Frank's fingerprints are all over the financial fiasco

Frank's fingerprints are all over the financial fiasco
By Jeff Jacoby , Globe Columnist | September 28, 2008

'THE PRIVATE SECTOR got us into this mess. The government has to get
us out of it."

That's Barney Frank's story, and he's sticking to it. As the
Massachusetts Democrat has explained it in recent days, the current
financial crisis is the spawn of the free market run amok, with the
political class guilty only of failing to rein the capitalists in. The
Wall Street meltdown was caused by "bad decisions that were made by
people in the private sector," Frank said; the country is in dire
straits today "thanks to a conservative philosophy that says the
market knows best." And that philosophy goes "back to Ronald Reagan,
when at his inauguration he said, 'Government is not the answer to our
problems; government is the problem.' "

In fact, that isn't what Reagan said. His actual words were: "In this
present crisis, government is not the solution to our problem;
government is the problem." Were he president today, he would be
saying much the same thing.

Because while the mortgage crisis convulsing Wall Street has its share
of private-sector culprits they weren't the ones who "got us into this
mess." Barney Frank's talking points notwithstanding, mortgage lenders
didn't wake up one fine day deciding to junk long-held standards of
creditworthiness in order to make ill-advised loans to unqualified
borrowers. It would be closer to the truth to say they woke up to find
the government twisting their arms and demanding that they do so - or
else.

The roots of this crisis go back to the Carter administration. That
was when government officials, egged on by left-wing activists, began
accusing mortgage lenders of racism and "redlining" because urban
blacks were being denied mortgages at a higher rate than suburban
whites.

The pressure to make more loans to minorities (read: to borrowers with
weak credit histories) became relentless. Congress passed the
Community Reinvestment Act, empowering regulators to punish banks that
failed to "meet the credit needs" of "low-income, minority, and
distressed neighborhoods." Lenders responded by loosening their
underwriting standards and making increasingly shoddy loans. The two
government-chartered mortgage finance firms, Fannie Mae and Freddie
Mac, encouraged this "subprime" lending by authorizing ever more
"flexible" criteria by which high-risk borrowers could be qualified
for home loans, and then buying up the questionable mortgages that
ensued.

All this was justified as a means of increasing homeownership among
minorities and the poor. Affirmative-action policies trumped sound
business practices. A manual issued by the Federal Reserve Bank of
Boston advised mortgage lenders to disregard financial common sense.
"Lack of credit history should not be seen as a negative factor," the
Fed's guidelines instructed. Lenders were directed to accept welfare
payments and unemployment benefits as "valid income sources" to
qualify for a mortgage. Failure to comply could mean a lawsuit.

As long as housing prices kept rising, the illusion that all this was
good public policy could be sustained. But it didn't take a financial
whiz to recognize that a day of reckoning would come. "What does it
mean when Boston banks start making many more loans to minorities?" I
asked in this space in 1995. "Most likely, that they are knowingly
approving risky loans in order to get the feds and the activists off
their backs . . . When the coming wave of foreclosures rolls through
the inner city, which of today's self-congratulating bankers,
politicians, and regulators plans to take the credit?"

Frank doesn't. But his fingerprints are all over this fiasco. Time and
time again, Frank insisted that Fannie Mae and Freddie Mac were in
good shape. Five years ago, for example, when the Bush administration
proposed much tighter regulation of the two companies, Frank was
adamant that "these two entities, Fannie Mae and Freddie Mac, are not
facing any kind of financial crisis." When the White House warned of
"systemic risk for our financial system" unless the mortgage giants
were curbed, Frank complained that the administration was more
concerned about financial safety than about housing.

Now that the bubble has burst and the "systemic risk" is apparent to
all, Frank blithely declares: "The private sector got us into this
mess." Well, give the congressman points for gall. Wall Street and
private lenders have plenty to answer for, but it was Washington and
the political class that derailed this train. If Frank is looking for
a culprit to blame, he'll find one suspect in the nearest mirror.

Jeff Jacoby can be reached at jacoby@xxxxxxxxxx

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What's with the DOJ? If Frank, Dodd and the rest
of the lying greedy bastards were Republicans,
the congress would be scrambling to every
microphone to demand a special prosecutor look
into these unsavory louts.
.

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