David Brooks Rewrites the History of the Financial Crisis -- Blames Middle Class Homeowners

Yesterday, David Brooks, the non-threatening, New York Times-friendly conservative, pushe one of the most pernicious lies out there.

The Fannie Mae scandal is the most important political scandal since Watergate. It helped sink the American economy. It has cost taxpayers about $153 billion, so far. It indicts patterns of behavior that are considered normal and respectable in Washington.

The Fannie Mae scandal has gotten relatively little media attention because many of the participants are still powerful, admired and well connected. But Gretchen Morgenson, a Times colleague, and the financial analyst Joshua Rosner have rectified that, writing “Reckless Endangerment,” a brave book that exposes the affair in clear and gripping form.

The story centers around James Johnson, a Democratic sage with a raft of prestigious connections. Appointed as chief executive of Fannie Mae in 1991, Johnson started an aggressive effort to expand homeownership.

Back then, Fannie Mae could raise money at low interest rates because the federal government implicitly guaranteed its debt. In 1995, according to the Congressional Budget Office, this implied guarantee netted the agency $7 billion. Instead of using that money to help buyers, Johnson and other executives kept $2.1 billion for themselves and their shareholders. They used it to further the cause — expanding their clout, their salaries and their bonuses. They did the things that every special-interest group does to advance its interests.

Fannie Mae co-opted relevant activist groups, handing out money to Acorn, the Congressional Black Caucus, the Congressional Hispanic Caucus and other groups that it might need on its side.

Fannie, a for-profit company, acted irresponsibly because it was seeking big profits just like other financial institutions. That's a very different proposition than bringing on the crisis. Dean Baker called out Brooks thusly:

There's a small problem in this story. The worst junk mortgages that inflated the housing bubble to extraordinary levels were not bought and securitized by Fannie and Freddie, they were securitized by Citigroup, Merrill Lynch, Goldman Sachs, Lehman and the other private investment banks. These investment banks gobbled up the worst subprime and Alt-A garbage that sleaze operations like Ameriquest and Countrywide pushed on homebuyers.

The trillions of dollars that the geniuses at the private investment banks funneled into the housing market were the force that inflated the bubble to its 2006 peaks. Fannie and Freddie were followers in this story, jumping into the subprime and Alt-A market in 2005 to try to maintain market share. They were not the leaders.

Last year, we published an excerpt from my book --"Conservatives Push Absurd Lie that Wall Street Hustlers Were Innocent Victims ... of Poor People." Since pixels come cheap, I'll just reprint the whole piece here ...

Perhaps the most pernicious right-wing lie of late is that the Wall Street hustlers who came close to bringing the global economy to its knees in 2008 were just innocent victims of government-sponsored programs that forced them to lower lending standards in a misguided effort to increase home ownership among the poor (read: dark-skinned).

It’s an alluring story line for those who are ideologically predisposed to blame “inner city” people instead of MBAs in suits roaming the executive suite. It’s also patent nonsense—a Big Lie that has nonetheless become an object of almost religious belief for some on the Right.

Jeb Hensarling, a notably obtuse Republican back-bencher from Texas, wrote that “the conservative case is simple”:

The [Community Reinvestment Act] compelled banks to relax their traditional underwriting practices in favor of more “flexible” criteria. These subjective standards were then applied to all borrowers, not just low-income individuals, leading to a surge in lower-quality loans. . . . Blame should [also be] directed at Fannie [Mae] and Freddie [Mac], and their thirst for weaker underwriting to help meet their federally mandated “affordable housing” goals. . . . This distortion has had seismic consequences as market participants, wrongly believing GSE-touched loans were sanctioned by the government and therefore safe, began to rely on a government mandate as a substitute for their own due diligence.

This tale has everything a conservative could want—Big Government overreach, well-intentioned but out-of-touch liberals causing devastating unanticipated consequences with their social tinkering, and even their favorite bogeyman, ACORN, and other low-income housing advocates that have pushed for increased home-ownership among the poor.

The narrative gained steam with an influential op-ed in the Wall Street Journal by Peter Wallison, a fellow with the American Enterprise Institute (who, according to his bio, “had a significant role in the development of the Reagan administration’s proposals for the deregulation of the financial services industry”). Wallison found that “Almost two-thirds of all the bad mortgages in our financial system, many of which are now defaulting at unprecedented rates, were bought by government agencies or required by government regulations.”

The data shows that the principal buyers were insured banks, government sponsored enterprises (GSEs) such as Fannie Mae and Freddie Mac, and the FHA—all government agencies or private companies forced to comply with government mandates about mortgage lending.

The sleight-of-hand here is pretty straightforward. The U.S. government regulates lenders and provides deposit insurance to banks, which means that a large chunk of all home loans—good, bad, and in between—have some connection to a government program. It’s like saying that the government is responsible for pollution because the EPA regulates industrial emissions.

Yet no bank has ever been “forced to comply with government mandates about mortgage lending.” There are no“government mandates,” and there never were. In order to qualify for government-backed deposit insurance—a benefit that banks aren’t forced to accept but enjoy having—the Community Reinvestment Act and similar measures designed to prevent discrimination in lending (to qualified individuals) only encourage banks to lend in all of the areas where they do business. And Section 802 (b) of the Act stresses that all loans must be “consistent with safe and sound operations”—it’s the opposite of requiring that lenders write risky mortgages.

