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Bloomberg Is Right About the 2008 Financial Crash | Bloomberg Is Right About the 2008 Financial Crash |
(3 days later) | |
You would have thought that Michael Bloomberg, the former New York City mayor, had picked the right moment to enter the Democratic presidential primaries. From the rural and heavily white states of Iowa and New Hampshire, the contest now moves to South Carolina, where the Democratic electorate is mostly black. A mayor who three times won the trust of one of the world’s most ethnically diverse cities ought to be on solid ground. | You would have thought that Michael Bloomberg, the former New York City mayor, had picked the right moment to enter the Democratic presidential primaries. From the rural and heavily white states of Iowa and New Hampshire, the contest now moves to South Carolina, where the Democratic electorate is mostly black. A mayor who three times won the trust of one of the world’s most ethnically diverse cities ought to be on solid ground. |
But he has never before faced presidential-campaign-caliber opposition research. In recent days, information from Mr. Bloomberg’s past has surfaced that puts his record on race relations in a deplorable light. He was accused of defending redlining — the practice, illegal since the Fair Housing Act of 1968, of systematically denying credit to black neighborhoods. In an interview at Georgetown University in 2008, flagged this week in a story by The Associated Press, Mr. Bloomberg blamed that year’s mortgage crisis and financial crash on congressional legislation that pressured banks “to make loans to everyone.” | But he has never before faced presidential-campaign-caliber opposition research. In recent days, information from Mr. Bloomberg’s past has surfaced that puts his record on race relations in a deplorable light. He was accused of defending redlining — the practice, illegal since the Fair Housing Act of 1968, of systematically denying credit to black neighborhoods. In an interview at Georgetown University in 2008, flagged this week in a story by The Associated Press, Mr. Bloomberg blamed that year’s mortgage crisis and financial crash on congressional legislation that pressured banks “to make loans to everyone.” |
Community organizers and fair-housing advocates accused him this week of embracing a “myth” that blames minorities for bankers’ misdeeds. But that accusation is unfair. True, Mr. Bloomberg goes easy on bankers: Complex derivatives, swaps, “tranching” and opaque offshore deals play no role in his account. But blaming minorities is the last thing he is doing. He is blaming Congress. Certainly there were many elements that brought on the finance crisis, but Mr. Bloomberg correctly identifies the major one: a flawed attempt to use credit markets to broaden access to housing. Studies bear that out. | Community organizers and fair-housing advocates accused him this week of embracing a “myth” that blames minorities for bankers’ misdeeds. But that accusation is unfair. True, Mr. Bloomberg goes easy on bankers: Complex derivatives, swaps, “tranching” and opaque offshore deals play no role in his account. But blaming minorities is the last thing he is doing. He is blaming Congress. Certainly there were many elements that brought on the finance crisis, but Mr. Bloomberg correctly identifies the major one: a flawed attempt to use credit markets to broaden access to housing. Studies bear that out. |
On Oct. 28, 1992, at the end of an election campaign shadowed by the outbreak in Los Angeles of the deadliest race riots in a quarter-century, President George H.W. Bush signed a Housing and Community Development Act. Mr. Bush wanted to put Fannie Mae and Freddie Mac — the so-called government-sponsored enterprises that purchase, guarantee and securitize trillions of dollars in home loans — behind the cause of fair housing in “underserved areas.” | On Oct. 28, 1992, at the end of an election campaign shadowed by the outbreak in Los Angeles of the deadliest race riots in a quarter-century, President George H.W. Bush signed a Housing and Community Development Act. Mr. Bush wanted to put Fannie Mae and Freddie Mac — the so-called government-sponsored enterprises that purchase, guarantee and securitize trillions of dollars in home loans — behind the cause of fair housing in “underserved areas.” |
That meant lowering underwriting standards. The government-sponsored enterprises, or G.S.E.s, would now be able to “establish a down payment requirement for mortgagors of 5 percent or less” and “approve borrowers who have a credit history of delinquencies” as long as the borrower could show that his credit had been reasonably good for 12 months. | That meant lowering underwriting standards. The government-sponsored enterprises, or G.S.E.s, would now be able to “establish a down payment requirement for mortgagors of 5 percent or less” and “approve borrowers who have a credit history of delinquencies” as long as the borrower could show that his credit had been reasonably good for 12 months. |
