Tuesday, October 7, 2008

Deregulation and Community Organizing

Sebastian Mallaby destroys the trope that the financial crisis is the fault of “deregulation.”

The financial turmoil has pushed the Obama campaign into the lead, and this is mostly justified. Barack Obama is more thoughtful on the economy than his
opponent, and his bench of advisers is superior. But there's a troubling side to
the Democratic advance. The claim that the financial crisis reflects Bush-McCain
deregulation is not only nonsense. It is the sort of nonsense that could

Mallaby argues that the genesis of the crisis lies with the Federal Reserve’s response to China’s flood of cheap goods and surplus capital.

So the first cause of the crisis lies with the Fed, not with deregulation. If too much money was lent and borrowed, it was because Chinese savings made capital cheap and the Fed was not aggressive enough in hiking interest rates to counteract that. Moreover, the Fed's track record of cutting interest rates to clear up previous bubbles had created a seductive one-way bet. Financial engineers built huge mountains of debt partly because they expected to profit in good times -- and then be rescued by the Fed when they got into trouble. Of course, the financiers did create those piles of debt, and they certainly deserve some blame for today's crisis. But was the financiers' miscalculation caused by deregulation? Not really.

The key financiers in this game were not the mortgage lenders, the ratings agencies or the investment banks that created those now infamous mortgage securities. In different ways,these players were all peddling financial snake oil, but as Columbia University's Charles Calomiris observes, there will always be snake-oil salesmen. Rather, the key financiers were the ones who bought the toxic mortgage products….

Who were the purchasers? They were by no means unregulated. U.S. investment banks, regulated by the Securities and Exchange Commission, bought piles of toxic waste. U.S. commercial banks, regulated by several agencies, including the Fed, also devoured large quantities. European banks, which faced a different and supposedly more up-to-date supervisory scheme, turn out to have been just as rash.

By contrast, lightly regulated hedge funds resisted buying toxic waste for the most part -- though they are now vulnerable to the broader credit crunch because they operate with borrowed money.

If that doesn't convince you that deregulation is the wrong scapegoat, consider
this: The appetite for toxic mortgages was fueled by Fannie Mae and Freddie Mac, the super-regulated housing finance companies. Calomiris
that Fannie and Freddie bought more than a third of the $3 trillion in junk mortgages created during the bubble and that they did so because heavy government oversight obliged them to push money toward marginal home purchasers.

There's a vigorous argument about whether Calomiris's number is too high. But everyone concedes that Fannie and Freddie poured fuel on the fire to the tune of hundreds of billions of dollars.

Dovetailing with Mallaby, I argued that it was indeed regulation, which shares a huge measure of blame for the crisis. Regulations promulgated by liberal Democrats, the Clinton administration and radical groups like ACORN, which blackmailed banks into loosen credit standards in order for low-income minorities to obtain mortgages and fulfill their left wing social agenda. And in the case of ACORN, fill its own coffers.

The indefatigable Stanley Kurtz explicates ACORN’s inside/outside strategy, which played central role at the heart of the Fannie Mae and Freddie Mac subprime scheme. I apologize for the extensive portions, but they really are needed to see just how big a role ACORN plays in all this.

At first, ACORN’s anti-bank actions were relatively few in number. However, under a provision of the 1989 savings and loan bailout pushed by liberal Democratic legislators, like Massachusetts Congressman Joseph P. Kennedy, lenders were required to compile public records of mortgage applicants by race, gender, and income. Although the statistics produced by these studies were presented in highly misleading ways, groups like ACORN were able to use them to embarrass banks into lowering credit standards… Any merger could be blocked under CRA, and once ACORN began systematically filing protests over minority lending, a formerly toothless set of regulations began to bite…

ACORN’s efforts to undermine credit standards in the late 1980s taught it a valuable lesson. However much pressure ACORN put on banks to lower credit standards, tough requirements in the “secondary market” run by Fannie Mae and Freddie Mac served as a barrier to change. Fannie Mae and Freddie Mac buy up mortgages en masse, bundle them, and sell them to investors on the world market. Back then, Fannie and Freddie refused to buy loans that failed to meet high credit standards. If, for example, a local bank buckled to ACORN pressure and agreed to offer poor or minority applicants a 5-percent down-payment rate, instead of the normal 10-20 percent, Fannie and Freddie would refuse to buy up those mortgages.

So the eighties taught ACORN that a high-pressure, Alinskyite outside strategy wouldn’t be enough. Their Washington lobbyists would have to bring inside pressure on the government to undercut credit standards at Fannie Mae and Freddie Mac. Only then would local banks consider making loans available to customers with bad credit histories, low wages, virtually nothing in the bank, and even bankruptcies on

Another factor working in ACORN’s favor was that its increasing success with local banks turned those banks into allies in the battle with Fannie and Freddie. Precisely because ACORN’s local pressure tactics were working, banks themselves now wanted Fannie and Freddie to loosen their standards still further, so as to buy up still more of the high-risk loans they’d made at ACORN’s insistence. So by the 1993, a grand alliance of ACORN, national Democrats, and local bankers looking for someone to lessen the risks imposed on them by CRA and ACORN were uniting to pressure Fannie and Freddie to loosen credit standards still further….

