Missoula Notebook

Breaking: Financial Crisis Not The Fault Of The People In Charge of Everything

By Sutton Stokes, 10-13-08

	Lehman Brothers CEO may not know where the money went, but he's sure he didn't lose it. Must have been the poor people. Photo by Flickr user World Economic Forum. Some rights reserved.

In case you don’t get the kind of email forwards that show up in my inbox, the current ritual of self-reassurance on the American right consists of convincing yourself that, back in the early 2000s, a couple of Democratic Congress members who received campaign contributions from Freddie Mac and Fannie Mae somehow managed to prevent a Republican White House, a Republican Senate, and a Republican House of Representatives (all of whom had recourse, just in case it turned out to be necessary, to a Supreme Court on which 5 of 7 justices had been appointed by Republican presidents) from achieving their secret heart’s desire of imposing increased regulation and oversight on the two government-sponsored enterprises.

Ergo, Democrats caused the entire current financial crisis. Never mind that the vast majority of the contributions came from Fannie Mae and Freddie Mac employees, as opposed to people running the companies and the PACs they set up for the express purpose of advancing the company’s interests. You can check out all the contributions on this page,, where you might also note that the largest contribution, admittedly to a Democrat, works out to about $16,000 a year, not exactly the kind of sum you’d think would have Senators leaping to do your evil bidding.

The “Democrats caused the financial crisis” meme has now spread to the Missoulian letters page. Most recently, Mike Nordquist of Stevensville weighed in with an opinion along these lines, arguing that “in the 1990s, under Clinton, the Democrats, with their chicken-in-every-pot ideology pushed to make homeownership available to minorities, those with low incomes and those who could not qualify for conventional home loans”; this put us on the edge, Nordquist argued, and bad decisions by Fannie Mae and Freddie Mac (who supposedly bribed Congress to be allowed to destroy their own businesses) pushed us over.

If all of this were true, you’d think that Republican partisans would be facing a bit of a conflict here: if Democrats are really to blame, then they were able to work their evil even though Republicans were in charge, which certainly doesn’t make the GOP sound like the kind of people you’d want running anything important.

But actually, it isn’t true. The first place I saw the claim debunked was on Slate, where Daniel Gross asked “Investment banks and insurance companies run by centimillionaires blow up, and it’s the fault of Jimmy Carter, Bill Clinton, and poor minorities?”

The Carter and Clinton reference is to the part of the fairy tale that blames the Carter-initiated and Clinton-strengthened Community Redevelopment Act, which was designed to get banks to stop illegally denying loans on the basis of race, although nothing in the act, Gross says, required anyone to make poor business decisions: “ [T]he CRA didn’t force mortgage companies to offer loans for no money down, or to throw underwriting standards out the window, or to encourage mortgage brokers to aggressively seek out new markets. Nor did the CRA force the credit-rating agencies to slap high-grade ratings on packages of subprime debt.”

Gross says there’s another, even more important reason why you can’t blame the CRA for the current crisis: it didn’t even have authority over most of the sub-prime lenders.

”The Community Reinvestment Act applies to depository banks. But many of the institutions that spurred the massive growth of the subprime market weren’t regulated banks. They were outfits such as Argent and American Home Mortgage, which were generally not regulated by the Federal Reserve or other entities that monitored compliance with CRA. These institutions worked hand in glove with Bear Stearns and Lehman Brothers, entities to which the CRA likewise didn’t apply…

Now this morning brings an informative piece from McClatchy newspapers (the best in the business these days, as far as hard-hitting, unbiased reporting goes). Reporters David Goldstein and Kevin Hall elaborate on Gross’s point by explaining that “only one of the top 25 subprime lenders in 2006 was directly subject to the housing law that’s being lambasted by conservative critics.”

In fact, “between 2004 and 2006, when subprime lending was exploding, Fannie and Freddie went from holding a high of 48 percent of the subprime loans that were sold into the secondary market to holding about 24 percent… [because] Fannie and Freddie were subject to tougher standards than many of the unregulated players in the private sector who weakened lending standards, most of whom have gone bankrupt or are now in deep trouble.”

Before you send your next forward, do us all a favor and read both articles, okay?

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