It didn't take long, once the investment banks started failing, for the bigshots on Wall Street to start looking for a scapegoat, and as is usual for people in that position, they peered down as far as they could to find someone to blame. I'm talking about the argument put forward by pretty much everyone on the WSJ Op-Ed page, Charles Krauthammer, Jim Cramer, Neil Cavuto, and that well known
bastion of conservative thought useless even as birdcage liner magazine, the National Review, that Democrats--in particular, Jimmy Carter and Bill Clinton--and minorities (of course) are the real culprits in the mortgage crisis.
The highly offensive argument goes like this. Congress, back in 1977, passed the Community Reinvestment Act, which was meant to encourage banks to make home loans to minorities, because in the past, banks had been pretty crappy in that regard for racial and ethnic reasons. Congress, they say, forced banks to make crappy loans to brown people that those brown people couldn't pay back, and so we have the housing crunch.
Now, being the economic novice I am, I know in my gut that that theory is not only offensive, but it's also wrong. If I were a right-winger, I could just leave it at that--of course, if I were a right-winger, I'd be making the argument, which makes it unlikely I'd see what was wrong with it, but I'm about to go cross-eyed trying to keep that straight so I'll just leave it alone.
I can do that because Newsweek's Daniel Gross has explained exactly how the above theory is both offensive and wrong.
The Community Reinvestment Act applies to depository banks. But many of the institutions that spurred the massive growth of the subprime market weren't regulated banks. They were outfits such as Argent and American Home Mortgage, which were generally not regulated by the Federal Reserve or other entities that monitored compliance with CRA. These institutions worked hand in glove with Bear Stearns and Lehman Brothers, entities to which the CRA likewise didn't apply. There's much more. As Barry Ritholtz notes in this fine rant, the CRA didn't force mortgage companies to offer loans for no-money down, or to throw underwriting standards out the window, or to encourage mortgage brokers to aggressively seek out new markets. Nor did the CRA force the credit-rating agencies to slap high-grade ratings on subprime debt.I could quote the whole thing, really; it's that good. And I highly recommend you go read it, but this is the nutmeat, as Stephen Colbert would say. Poor people didn't cause this problem--rich people did. It's a perfect example of the adage that if you owe the bank $10K and can't pay, you have a problem, but if you owe the bank $10 million and can't pay, the bank has a problem.
Second, many of the biggest flameouts in real estate have had nothing to do with subprime lending. WCI Communities, builder of highly amenitized condos in Florida (no subprime purchasers welcome there), filed for bankruptcy in August. Very few of the tens of thousands of now-surplus condominiums in Miami were conceived to be marketed to subprime borrowers, or minorities—unless you count rich Venezuelans and Colombians as minorities. The multi-year plague that has been documented in brilliant detail at IrvineHousingBlog is playing out in one of the least subprime housing markets in the nation.
Third, lending money to poor people and minorities isn't inherently risky. There's plenty of evidence that in fact it's not that risky at all. That's what we've learned from several decades of microlending programs, at home and abroad, with their very high repayment rates. And as The New York Times recently reported, Nehemiah Homes, a long-running initiative to build homes and sell them to the working poor in subprime areas of New York's outer boroughs, has a repayment rate that lenders in Greenwich, Conn., would envy. In 27 years, there have been fewer than 10 defaults on the project's 3,900 homes. That's a rate of 0.25 percent.
On the other hand, lending money recklessly to obscenely rich white guys, such as Richard Fuld of Lehman Brothers, or Jimmy Cayne of Bear Stearns, can be really risky. In fact, it's even more risky, since they have a lot more borrowing capacity.
We can really relate to Gross's second point down here in south Florida. There's a tremendous glut of high end condos on the market both in Fort Lauderdale and Miami, and I don't see them moving any time soon. I don't know how big and how wealthy a population has to be to sustain thousands upon thousands of condos with prices in the $500K range at the low end and into seven figures at the high end, but I can tell you this--we don't have it in south Florida right now, and we're not likely to have it in the near future. And yet, despite all these units sitting empty, every day new construction continues. And is any of it affordable housing for working to middle class people? Not that I've seen.
So there it is for you--a solid explanation as to why poor people aren't to blame for the housing crisis. Someone go punch Jim Cramer in the face now.