Criticizing Democratic efforts to reform regulation of the financial industry, right-wing media figures have begun repeating the myth that affordable housing initiatives are to blame for the 2008 financial crisis, pointing to the 1977 Community Reinvestment Act and Fannie Mae and Freddie Mac. Economists -- including Federal Reserve Chairman Ben Bernanke -- have strongly rejected this notion.
Conservative media figures again heap blame on affordable-housing initiatives
Hannity: “The problem came from ... the Community Reinvestment Act.” On the April 20 edition of his Fox News show, Sean Hannity discussed the financial crisis and stated, “We're going to repeat the problem we don't understand.” He further claimed, “The problem came from this notion that everybody in America had a right to a house whether they could ever afford to pay their loan back. That's what the Community Reinvestment Act was all about.”
Limbaugh: Wall Street not to blame for “financial meltdown,” affordable housing is. On the April 20 edition of his radio program, Rush Limbaugh said that “the premise of this whole financial-regulatory reform bill” was that “Wall Street's to blame for the financial meltdown, and it's not.” He continued:
Let's go back to the premise of this whole financial-regulatory reform bill. The whole premise of this is that -- is based on the fact that Wall Street's to blame for the financial meltdown, and it's not. Government is to blame for the meltdown. ... It was these subprime mortgages that were required by the government to be lent -- Community Redevelopment [sic] Act, or what have you. ... So here, once again, we have people on Capitol Hill -- Chris Dodd, who's being shamefully retired from his seat in the Senate, Barney Frank over in the House, and any number of other people -- Fannie Mae and Freddie Mac -- who are the literal and real architects of the financial meltdown of last year.
Perino: Fannie and Freddie “led to this crisis in the first place.” On the April 20 edition of Fox News' Hannity, Fox News contributor Dana Perino claimed that financial reform would be a long-term problem for the administration, stating :
If you look at the poll yesterday from Pew Research Center, 80 percent of the American people don't trust the government, nor do they trust the other big institutions that are in their lives, including the banks. And at the end of the day, when they step back and you start peeling back the layers, anybody paying attention, they might watch President Obama's speech on Thursday and be impressed, but then also they might realize that he was the one who was defending Fannie Mae and Freddie Mac that led to this crisis in the first place.
WSJ's Fund: Fannie and Freddie “got us into this housing mortgage mess.” On the April 19 edition of Fox News' Happening Now, co-host Bill Hemmer asked whether “Republicans take a risk in opposing” financial regulatory reform. Wall Street Journal columnist John Fund responded:
Sure. With 60 percent supporting more financial regulation, it is a risk. But I think if they say a few things that'll -- people might look a different way. Fannie Mae and Freddie Mac, which are the two federal entities that got us into this housing mortgage mess and led the other banks into making stupid mistakes, they're not reformed by this bill. They get off scot-free.
Experts reject claims that affordable housing initiatives caused the financial crisis
Bernanke: Experience “runs counter to the charge that CRA was at the root of, or otherwise contributed in any substantive way to, the current mortgage difficulties.” In a November 25, 2008, letter, Federal Reserve chairman Ben Bernanke stated: “Our own experience with CRA over more than 30 years and recent analysis of available data, including data on subprime loan performance, runs counter to the charge that CRA was at the root of, or otherwise contributed in any substantive way to, the current mortgage difficulties.” Bernanke further wrote:
Further, a recent Board staff analysis of the Home Mortgage Disclosure Act and other data sources does not find evidence that CRA caused high default levels in the subprime market.
As the financial crisis has unfolded, many factors have been suggested as contributing to the current mortgage market difficulties. Among these are declining home values, incentives for originators to place loan quantity over quality, and inadequate risk management of complex financial instruments. The available evidence to date, however, does not lend support to the argument that CRA is to blame for causing the subprime mortgage crisis.
SF Reserve Bank's Yellen: "[S]tudies have shown that the CRA has increased the volume of responsible lending to low- and moderate-income households." Janet Yellen, president and CEO of the Federal Reserve Bank of San Francisco, in a March 2008 speech criticized efforts to blame CRA lending for weaknesses in the mortgage market, stating:
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.
Slate's Gross: "[t]he notion that the Community Reinvestment Act is somehow responsible for poor lending decisions is absurd." In an October 7, 2008, Slate.com article, Daniel Gross, a business columnist for Newsweek and author of Dumb Money: How Our Greatest Financial Minds Bankrupted the Nation, criticized the notion that affordable housing initiatives caused the financial crisis, writing that “the notion that the Community Reinvestment Act is somehow responsible for poor lending decisions is absurd” and that “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.” Gross further explained, “On the other hand, lending money recklessly to obscenely rich white guys ... can be really risky. In fact, it's even more risky, since they have a lot more borrowing capacity.”
Economist Dean Baker: Claim that Fannie and Freddie “responsible for the financial disaster is absurd on its face.” Economist Dean Baker reported in September 2008 that the accusation that “the financial crisis is attributable to the close government relationship with Fannie Mae and Freddie Mac” is “obviously not true.” He further wrote:
Fannie and Freddie got into subprime junk and helped fuel the housing bubble, but they were trailing the irrational exuberance of the private sector. They lost market share in the years 2002-2007, as the volume of private issue mortgage backed securities exploded. In short, while Fannie and Freddie were completely irresponsible in their lending practices, the claim that they were responsible for the financial disaster is absurd on its face -- kind of like the claim that the earth is flat.
Gross: Investment banks to blame for subprime loans. In an October 2008 Newsweek article, Daniel Gross wrote:
There was a culture of stupid, reckless lending, of which Fannie Mae and Freddie Mac and the subprime lenders were an integral part. But the dumb lending virus originated in Greenwich, Ct., midtown Manhattan, and Southern California, not Eastchester, Brownsville, and Washington. Investment banks created a demand for subprime loans because they saw it as a new asset class that they could dominate. They made subprime loans for the same reason they made other loans: They could get paid for making the loans, for turning them into securities, and for trading them -- frequently using borrowed capital.
Former Lehman Brothers CEO Richard Fuld: Fannie and Freddie played “de minimis” role. Gross further reported that the following happened during testimony by Former Lehman Brothers CEO Richard Fuld before the House Committee on Oversight and Government Reform:
At Monday's hearing, Rep. John Mica, R-Fla., gamely tried to pin Lehman's demise on Fannie and Freddie. After comparing Lehman's small political contributions with Fannie and Freddie's much larger ones, Mica asked Fuld what role Fannie and Freddie's failure played in Lehman's demise. Fuld's response: “De minimis.”
From Fuld's testimony:
MICA: And one of your big com -- well, one of the big packagers, or the competitor, so to speak, was Fannie Mae, which was deep into this. And you were -- you were dealing in some of the paper, I think, for secondary markets and other securitized mortgage paper, to basically package it and make money off it. Is that right?
FULD: Yes, sir.
MICA: What was Lehman Brothers' exposure to the debt of Fannie Mae and Freddie Mac, and what role did their collapse play in precipitating some of your financial troubles?
FULD: Our --
MICA: It didn't matter or you --
FULD: Our exposure to both Fannie Mae and Freddie Mac was de minimis, sir.