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Getting Back in Our Subprime

Those who cannot remember the past are doomed to repeat it, according to George Santayana’s famous adage, but those who remember the past incorrectly are likely to create brand new catastrophes. The Obama administration’s current efforts to re-inflate the housing bubble through the same old subprime lending methods will eventually demonstrate the point.
Surely our youngest and most oblivious readers will vaguely recall the Crash of ’08, the unhappy effects of which still linger today, but even at the time it was not widely understood what had caused it. The worst economic downturn since the Great Depression occurred at the end of George W. Bush’s administration, and after eight years of relentless criticism of everything from his Iraq War policy to his decades-old Air National Guard service records to his mangling of the word “nuclear” most people readily accepted the explanation that he was solely responsible. How he had managed to bring down the American economy was never specified, but candidate Obama and his many friends in the American media were happy to allow a a consensus to form that it must have had something to with that Republican fetish for de-regulation or the tax-cuts-for-the-rich or just an inclination to let those greedy bankers get ever richer by making huge loans to people who would never be able to re-pay them. That there had been no significant de-regulation of the financial sector and instead thick book of new regulations from Sarbanes-Oxley had been added, along with a few new battalions of regulators to enforce them, did not matter. Nor did the fact that the tax cuts had been for everybody, including the half of the country that did not pay federal income taxes, or that they had increased the federal revenues as promised. The obvious illogic of greedy bankers giving hundreds of billions of dollars in mortgage loans to people who were bound to default didn’t make much difference, either.
Already forgotten at that point was the decades of criticism those greedy bankers had endured for failing to make loans to people who couldn’t pay them back, and that at some point in ’90s they were cajoled, incentivized, and ultimately compelled to do so. When it all started President Bill Clinton and his Housing and Urban Development Secretary, Andrew Cuomo, were quite pleased to let people know they had threatened legal action against various banks with the Community Re-Investment Act, which had been passed in the waning days of the Carter but lightly enforced during the years of Reagan and the elder Bush, and they even set up agencies to let targeted groups such as single women know that they banks were now obliged to dole out money to people with poor credit ratings. The mortgage kings Fannie Mae and Freddie Mac were directed to invest half their portfolios in subprime loans, Activists groups such as ACORN also got in on the action, picketing and squatting in banks that were so stodgy they would only loan to the credit worthy, and an obscure civil rights attorney and former community organizer named Barack Obama was among those who sued banks to force loans to people who would wind up in default and disastrous financial circumstances. This was known as “affordable housing policy,” much as Obamacare would later be dubbed The Affordable Care Act, and when it’s only obvious effect was a suspiciously steep spike in property values it was considered proof of Clinton’s economic.
When interest rates finally rose and the prices finally flattened and those borrowers less-than-credit-worthy borrowers ran out of gimmicks and started defaulting in droves and leaving the banks with hundreds of billions of losses, it was naturally taken as proof of the younger Bush’s hilarious stupidity. Never mind that Bush and Senators John McCain and Elizabeth Dole had made a futile effort to reform the policy and was blocked by Rep. Barney Frank of Massachusetts, Sen. Chris Dodd of Connecticut, a Congressional Black Caucus that it racist to deny a minority member a loan just because he could not pay it back, and the rest of the Democratic party. the greedy banker and his laissez faire Republican enablers was just too familiar a cliche to resist. The man who had sued a bank to force them to make loans to his indigent clients won election to the presidency on a vow to fight “predatory lending,” Bush was vilified and McCain and Dole both went down to defeat, Cuomo became Governor of New York, Dodd and Frank got to re-write pretty much the entire financial code, and four years later Obama won re-election on the argument that electing a Republican would be like handing the keys over to the fool who had run the car into a ditch.
All in all, the “affordable housing policy” proved such a smashing success for the Democrats that they’ve decided to do it again. It didn’t work out so well for the country at large last time around, and there’s no reason to believe it will work out any better this time, but if history can repeat itself precisely the crash won’t come until some after Hillary Clinton has finished a second term and some Republican with peculiar pronunciations is conveniently installed in office. If all goes according to plan the public still won’t wise up, and that is something they really can bank on.

— Bud Norman

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