There are no penalties for noncompliance with CRA guidelines. The only “stick” hanging over banks that fail to meet those standards is that their refusal might be taken into account by regulators when they want to open new branches or merge with other financial institutions. What’s more, there are no defined standards for CRA compliance, and within the banking community, the loose guidelines are considered to be somewhat of a joke.

As Sheila Blair, the chairwoman of the FDIC, asked in a December 2008 speech, “Where in the CRA does it say: make loans to people who can’t afford to repay? Nowhere! And the fact is, the lending practices that are causing problems today were driven by a desire for market share and revenue growth . . . pure and simple.”

Fannie and Freddie: Tempted by Easy Profits

Fannie Mae and Freddie Mac were created by an act of Congress, but they are (or were, until being taken over in the wake of the housing crash) private, for-profit entities whose dual mandate was to increase the availability of mortgages to moderate- and low-income families, and at the same time turn a profit for their shareholders. Fannie and Freddie did end up with a very large portfolio of subprime loans, with a high rate of default, but they didn’t get into the market because the government mandated it. They dived in deep because there were profits to be made as the housing bubble expanded. As Mary Kane, a finance reporter for the Washington Independent, put it:

Neither the Community Reinvestment Act—the law most cited as the culprit—nor other affordable housing goals set by the government forced Fannie, Freddie or any other lender to make loans they didn’t want to. The lure of the subprime market was high yields and healthy profit margins—it’s as simple as that.

Contrary to the conservative spin, University of Michigan law professor Michael Barr told a congressional committee that although there was in fact quite a bit of irresponsible lending in low-income communities in the late 1990s and the early 2000s, “More than half of subprime loans were made by independent mortgage companies not subject to comprehensive federal supervision; another 30 percent of such originations were made by affiliates of banks or thrifts, which are not subject to routine examination or supervision, and the remaining 20 percent were made by banks and thrifts [subject to CRA standards].” Barr concluded, “The worst and most widespread abuses occurred in the institutions with the least federal oversight [italics added].”

That’s not to say that millions of Americans didn’t bite off more than they would eventually be able to chew in the housing market. A lot of people looking to turn a quick buck by capturing the booming value of real estate in the mid- to late 2000s bought property with “teaser” loans that offered very low rates for the first few years; the investors assumed that they’d be able to turn a tidy profit before higher interest rates kicked in. Many of those individuals have since found themselves “under water”—owing more on their homes (and investment properties) than they’re worth.

Yet it’s worth noting that most of the experts also didn’t identify the real estate bubble as a problem, even as home prices far surpassed values that could be reasonably explained by the laws of supply and demand. Irrational exuberance was the theme of the day. In 2006, David Learah, the former head of the National Association of Realtors, wrote a book titled Why the Real Estate Boom Will Not Bust—And How You Can Profit from It: How to Build Wealth in Today’s Expanding Real Estate Market. The book made quite a splash at the time.

In 2010, former Fed chairman Alan Greenspan offered a bit of historical revisionism to a House committee investigating the causes of the financial crisis, telling lawmakers, “In 2002, I expressed concern . . . that our extraordinary housing boom, financed by very large increases in mortgage debt, cannot continue indefinitely. . . . I warned of the consequences of this situation in testimony before the Senate Banking Committee in 2004.”

Writing in the Washington Post, Dana Milbank offered a corrective with some of the highlights of Greenspan’s congressional testimony at the peak of the housing bubble. In 2005, Greenspan told lawmakers, “A bubble in home prices for the nation as a whole does not appear likely.” He added, “Home price declines . . . were they to occur, likely would not have substantial macroeconomic implications,” and explained that “nationwide banking and widespread securitization of mortgages make it less likely that financial intermediation would be impaired.”

In English, that last bit meant “Banks won’t get into serious trouble even if things do go to hell,” and we know how well that prediction turned out. If Greenspan could be so wrong and the smart people at the Washington Post and the New York Timescouldn’t see this huge, dangerously inflated housing bubble, how was your average couple trying to get a place to live or the small investor looking for a few bucks in rental income supposed to make a rational decision about how much debt to take on? That’s not a defense of individuals who got in over their heads; it’s simply an important bit of context. 

The narrative that the real estate crash and the subsequent recession were the fault of borrowers, especially poor and middle-income borrowers—while members of the financial community were innocent victims—is not only revisionism of the worst kind, but it’s an especially egregious lie.

The obvious sin of this claim is that it shifts responsibility for the mess away from those who created it, but what makes it even more disgraceful is that conservatives have long argued that efforts to increase home ownership among low-income families and communities of color was the “free market” thing to do (and have, to some degree, negated the need for a decent social safety net). It was George W. Bush, not Vladimir Lenin, who said in a 2002 speech, “We have a problem here in America . . . a homeownership gap,” and said, “we’ve got to work together to close [the gap] for the good of our country.” This was standard American Enterprise Institute–quality conservative fare.

Blaming individuals is easy—it’s not hard to understand how people could borrow a bunch of cash they were later unable to pay back. The real cause of the housing crash is, of course, a far more complicated tale. And it’s a story that ultimately represents the abject failure of conservative economic mythology.