The economist Viral Acharya and three of his colleagues at the New York University business school saw the first President Bush’s reckless housing plan as the “Rubicon” on the way to the financial crisis that, in the following century, would nearly destroy the world economy under the presidency of Mr. Bush’s even more reckless son. Suddenly the government had room to deal in dangerous mortgages — ones with suspect borrowers and high loan-to-value ratios. | The economist Viral Acharya and three of his colleagues at the New York University business school saw the first President Bush’s reckless housing plan as the “Rubicon” on the way to the financial crisis that, in the following century, would nearly destroy the world economy under the presidency of Mr. Bush’s even more reckless son. Suddenly the government had room to deal in dangerous mortgages — ones with suspect borrowers and high loan-to-value ratios. |
Bill Clinton, elected president in 1992, made this mission his own. Starting in the summer of 1994, he crusaded against the dearth of private housing credit in poor, black, urban neighborhoods. It was he who, without strong evidence, made the incendiary accusation of “redlining.” | Bill Clinton, elected president in 1992, made this mission his own. Starting in the summer of 1994, he crusaded against the dearth of private housing credit in poor, black, urban neighborhoods. It was he who, without strong evidence, made the incendiary accusation of “redlining.” |
Mr. Clinton enlisted and empowered community organizers, using the Community Reinvestment Act, a nearly forgotten piece of legislation from 1977 that gave community groups a way to stymie banks by accusing them of discrimination. He brokered deals. In the quarter-century after 1992, $850 billion in loans was steered through these community groups. The banks took the precaution of showering gifts and grants on the community groups directly, too. After 1993, the Association of Community Organizations for Reform Now, which would later attract controversy for its role in helping elect Barack Obama president, received $13.5 million from Bank of America, $9.5 million from JPMorgan Chase and $8.1 million from Citibank. | Mr. Clinton enlisted and empowered community organizers, using the Community Reinvestment Act, a nearly forgotten piece of legislation from 1977 that gave community groups a way to stymie banks by accusing them of discrimination. He brokered deals. In the quarter-century after 1992, $850 billion in loans was steered through these community groups. The banks took the precaution of showering gifts and grants on the community groups directly, too. After 1993, the Association of Community Organizations for Reform Now, which would later attract controversy for its role in helping elect Barack Obama president, received $13.5 million from Bank of America, $9.5 million from JPMorgan Chase and $8.1 million from Citibank. |
By the time Mr. Clinton left office, the Department of Housing and Urban Development required that low-income loans make up 50 percent of the G.S.E.’s portfolio. Republicans never objected. They seemed to assume that, as long as the costs of fair housing came in the form of a risk distributed across society, with no increase in any line item in the federal budget, then they must be unimportant. Jack Kemp campaigned for vice president in 1996 calling for “a new civil rights agenda based upon expanding access to credit and capital.” As part of its program of “compassionate conservatism,” George W. Bush’s administration raised the G.S.E.s’ quota for low-income loans to 56 percent. | |
That brought an astonishing deterioration in the quality of housing assets. By 2007, high-risk mortgages made up 22 percent of the G.S.E.s’ portfolio, up tenfold from a decade before. The economists Atif Mian and Amir Sufi discovered that, between 2002 and 2005, income and mortgage credit growth were “negatively correlated.” The less likely you were to pay off a mortgage, the more likely you were to get one. | That brought an astonishing deterioration in the quality of housing assets. By 2007, high-risk mortgages made up 22 percent of the G.S.E.s’ portfolio, up tenfold from a decade before. The economists Atif Mian and Amir Sufi discovered that, between 2002 and 2005, income and mortgage credit growth were “negatively correlated.” The less likely you were to pay off a mortgage, the more likely you were to get one. |
