One would think that at least two lessons would have been learned from the financial crisis: stop pushing loans to people who cannot or will not pay them back and stop offering loans with “flexible underwriting criteria.” Not so. The Obama administration and Democrats in Congress are pushing their most audacious plan yet expanding the Community Reinvestment Act (CRA) which helped spark the crisis in the first place.
As our old Hoover Institution friend Peter Schweizer points out in his Forbes column “Expanding the CRA,” in the nine years running up to the economic crisis, banks operating under the constraints of the CRA to offer more than $4.2 trillion in loans to people they would ordinarily not lend money to. Now they want to expand the CRA to cover credit unions, other mortgage lenders and insurance companies. This would mean trillions more in what Peter refers to as affirmative action lending.
Peter’s new book on the origins of the financial crisis is Architects of Ruin: How Big Government Liberals Wrecked the Global Economy–and How They Will Do It Again if No One Stops Them. He argues that the CRA not only helped spark the crisis, but also that Fannie Mae and Freddie Mac made possible the rise of subprime lenders such as Countrywide and Ameriquest.
As for the speculative action on Wall Street that contributed to the crisis, Peter points out that Washington had a hand in that too. Peter argues that the Clinton administration fueled the speculation by bailing out big investment houses such as Goldman Sachs and Morgan Stanley five times during the Clinton years. The Clinton team not only pulled their chestnuts out of the fire from derivative investments around the world, they ensured that they actually profited from their risky behavior.
In finance they call this “moral hazard.” It’s like bailing a friend with a DUI charge out of jail, giving them the keys to the car, and throwing a six pack in the back seat. Peter’s Forbes column suggests that the Democrats are turning in an encore performance.
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