Well Kept Secrets?

Elizabeth Woods

With only 29 days left until the “big day” it looks like Obama is pulling a big lead. The boost from Palin has slowly dwindled down and Americans are refocused on the crisis of the economy. An attempt at redirecting voters attention from the economy by the McCain camp has made it evident that when it comes to the economy, more Americans trust Obama over McCain. My question is why? My guess is that if you asked the average Joe about what has caused our financial meltdown he wouldn’t have a clue.


What the average American doesn’t know may be shocking. If we look back into the history of our political decisions over the years, it is fair to say that both parties have played a role, but what get’s me is that the Democrats refuse to take any responsibility for this disaster. Democrats refuse to acknowledge that the Community Reinvestment Act may be partly to blame. The Community Reinvestment Act (CRA)  was first put into effect by Carter in 1977. This bill had good intentions of allowing lower income households to qualify for loans, but expansion of the act allowed a vast amount of people to acquire loans that couldn’t afford them.

In 1995, Clinton strongly reinforced the CRA. In affect, banks were mandated to give loans to lower income communities, enforced by the Fed, the Comptroller of the Currency, the Office of Thrift Supervision, and the Federal Deposit Insurance Corporation. Non compliance to give out loans to lower income communities, resulted in prohibited bank mergers, branch expansions, or new branch installments, all regulated by these agencies.  Consequently, banks were pushed to increasingly lend out more subprime loans.

What’s even more interesting is that left-wing non profit organizations, such as ACORN, with whom Obama has been affiliated with, were receiving billions of dollars from these banks so they could shell out more subprime loans. In turn, CRA allowed these non profit organizations to collect a fee for marketing these loans to low income families. Barack Obama has received $126,349 from Fannie Mae over a four year period. While Fannie lent out more and more loans that couldn’t be paid for, Obama looked the other way. Meanwhile, McCain co sponsored a bill that would regulate mortgages.Democrats denied this bill. Maybe because fellow Democrats Chris Dodd and John Kerry also received thousands from Fannie Mae. It doesn’t seem right that the Republicans should take all the criticism for the economy taking a fall, but with election day right around the corner you can bet they will continue to take this position.


Filed under Democratic Party, McCain, Obama, Republican, Uncategorized

2 responses to “Well Kept Secrets?

  1. Tony Robinson

    A very important post, Elizabeth. The link to the article titled “billions of dollars from banks” in your post is especially interesting and informative and I recommend others to follow the link and read the article for an eye-opener about one perspective on how the CRA works.

    This post educates readers about recent conservative arguments that the Community Reinvestment Act (a 30 year old law requiring banks to invest more of their loans in low-income communities and to make affirmative efforts to get more loans out to minority homebuyers) is partly to blame for the financial meltdown, because it required banks to make so many bad loans to lower-income credit-risks in inner-city, minority communities. This is an important argument to understand, and I appreciate Elizabeth’s work in gathering material for people on this point. She embeds a terrific number of educational links here.

    As some of the links show, conservatives are working towards outright abolition of the CRA and John McCain has said he will examine whether it should be changed or abolished if he is president.

    Elizabeth’s material will stand on its own, but here are some competing points that people should consider in weighing whether the CRA should share any significant part of the blame for the global financial meltdown:

    1) The essence of this argument is that low-income, minority homebuyers were allowed too much credit in America in recent years, and that this is playing a big role in causing the stock market collapse/financial meltdown, here in America and across the globe. How can it be that poor people in America can shoulder the burden for a collapse that is worldwide? Is it accurate to argue that a real source of the problem is too much credit for inner-city, minority poor (the heart of the CRA’s target community), and that a solution would be to dry up credit to these communities? I am suspicious at the outset of such arguments.

    2) In fact the CRA is 30 years old, so why is it causing the meltdown today? Clinton strengthened the CRA in the early 1990s–but again, why is the explosion in sub-prime lending, global credit swapping, mortgage securitization, etc. exploding in the late 2000’s, and how are decade old CRA reforms to blame for that?

