Feel-Good Big Government The Origins of Economic Catastrophe

Mike Scruggs

In 1992, the Clinton Administration ordered the Boston Federal Reserve Bank to undertake a study of racial discrimination in mortgage lending and appointed the investigative staff to undertake the study. The study showed that blacks and Hispanics were rejected for mortgage loans more frequently than whites. On that basis the Clinton Administration launched the most costly and far-reaching social crusade in American history. New precedents were set in the exercise of government power over private lenders and their underwriting criteria.

Private banking analysts and economists quickly established that the study was flawed in the extreme The Clinton Administration study did not take into consideration the net worth, debt burden, and employment record of applicants. Also omitted from the study were factors such as the size of the down payment and the loan to value ratio. Moreover, it did not consider whether borrower submitted information could be verified. When this missing data was factored in, it was found that the mortgage lenders were exercising normal business judgment rather than the alleged racial discrimination.

Nevertheless, in early 1994, the Clinton Administration claimed that racial and ethnic discrimination by mortgage lenders had caused racial disparity in homeownership rates and declared political war on “racist lenders.” On April 15, 1994, the White House issued an ultimatum backed by all the power of the Federal Government that mortgage lenders had to ease credit standards for lower income minorities or face investigations of racial discrimination, adverse publicity, denial of access to secondary mortgage markets, fines, and other penalties. In short, the Clinton Administration bullied the banks and mortgage lenders into lowering—in fact, practically eliminating—credit standards for minorities.

This unprecedented Federal license for bullying and despotism was codified in a 20-page document called “Policy Statement on Discriminatory Lending.” Clinton also set up an interagency Task Force on Fair Lending backed by no less than ten federal agencies. Signing this edict were such notables as Attorney General Janet Reno, Housing and Urban Development (HUD) Secretary Henry Cisneros, Comptroller of the Currency Eugene Ludwig, and Federal Reserve Chairman Alan Greenspan.

The Federal Deposit Insurance Corporation (FDIC) warned the banking industry that they should be proactive in making “multicultural” loans, and that even unintentional discrimination was against the law. It also warned lenders that they must be prepared to prove to federal regulators and prosecutors that rejection of minority applicants, even those with high debt ratios and low credit scores, was not racial discrimination. This was accompanied by a Justice Department statement threatening “the full range of its enforcement authority.”

Some of us older folks remember the days when our liberties were held in higher esteem. We remember when the burden of proof was on the government to prove a crime and when running a business was not burdened by government regulations that made a crime of what were formerly important economic freedoms.

Thus the Federal Government, in the name of “affirmative action,” virtually intimidated the banking industry out of exercising sound credit and business practices. In 1996, only about three percent of Fannie Mae mortgages were made with down payments of five percent or less. By 2007, it had risen to over 25 percent. HUD’s so-called “affordable-housing loans” as a percent of total mortgages went from less than 40 percent to 55 percent in the same period. There was rejoicing in Washington that government housing and lending policies were lifting the poor into the middle class. Wiser voices were silenced by a full-court-press of legislation, regulations, government propaganda, and mandated political correctness. The actual results have been to perpetuate poverty and crush middle class prosperity.

A tree is still best known by its fruit, and bad policies eventually have bad consequences. Like termites, the accumulating damage of foolish government policies may take years to become visible to most of the public—government secrecy, propaganda, and ardent campaigns of political correctness often suppress the truth of their results. Unfortunately, the G. W. Bush administration elected in 2000 embraced Clinton’s misguided affirmative action lending mandates as a sacred cow until their malignant results became impossible to ignore.

Eventually, government mandated sub-prime loans began defaulting in numbers that should have been expected by sound banking analysis. But to politicians who seem never to anticipate consequences beyond the immediate, it was shocking. The bankers were decried as the greedy villains who must be punished. They were actually accused of exploiting the poor by giving them the loans that the government demanded be given to them. Those who exploited the public by selling them bundles of highly risky mortgages were guilty of terrible business judgment and ethical irresponsibility, but it was primarily political vote buying and government bullying that seeded the financial disaster. The panic that followed led to spending trillions of dollars on bailouts and stimulus plans that did not work. Honest and reasonable economic analysis would have predicted their failure and subsequent more serious economic consequences. Now we are in a terrible economic mess that has cost millions of jobs and trillions of dollars in individual investment savings.

Throwing gasoline on the fire, we have a President schooled only in Marxist political tactics and rhetoric, who is clueless on how a capitalist economy works and why it works much better than a socialist economy. We have a President who is determined to replace economic freedom with bigger and more coercive government.

But smile, you can feel good about yourself and America. All the financial and economic pain we are suffering is for good causes—affirmative action mortgages, multiculturalist social engineering, and limitless government power.