cuts.

Tax cuts encourage growth. To me, that's an axiom. Right now, Ireland is experiencing tremendous success with their national experiment of lowering corporate taxes to 12.5%. Compare that to 35% here in the US. If we as a nation accepted the notion that tax cuts generate revenue and encourage growth, we could put to bed the notion that taxing those who create wealth will help us out of our economic slowdown. Then we could concentrate on solving our other economic issues.

Time for a change?

Well the election is over and it's time for evaluation and anticipation. First, obviously, my election prediction didn't come true. Sen. McCain had every chance to grab this election by the throat and he simply didn't have the killer instinct. He is definitely a gentleman, but he is just as certainly not the President. However, I don't want to dwell in the past. I believe that things happen for a reason and time will only tell what the reasons are. Frankly, I believe that on election day, over 125 million Americans went to the polls and nearly 53% of them said, "Ahh , what the hell. Let's let this guy try. He can't be any worse, can he?!?"

Let's put this in perspective though. While 66.5 million people voted FOR Obama, over 55 millions voted AGAINST him. When the last two elections were close, we heard the mantra of "minority rights" when it came time to make policy. We will see if that is of great concern now that the Dems are no longer the minority.

It is time though to reflect on the historic nature of this election. All elections are historic for one reason or another, but in this election, clearly the history is in the race of the candidate. (Warning: the following may be deemed politically incorrect and may cause uncontrollable accusations of racism against your humble blogger. Read at your own risk.) First, this is a tremendous achievement and we should all be proud that a man of African heritage has just as much opportunity to reach the highest office in the land as anyone else (with the possible exception of women. Oops, did I say that out loud?!?). A couple of thoughts on this point: does this mean that racism is dead in America now? Simple answer: No. What it means is that racism has been relegated to the underclass. While for years it was mainstream policy, it has now taken its rightful place in the "ash heap of history." (a Reagan quote) Can this kind of success be extrapolated to other Americans of African descent in less notable positions in our society? The simple answer to that is an emphatic: YES! For years I have believed that we had overcome the polarization of past mistakes and that anyone could be rewarded in this society if they were only willing to work hard and get a good education. (Sometimes, working hard is enough) Signs of this kind of success are all around us. Now we have ultimate proof. Will blacks still face racism? Yes. Just as women face sexism, older folks face ageism, fat people face fatism, etc. We all have our crosses to bear, but they can be overcome! (Except for ugly people, there's no hope for them! LOL) My lingering question though is this: why do we celebrate the blacknes of people like Barack Obama, Tiger Woods, and Halle Berry and ignore their other influences. How is saying that Barack Obama is the first black President any different than saying he's just another white guy! After all, he is half black AND half white. Why ignore his whiteness? Why is Tiger Woods considered the most successful black golfer when he's also the most successful white golfer, and the most successful Indian golfer, AND the most successful asian golfer. Aren't those other influences important? Halle Berry wasn't necessarily the first black woman to win the Oscar for Best Actress if you ignore her blackness the way you're ignoring her whiteness. Then she's just another in a long line of white women who have won the award. How 'bout we just do what Martin Luther King said and just judge people on the content of their character and not the color of their skin. Let's see if Obama will set policy with this criteria over the next four years.

Now it's time for a little game, sort of like Where's Waldo? See if you can find the black guy among Barack Obama's economic advisors. Is he here? How 'bout here? No? Ok, how 'bout here? Ok, that was too easy! Amazing how much "change" looks just so familiar.