Obama was propelled to victory by the general impression that capitalism – supposedly represented in its most laissez-faire form by G.W. Bush – was an inherently flawed system and needed to be abandoned in favor of an ultra-progressive socialist system.

The accepted narrative on the Left is that the banks were destroyed by lack of regulation. Yet if you ask a proponent of this view by what proposed mechanism the banks, and the rest of the economy, have failed — that is, what specific aspects of “lack of regulation” drove the failure and how — no one has a clue.

The implication is that capitalism is in the hands of greedy people who lent to people who they knew could not repay their loans and that Republicans represent these greedy people.

Yet many of the loans were made in the last decade to people who obviously lacked the means to pay and with no down payment. 

For centuries lenders have demanded a down payment — usually about 20 percent — as a requisite for mortgage lending. The underlying reason for this now-unpopular practice was, arguably, greed, but based on common sense: it didn’t take long for lenders to learn — on the outside chance they lacked common sense to know this instinctively — that issuing mortgages without requiring a down payment inevitably would lead to enormous losses for the lenders. Thus, banks traditionally knew that the legal fees and paperwork needed to process a foreclosure were extremely expensive, and unless a significant down payment of roughly 20 percent was paid up front, their chances of recovering their money in the event of a default were slim to none.

Now, given the upward spiral of housing prices in the last decade or so, it is true that banks could speculate on real estate appreciation and obviate the requirement of such a large down payment. But the prices almost never rose as much as 20 percent in one year, the amount necessary to offset the lack of down payment, so the exposure for the banks was enormous. Why would even the greediest of lenders assume such risks?

The answer is social engineering. Under the CRA (Community Reinvestment Act) passed under Carter and strengthened under Clinton, banks were forced to lend under extremely risky circumstances. The jargon included terms like “no-doc,” or no documentation of income sources. No down payment was required either. Another fatal factor was the fact that the semi-government organizations (SGOs) Fanny and Freddy lent the aura of government guarantees to home loans, making these loans seem less risky to banks.

Another factor was the “securitization” of loans, which put them into circulation in the stock market as if they were securities, thereby spreading them across the globe. The false Fanny-Freddy guarantees made them seem secure so investors went ahead and bought these securities, later to be branded as “toxic.”

While there was greed on the part of the mutual fund managers, the elderly, for example, whose 401k’s were — and are — laden with these toxic securities, were for the most part, just innocent bystanders, at worst victims of unscrupulous or naïve investment advisors and sellers.

While the Left scoffs at the idea that Obama had a meaningful role in all of this, his participation in ACORN, the community-organizing group that strong-armed banks into giving loans to bad credit risks — no-doc, no down payment — was very instrumental in creating the crisis. His own party did more to bring the banks down with social engineering schemes than anything else.

Three causes can be identified:

1. The CRA (Community Investment Act), mentioned above;
2. The creation of Fanny Mae under FDR in 1938 and Freddy Mac by a Democrat-led congress in 1970;
3. Smart Growth, a Big Government scheme applied on a local level to make land scarce for development. It brought up land prices artificially. A study has shown that the homes that lost most value since 2007 were in smart growth areas.

In addition, Mark-to-Market accounting rules under FAS 157, which undervalued companies by applying current values to instruments that were in the process of acquiring value, may have contributed to the crisis. Some undervalued companies were forced to go under that, arguably, may have survived and prospered.

Sadly, while the Republicans, like Bush and McCain, whimpered a bit about Fanny and Freddy, they ran out of steam early and then acquiesced, making themselves complicit — or at least assuming the appearance of complicity. Bush's HUD website shows the following paragraph, added in 2005:

Zero Percent Downpayment Option. The Administration proposes a zero downpayment mortgage option in the Federal Housing Administration (FHA) that would allow first-time buyers with a strong credit record to finance 100 percent of their home purchase including closing costs. The Budget also proposes a program called Payment Incentives, which would allow borrowers with limited or weak credit histories to purchase homes by initially paying higher mortgage insurance premiums that would gradually be reduced after a period of timely payments. In 2006, these new mortgage programs will help more than 250,000 families to buy a home of their own.

Good conservative leadership would have avoided all appearances of being tainted with these bad banking policies. The public would have been warned constantly of these ruinous policies and the Democrats could not have gotten away with claiming the economy fell due to "lack of regulation." Everyone would have known it was the fruits of over-regulation. As it is, "conservatism" came out looking just as bad as the far left. And no one in government articulated the causes or even dared mention abolishing the CRA and tightening up on, or abolishing, Fanny-Freddy.

Incredibly, no one in government today, on either side of the aisle, is advocating abolition or even modification of the CRA or Fanny-Freddy, even as they insist they need our children’s money to “fix” the banks and economy, “rescuing” badly run institutions but without even attempting to reform them.

Donald Hank is a former language teacher, currently operating a technical translation agency in Wrightsville, PA. He holds an undergraduate degree in French and German from Millersville State University (PA), a Master’s degree in Russian language and literature from Kutztown State College (also in PA), has studied Chinese for 3 years in Taiwan at the Mandarin Training Center, and is self-taught in other languages, having logged a total of 8 years abroad in total immersion situations. He is also the founder of Lancaster-York Non-Custodial Parents, a volunteer organization that provides Christian counseling for non-custodial parents.

