Conservative Think Tank Credits Deregulation For Economic Crisis

Nov 03 2011 Published by under Uncategorized

The conservatives are masters at creating a problem, then blaming the other guy for the mess. Look at our debt, it was doubled by Ronald Reagan, fixed by Clinton, and then the Clinton surplus was squandered by the Republicans and George W Bush. This is also the case with the Heritage Foundation advocating for the health insurance mandate in the early 1990s and is now the case regarding the CATO Institute’s accusations about the Community Reinvestment Act of 1977.

Back the year 2000, CATO published this white paper regarding the CRA, community reinvestment act, it stated among many things,

“Despite wide acceptance of the claims made by cra’s advocates, those claims are conceptually and observationally unfounded. Economic theory and empirical evidence indicate that the reason for recent growth in lending to low-income neighborhoods is not cra, but the effectiveness of market forces in breaking down the types of financial barriers that were prevalent when cra was enacted”

In reality, deregulation and new technologies have promoted competition and precipitated a great broadening of the credit market. As a result, cra is not necessary to ensure access to credit by all segments of our economy. Moreover, cra’s redundancy is not without significant costs, some of which are associated with a particularly regrettable type of regulatory burden involving the imposition of conflicting demands on banks.

So in short, deregulation was the reason for the increase in low income lending. Unfortunately, when the (expletive) hit the fan, the first thing they did was blame the CRA, poor people and the government.

On top of the CATO report, Peter Wallison from the American Enterprise Institute, another free market, deregulation think tank, said this about Fannie and Freddie in the year 2000,

“The GSE form–at least as it is embodied in Fannie Mae and Freddie Mac–contains an inherent contradiction. It is a shareholder-owned company, with the fiduciary obligation to maximize profits, and a government-chartered and empowered agency with a public mission. It should be obvious that it cannot achieve both objectives. If it maximizes profits, it will fail to perform its government mission to its full potential. If it performs its government mission fully, it will fail to maximize profits.”

…”This has direct consequences in the real world. Since 1992, Fannie and Freddie have had an obligation to assist in financing affordable and low income housing. Obviously, doing so would be costly, and would thus reduce their profitability. Studies now show that their performance in financing low income housing–especially in minority areas–is far worse than that of ordinary banks.

In other words, despite the fact that Fannie and Freddie receive subsidies to perform a government mission–in this case support of low income housing–their need for and incentives to retain a high level of profitability is an obstacle to their performance.”

“In recent years, study after study has shown that Fannie Mae and Freddie Mac are failing to do even as much as banks and S&Ls in providing financing for affordable housing, including minority and low income housing.”- said Wallison

So what this AEI scholar is saying is, because Fannie and Freddie needed to be profitable they didn’t take the risks to meet their obligation of their mission of lending to risky, or sub prime borrowers. Bottom line, this free market, deregulation cheerleader, believed Fannie and Freddie did not have enough sub prime mortgages in their portfolio.

This contradicts what we have heard about these two companies over the last 5 years.

In fact he stated above that the banks held more of the sub-prime market than both Fannie and Freddie. Yet after the housing bubble burst and the following financial crisis, these same people blamed the GSE’s for the problem.

This is what the plan was all along. Conservatives have consistently hated anything about the “New Deal”, including the GSE’s but the American public loves the New Deal. The American public loves Social Security, Medicare and Medicaid, so the only way to eliminate them is to create a crisis.

The conservatives starved the beast. The Republicans increased spending and lowered taxes for 30 years in order to create a fiscal crisis of debt. They then used this debt crisis to cut all the social programs that intertwine the New Deal, i.e. cutting Social Security and Medicare. Now they have America where they want it, looking into the depths of a dark hole, giving us no options but to cut programs.

Image: Energy Matters

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