The G.S.E.s’ underwriting standards became those of the whole industry. By 2006, 46 percent of new homeowners were making no down payment at all on their houses, and banks had trillions of dollars in loans on their books that would never have been made, absent government pressure. No well-informed accountant thought these loans could survive an economic downturn, and they did not. The politicization of poor people’s mortgages in a single country — the promise to make loans to everyone, as Mr. Bloomberg put it — brought the world to the brink of economic disaster. | The G.S.E.s’ underwriting standards became those of the whole industry. By 2006, 46 percent of new homeowners were making no down payment at all on their houses, and banks had trillions of dollars in loans on their books that would never have been made, absent government pressure. No well-informed accountant thought these loans could survive an economic downturn, and they did not. The politicization of poor people’s mortgages in a single country — the promise to make loans to everyone, as Mr. Bloomberg put it — brought the world to the brink of economic disaster. |
The macroeconomist Raghuram Rajan, who would go on to become governor of the Reserve Bank of India, had perhaps the most comprehensive explanation of how it all came about. He had warned central bankers before the crisis that many American financial innovations meant to minimize risk were in fact amplifying it. Mr. Rajan linked the financial crisis to the gradual rise of American inequality. Since 1992, the U.S. economy had recovered slowly from recessions. All its recoveries were “jobless recoveries”; after the 2001 recession, it took 38 months for the economy to return to full employment. And “the United States is singularly unprepared for jobless recoveries,” Mr. Rajan warned. It had no big transfer programs. Under such circumstances, any recession with the slightest perceptible effect on the public would end political careers by the score. | |
The result was reckless government extension of credit under both Democratic and Republican leadership. As a remedy for downturns, expanding credit has two practical advantages over government spending. First, it does not bother fiscal conservatives as much. Second, as Mr. Rajan put it: “Easy credit has large, positive, immediate, and widely distributed benefits, whereas the costs all lie in the future. It has a payoff structure that is precisely the one desired by politicians, which is why so many countries have succumbed to its lure.” | The result was reckless government extension of credit under both Democratic and Republican leadership. As a remedy for downturns, expanding credit has two practical advantages over government spending. First, it does not bother fiscal conservatives as much. Second, as Mr. Rajan put it: “Easy credit has large, positive, immediate, and widely distributed benefits, whereas the costs all lie in the future. It has a payoff structure that is precisely the one desired by politicians, which is why so many countries have succumbed to its lure.” |
Mr. Bloomberg is saying something similar. He did not defend redlining. But that does not mean the idealistic fight against redlining is blameless in the financial shocks of 2008 and thereafter. It is what created the moral pressure — or provided politicians with the moral cover — to follow the destructive loose-credit policies that Mr. Rajan describes. | Mr. Bloomberg is saying something similar. He did not defend redlining. But that does not mean the idealistic fight against redlining is blameless in the financial shocks of 2008 and thereafter. It is what created the moral pressure — or provided politicians with the moral cover — to follow the destructive loose-credit policies that Mr. Rajan describes. |
It is easy to call Bill Clinton a mountebank for raising Fannie Mae’s low-income quota to 50 percent or George W. Bush a fool for raising it to 56 percent. But is there any doubt that they would have faced the same accusations of racial insensitivity that Mr. Bloomberg is now facing had either of them sought to lower it? | It is easy to call Bill Clinton a mountebank for raising Fannie Mae’s low-income quota to 50 percent or George W. Bush a fool for raising it to 56 percent. But is there any doubt that they would have faced the same accusations of racial insensitivity that Mr. Bloomberg is now facing had either of them sought to lower it? |
Christopher Caldwell, a contributing editor at The Claremont Review of Books, is the author of “The Age of Entitlement: America Since the Sixties,” from which this article is adapted. | |
The Times is committed to publishing a diversity of letters to the editor. We’d like to hear what you think about this or any of our articles. Here are some tips. And here’s our email: letters@nytimes.com. | The Times is committed to publishing a diversity of letters to the editor. We’d like to hear what you think about this or any of our articles. Here are some tips. And here’s our email: letters@nytimes.com. |
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