But eventually ACORN got what it wanted. In early 1994, the Clinton administration floated plans for committing $1 trillion in loans to low- and moderate-income home-buyers, which would amount to about half of Fannie Mae’s business by the end of the decade. Wall Street Analysts attributed Fannie Mae’s willingness to go along with the change to the need to protect itself against still more severe “congressional attack.”

This sweeping debasement of credit standards was touted by Fannie Mae’s chairman, chief executive officer, and now prominent Obama adviser James A. Johnson. This is also the period when Fannie Mae ramped up its pilot programs and local partnerships with ACORN, all of which became precedents and models for the pattern of risky subprime mortgages at the root of today’s crisis.

Who trained Chicago ACORN’s direct action organizers, who funded and supported ACORN through his positions on the Woods Fund and Chicago Annenberg Challenge? Barack Obama.

If community organizers like ACORN radicals are at fault for the subprime crisis, then what does it say about that experience as a qualification for president of the United States?

John McCain may think the Ayers connection is important (so do I) however, he missed a huge opportunity to reveal Obama's ties to the subprime mess. Instead, he pulled a lame stunt by suspending his campaign to go back to Washington. He compounded the mistake by flouting overwhelming public opinon and voting for that abhorrent bailout.

Should he care to make a second comeback, McCain would be wise to add this arrow to his quiver of arguments.


Bruce Godfrey said...

I will concede a point that I had previously doubted: that probably cause exists that ACORN is engaged in vote fraud, at least in one office to the satisfaction of a warrant-issuing judge.

Bruce Godfrey said...

probablE cause

AnotherWatcher said...

bruce, ACORN is involved in voter fraud in at least 6 states. Just do a search on 'ACORN voter fraud'.
Here is just one.

"KANSAS CITY, Mo. -- Four people have been indicted on charges of voter fraud in Kansas City, officials said Wednesday.

Investigators said questionable registration forms for new voters were collected by the Association of Community Organizations for Reform Now, a group that works to improve minority and low-income communities.

The four indicted -- Kwaim A. Stenson, Dale D. Franklin, Stephanie L. Davis and Brian Gardner -- were employed by ACORN as registration recruiters. They were each charged with two counts.

Federal indictments allege the four turned in false voter registration applications. Prosecutors said the indictments are part of a national investigation.

ACORN and Project Vote recruit and assign workers to low-income and minority neighborhoods to register people to vote.

The Kansas City Election Board told KMBC they found suspicious forms, such as seven applications from one person and an application for a dead man.

"There is some motive behind it -- this is not accidental," said Ray James with the Kansas City Election Board.

Election officials said some of the application cards had false addresses, signatures and phone numbers.

ACORN officials in Kansas City said they turned in the four people who were indicted.

"We're very happy that they were indicted," said Claudie Harris with ACORN.

Harris said ACORN workers are paid by the hour and not by the number of voter registration cards they turn in.

"When you fraudulently defraud this, that gives us a bad name and what we're trying to do a bad name," Harris said.

ACORN officials said the four indicted have been fired.

Harris said ACORN workers check every voter registration card before sending it to the Election Board.

Last month, ACORN claimed to have processed more than 35,000 voter registration applications in Kansas City since the summer."

AnotherWatcher said...


ACORN office in Vegas raided in voter-fraud probe
LAS VEGAS (AP) — Nevada state authorities are raiding the Las Vegas headquarters of an organization that works to get low-income people to vote.

A Nevada secretary of state's office spokesman said Tuesday that investigators are looking for evidence of voter fraud at the office of the Association of Community Organizations for Reform Now, also called ACORN.

No one was at the ACORN office when state agents arrived with a search warrant and began carting records and documents away.

Secretary of State spokesman Bob Walsh says ACORN is accused of submitting multiple voter registrations with false and duplicate names.

The raid comes two months after state and federal authorities formed a task force to pursue election-fraud allegations in Nevada.

Dawn Aldolph Dwyer , Jr. said...

Voter fraud : Florida

Ebony Rosenberg said...

Place you bets ladies

Obama will pummel Grand daddy McCain tonight

anotherwatcher said...

"Voter fraud : Florida"

The districts that saw the most fraud and voting problems were.......
Run by Democrats!

dawn aldolph dwyer , jr. said...


therein lies proof of the genius and depth of the republican voter fraud machine.

Optimistic Person said...

Great News Comrades, Seems McCain most probably could be President one day.....in Alaska...when it secedes from the Union.

He is ahead there!!!

Daniel said...

ACORN is accused of voter fraud in 12 states.

But, who's counting.


Gene Zimmerman said...

It has been just announced that the ACORN fruad was perpetrated by a rogue Republican Operative.