    3) The CRA only applies to a specific category of banks and savings and loans institutions, who have only given out 20% of all subprime loans. At least 80% of the loans that are causing the problem have nothing to do with the CRA. Here’s some data from a Media Matters fact check (http://mediamatters.org/items/200810070033?f=h_top) of the CRA caused the crisis argument: “Further, a study released earlier this year by a law firm specializing in CRA compliance estimated that in the 15 most populous metropolitan areas, 84.3 percent of high-cost loans in 2006 were made by financial institutions not governed by the CRA. In fact, Janet Yellen, president and CEO of the Federal Reserve Bank of San Francisco, stated in a March speech that “studies have shown that the CRA has increased the volume of responsible lending to low- and moderate-income households”

    4) Here’s more from that speech by the president of the San Fran Fed Reserve Bank: (http://www.huffingtonpost.com/2008/10/01/conservatives-seek-to-shi_n_131020.html)

    “There has been a tendency to conflate the current problems in the subprime market with CRA-motivated lending, or with lending to low-income families in general. I believe it is very important to make a distinction between the two. Most of the loans made by depository institutions examined under the CRA have not been higher-priced loans, and studies have shown that the CRA has increased the volume of responsible lending to low- and moderate-income households. We should not view the current foreclosure trends as justification to abandon the goal of expanding access to credit among low-income households, since access to credit, and the subsequent ability to buy a home, remains one of the most important mechanisms we have to help low-income families build wealth over the long term.”

    5) Here’s more from the http://www.huffingtonpost.com/2008/10/01/conservatives-seek-to-shi_n_131020.html
    “University of Michigan Law Professor Michael Barr, a specialist in banking and finance law, flatly rejected claims that the CRA was “a significant factor in the current crisis. CRA was enacted more than 30 years ago. It would be quite odd if this 30-year old law suddenly caused an explosion in bad subprime loans from 2002-2007….Subprime mortgages were mostly made by mortgage brokers and lenders and securitized by investment banks — institutions not covered by CRA. The CRA only covers banks and thrifts, and these institutions mostly have not suffered to the same extent or kind from bad lending as the non-CRA-covered institutions at the core of the current crisis.

    The problem here is not CRA. It is what the late former Fed Governor Ned Gramlich called ‘the giant hole in the supervisory safety net’ — bad lending by firms outside the banking sector’s rules for prudential supervision, capital requirements, consumer protection and yes, the CRA.”

    (In other words, CRA regulated banks are some of the most heavily supervised banks! The banks at the core of the crisis are the unregulated banks. The current crisis cannot be solved by blaming rules requiring bank supervision, and requiring banks to conduct affirmative outreach to poor and minority borrowers)

    Along similar lines, University of Oregon economist Marc Thoma also cited that “subprime loans grew twice as fast in institutions that did not have to meet the conditions of the CRA” and that the scope of coverage of CRA was reduced in 2004 under the Bush administration, “but even though fewer banks were subject to CRA restrictions, the growth of the subprime market continued unabated.”

    The real cause of the crisis? Exotic financial instruments allowing global securities companies and investors to buy and resell “equities” (including mortgage packages) at costs FAR exceeding their real market value–and to make insane profits while doing so. As long as they could keep reselling to someone at a higher price. credit derivatives, securitization transactions, global equities, global credit swaps–and all with minimum regulation.

    That’s what lead to a global financial crisis. Not giving a $100,000 mortgage to a minority homebuyer in Five Points.

  2. Stephen Noriega

    First, in the beginning, you seem to blame ACORN for actually giving out loans. They do not do this as a function of their organization. They perpetrate registration fraud as a function of their organizations.

    This is an interesting post but my take on it is much more theoretical than what agencies or parties caused this. Marx writes over and over again that as capitalist markets get further and further away from the actual value of their labor, the economic system becomes unstable and falls into inevitable crash and conflict. I believe this is a Marxist materialism as real estate loans, something not super far from labor value, are chopped up and used for other financial activities. When this happens, the value of the real estate becomes marooned away from the labor that built it and maintained it.

    To put it simply, if a bank has one loan for one property, it makes less money but it enjoys stability for the life of that loan. The lender enjoys accountability and transparency of the bank. If a thousand banks each hold parts of one hundred million loans, it is difficult to see a collapse until it is happening. It is difficult to determine if each bank or lender are behaving properly.

    If you want reasons for the dysfunctions of convoluted capitalism, instead of looking at Carter, Reagan, Clinton or Bush, I really do recommend Marx’s “Das Capital”.

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