TrackBack URI for this entry

Comments (11)

Subscribe to this comment's feed

Show/Hide comments

MarkGlen said:

	When the sun goes down If you want to know what bankers do after the sun goes down read BELLY UP by Phillip L. Zweig, Crown Publichers. It is a book about the collapse of the Penn Square Bank in Oklahome City, Oklahoma. I use to do my banking at B.J.'s dad's bank.
	report abuse vote down vote up

March 07, 2009 | url
Votes: +0

MarkGlen said:

	Why some lose their retirement capital Matthew 6:33 "But seek ye first the kingdom of God, and his righteousness; and all these things shall be added unto you." "all these things" could be called capital. Since some don't seek the Lord first He does not bless their retirement efforts. So, don't cry on my sholders.
	report abuse vote down vote up

March 07, 2009 | url
Votes: -3

weed said:

wrong reason "Obama was propelled to victory by the general impression that capitalism – supposedly represented in its most laissez-faire form by G.W. Bush – was an inherently flawed system and needed to be abandoned in favor of an ultra-progressive socialist system." the above quote, taken from the beginning of this posting, is absolutely false. obama won the election because the economy tanked about 4 months before election day. clinton's famous quote "it's the economy, stupid" is always in play in any election. it would be nice to think that the general citizenry of this country is well-schooled and intently interested in the ideological concepts involved in freedom, democracy, and government; and that they use this knowledge to make intelligent voting decisions. it doesn't work that way. joe bag of donuts looks at his bills, value of his 401k and real estate holdings, the money currently in his bank account, and asks the simple question "am i better off now than 4/8 years ago?" if the answer is "NO", out with the incumbent party.

report abuse vote down vote up

March 08, 2009
Votes: -2

us and them said:

Well orchestrated? One has to wonder if the economic collapse a few months before the election wasn't a well orchestrated plan by the Left and Democrats to assure victory in the election? When the dems took over in 2006, did they not promise 100 pieces of legislation in 100 days? What ever happened to that, and exactly what did they pass? They promised lower gas prices, and they skyrocketed. Just a observation.

report abuse vote down vote up

March 08, 2009
Votes: +3

MarkGlen said:

Three reasons the DemocRats took Congress and the White House Three major reason the republicans list the last election. 1. The war in Iraq and Afghanistan lasted too long: Who was it that said that war at first is like a beautiful woman that everyone wants to court, but as war drags on it becomes like an old hag that no one wants. 2. The Republicans favored no borders between Mexico, U.S. and Canada. as a result they lost their conservative base. 3. John McCain was seen as another Bob Dole P.S. I have been wondering for quite sometimes when the economy was going belly-up.

report abuse vote down vote up

March 08, 2009 | url
Votes: +0

Norman Lavigne said:

	Theologian Mexico owned many border states and I beleive that we should annex Mexico as the fifty-first state and deal with Mexico as we do with the rest of the Fifty States. Let them pay in our system, they are surely taken out of our system.
	report abuse vote down vote up

March 08, 2009 | url
Votes: -3

Thomas Paine said:

New World Order, not leftist policy You're so far off on your analysis. Government agencies like Fanny played a very small part in the explosion and collapse. This was NWO stuff at its best, the credit default swaps by AIG and others were handed out like candy. The Eurpopeon banks who bought the crap new it was crap and got word from the Neo Con's behind 911 that the Government and Fed would bail them out when it all collapsed. And at the same time geopordize the dollar with the flood of trillions for the bail out. The NWO has us by the throat! Don't fall for the liberal left BS. Yes, they suck too. JBS needs to remind people that the "Republicans" are fraud's too.

report abuse vote down vote up

March 08, 2009
Votes: +6

Thomas Paine said:

	Don Hank way off Don, get your facts straight. Go to Business Insurance Magazine, Monday, March 9th, 2009 issue, and see where the AIG money went: Europeon Banks. Nothing to do with Fannie. JBS is smarter than falling into the simplistic RUSH Limbaugh, "government is too big" trap. We know that Gov is too big, but we must go deeper!
	report abuse vote down vote up

March 09, 2009
Votes: +0

Tiadaghton said:

... Our country is now taking so steady a course as to show by what road it will pass to destruction, to wit: by consolidation of power first, and then corruption, its necessary consequence. --Thomas Jefferson The system of banking [is] a blot left in all our Constitutions, which, if not covered, will end in their destruction... I sincerely believe that banking institutions are more dangerous than standing armies; and that the principle of spending money to be paid by posterity... is but swindling futurity on a large scale. --Thomas Jeffferson

report abuse vote down vote up

March 09, 2009
Votes: +1

Berdj Kenadjian said:

Follow the Money If we would find out who caused the debt exlosion and credit crisis we need to follow the money. We need to ask, Who gained from the losses others incurred? We also need to know how to measure their gains both in terms of money and power. I believe that if we had the capacity to do that (which we don't due to privacy laws) we would find that the trail would take us to the few evil takeover artists who are plotting the downfall of the United States to subjugate a previously free people to the not-so-tender mercies of a dictatorial one-world government.

report abuse vote down vote up

March 10, 2009 | url
Votes: +2

Berdj Kenadjian said:

Follow the Money If we would find out who caused the credit crisis and the preceding debt explosion we should be able to find out who (speicifically by name identification) in the financial community made the decisions that resulted in the horrible practices that placed thousands of banks at risks they do not ordinarily take. This we cannot do because of privacy laws that protect the innocent and guilty alike. However, if we could follow the money, I believe, we would find that the trail would lead to those who are plotting the downfall of the United States so as to subjugate a previously free people to the not-so-tender mercies of a dictatotial one-world government.

report abuse vote down vote up

March 10, 2009 | url
Votes: +1