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Friday, October 10, 2008

Countering the Liberal Meme on the Mortgage Crisis

The liberal meme on the mortgage crisis is best verbalized by Barack Obama. Often in debates, he proclaims that the current financial meltdown is the final verdict on eight years of disastrous economic policies. This is one of those statements that works well politically but it wouldn't stand up to any sort of significant scrutiny. For instance, President Bush inherited an economy on the brink of crisis. His tax cuts turned that economy from the brink of crisis toward a recovery in remarkable fashion. Second of all, Fed policy during Bush's administration has been disastrous. Essentially, the liberal meme is that this crisis occurred because the Bush administration abhorred any and all regulation and he allowed greedy capitalists to run wild with no supervision and the result is the mess we have now. As such, this crisis proves, once and for all, that regulations are good not bad, and that free markets must be contained and controlled vigorously by a central government.

This meme falls apart under any sort of scrutiny. First, mortgages are among the most regulated industries anywhere. Anyone who has ever closed on a property knows all too well just how regulated they are. Closing documents number in the hundreds, and that's the closing documents. There are almost thirty documents to sign prior to closing. All of those signatures happen because of a regulation that banks must follow. If there are any more regulations in mortgages, it will take borrowers days not hours to close on a loan. Of course, borrowers only see a small fraction of all the regulation the industry imposes on the professionals that work in it. To say that the mortgage crisis started because of deregulation in the mortgage industry is to show shocking naivete to how the business operates.

In fact, the only specific form of deregulation that any liberal can point to is the 1999 bank deregulation law. How, I would ask, did bank deregulation cause the mortgage crisis? To this they have no answer. Bank deregulation didn't cause sub prime entities to loosen their standards. The two things are separated. In fact, most of those that scream about this 1999 legislation have no idea what it did. If anything, what the 1999 legislation did is help turn a mortgage crisis into a financial services crisis. That's because by bringing down the proverbial wall between banks and other financial institutions, it allowed more players into the mortgage market. There is other evidence that deregulation poured gasoline on this crisis. Robert Novak details how the unregulated credit swaps market created a sort of shadow banking system. All of these forms of deregulation allowed for bad loans to spread like a cancer. They didn't create the bad loans in the first place.

What allowed for these bad loans to be created was not deregulation but rather a lack of enforcement. Most of these so called toxic loans are fraudulent. Whether it is made up income, assets, living status, or rental income, these loans were done under false pretenses, en masse. There needs to be no new regulation to outlaw fraud. That was always illegal. It was however not enforced. For this, the Bush administration deserves plenty of blame. Yet, if liberals make this about enforcement and oversight, then they will also have to admit that Barney Frank, Chris Dodd, et al looked the other way while Fannie/Freddie continued to make increasingly risky investments and didnt' oversee them. As such, trying to pin the blame on one party, if the blame is a lack of enforcement, is disingenuous.

This brings me to my final point about the viability of free markets. If this was a lack of enforcement of basic honesty, in the form of fraud, then it is not only unfair but wrong to blame the free market and unfettered capitalism for this. No market, free or otherwise, could possibly function properly when it is inundated with fraud on a mass scale. Of course, the free market for real estate blew up. It was infiltrated with an obscene amount of fraud. All those that looked the other way while it happened must be held responsible for its materialization. Yet, that doesn't mean that this crisis is proof that free markets can't function without strict government oversight. What it means is that even free markets demand honesty from its players. Recognizing that this crisis was caused, as its nexus, by fraud is vitally important. Folks like Barack Obama proclaim that this proves we need a 21st century regulatory system. We don't. All we really need is a renewed commitment to the basic tenets of every century's regulatory framework. That is that fraud is unacceptable and must be prosecuted vigorously.

For fairness, here is how I challenge the meme for the opposite ideology.

Finally, for a detailed account of how we got into this mess check out this link.


todd anthony said...

I like your article, but I think too that you leave out the dangers of too much regulation. As you said, it wasn't deregulation that placed us in this mess. Instead, it was pressure from LEFT-WING groups like ACORN and La Raza on financial institutions to completely dismiss all good banking practices and lend money to those with bad credit histories and insufficient income to make mortgage payments. Sadly, a significant number of these people were minorities. Nevertheless, they couldn't pay their bills. The roots of the subprime lending crisis lies in the Carter-sponsored Community Reinvestment Act of 1977, then it's its retooled version supported by Bill Clinton.

todd anthony said...

With that said, you get my vote :)


mike volpe said...

I'm not going to give a long answer however I debunk your assertion in my article debunking the conservative meme. The idea that this was created because ACORN pressured banks to do sub prime mortgages is absurd. ACORN's role in this mess is minute, and Conservatives inflated not for truth but for political partisanship. The CRA played a tiny role in this mess as well. All of these things I address in my piece attacking the Conservative meme of folks like you.

todd anthony said...

Ah, "folks like me."

Coming from a liberal, that's patently funny, especially when "people like you" chide "people like me" for stereotyping.

Tell me again how you know that groups like ACORN played miniscule roles? How is this possible? Also, can you tell me the ratio of low income homeowners to foreclosures? I'm assuming this was all predatory lending, right? The amount of mortgage counseling, ESPECIALLY liberal funded mortgage counseling is mind-boggling.

I love how liberals, when dissent exists, either attempt to stifle opposing viewpoints OR, instead of backing up their claims with facts, resort to pre-school tactics, such as brow-beating, name calling, etc...ultimately tactics they purport to abhor.

Nice try guy.

I'm curious how you can support the notion proffered by your liberal heroes (e.g. Barney Frank, Chris Dodd, Barry Obama) that the mortgage industry was in good working order, yet it was REPUBLICANS (see: George Bush and John McCain) that called for regulation.

mike volpe said...

That's funny, Todd, for two reasons. First, you just got done complimenting me and telling me how great my article was but that was before I dared to disagree with you. Second of all, you claim I am a liberal. If you read any of my site you would know I am quite the Conservative. Though, I am also a mortgage broker and thus, I don't need anyone's talking points to tell me how all of this got started because I was there.

Sub prime didn't explode because ACORN forced banks to do risky loans. That is nonsense that pundits have discovered, most of which hadn't heard of fannie mae/freddie mac or the Community Reinvestment Act until a couple of months ago.

Sub prime exploded because Greenspan dropped rates so excessively in 2001-2003 that banks became flooded with cash, which they borrowed from the Fed and each other. Since real estate was moving, and it was the only thing moving at the time, the banks put all this new cash in real estate, or mortgages. Only they had so much new money, that they had more money than loans. As such, new loans were created and the monster formed.

Anonymous said...

Certainly, the media have been fueling inaccurate information about the financial crisis. But neither party is innocent.

Conrad Bibby said...

One question, Mike, and it's not merely rhetorical:

You say that the only example of deregulation the liberals can point to is the '99 law. But how does that support BHO's claim that this crisis was the result of Bush's failed policies over the last 8 years? Bush wasn't president until 2001. If the '99 law was that central to the problems we're facing today -- which I understand you dispute -- then aren't the liberals pointing the finger at themselves?

mike volpe said...

I think liberals will say that it was Phil Gramm that lead the charge for this bill and conveniently forget that Bill Clinton passed it. That's one of many reasons why blaming deregulation is asinine.

Bush has plenty of blame but it isn't deregulation but allowing a total lack of enforcement. Remember how for years, he proclaimed that home ownership was at all time highs in his Presidency, well that's because of fraud. He looked the other way while the fraud went on. That is what he is responsible for, but liberals looked the other way as well.