Finally, the True Story of the Financial Crisis Breaks Through
Since the financial crisis in 2008, the American people have heard—through the media and from the government—only one narrative about the causes of the crisis. In that narrative, the villain was the private sector, usually identified as Wall Street. Blaming Wall Street is an American tradition, so there is nothing unusual in that, but in this case it resulted in a new law—the Dodd-Frank Act—that is gradually strangling the economic recovery in its crib.
It had seemed for a while as though the real story would never get out. In reality, the financial crisis was caused by government housing policy, which—beginning in the Clinton administration and continuing through Bush—sought to increase home ownership by requiring Fannie Mae and Freddie Mac and other government agencies (and banks covered by the Community Reinvestment Act) to make mortgage credit available to borrowers who were at or below the median income in the places where they lived.
It is possible, of course, to find prime borrowers who are below the median income where they live, but by 2000 half of all loans Fannie and Freddie bought were required to be made to borrowers at or below the median income; after that, the the requirements got even stiffer. To find these loans, Fannie and Freddie had to reduce their underwriting standards. As a result, before the financial crisis in 2008, about half of all mortgages in the United States—27 million loans—were subprime or otherwise of low quality because of low or no down payments or other deficiencies. Over 19 million of these loans were held or guaranteed by Fannie and Freddie, other government agencies, or banks under the CRA—not by Wall Street. When the great housing bubble deflated in 2007, these loans began to default in unprecedented numbers, driving down house prices and weakening financial institutions in the US and around the world that held them as investments. That’s what caused the financial crisis.
Now it appears that this accurate narrative about the financial crisis will finally get a full hearing in the U.S. Michele Bachman has apparently been doing a good deal of research on this topic, and as recorded in an article by Bob Tyrrell yesterday in the New York Sun, she has correctly identified where the responsibility for the financial crisis actually lies: “The Liberals have, like a vast shoal of squid, spread an inky cloud over the financial meltdown,” Tyrrell writes, “Mrs. Bachmann dispels the darkness regarding its origins. Says she, ‘There were a lot of bad actors involved, but it started with the Community Reinvestment Act under Jimmy Carter and then the enhanced amendments that Bill Clinton made to force, in effect, banks to make loans to people who lacked creditworthiness. If you want to come down to a bottom line of “How did we get in this mess?” I think it was a reduction in standards.’ Whereupon she goes on to say, ‘Being of the Financial Services Committee, I can assure you, all roads lead to Freddie and Fannie, the mortgage lenders...’”
As a presidential candidate, Michele Bachman will have a big megaphone, and on this issue she will be saying things that many Americans have never heard.