In a new study released by the National Bureau of Economic Research, a definitive link is made between the Carter-era Community Reinvestment Act (CRA), its expansion under President Clinton and the economic downturn. According to the study, "[t]here is a clear pattern of increased defaults for loans made by these banks in quarters around the [CRA] exam. Moreover, the effects are larger for loans made within CRA tracts [of predominatly low-income and minority areas]." In order to address the concerns of the CRA examiners, banks increased loan flexibility creating loans that defaulted 15% more often. In the early 1990s, the Democrat Congress gave HUD the authority to set and enforce (through fines) CRA-grade loan quotas at Fannie Mae and Freddy Mac.
According to the Investor's Business Daily, Fannie and Freddy bought about half of all CRA home loans most carrying subprime features between 2001 and 2007. In the mid-90s, banks that didn't meet the new lending targets were denied merger plans and were subject to other penalities. Banks were strong-armed through these tactics into pledging to issue more of the riskier loans.
Keep in mind that President Bush went to Congress repeatedly (17 times in 2008 alone) warning them of the issues at Fannie Mae and Freddy Mac. Democrats ignored him saying that there was no issue there. John McCain co-sponsored critical reforms that would have prevented the housing market collapse but Democrats killed it and ridiculed people who suggested such reforms were needed. The New York Times even saw the potential for a meltdown:
In moving, even tentatively, into this new area of lending [CRA directed lending], Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980's.While the blame game doesn't lead us to any solution, maybe the country, the media, and Congress should pause for a minute and consider that the GOP has a point. The recent effort to avoid the fiscal cliff does NOTHING towards addressing the real problem. Many Americans - even under whatever "rich" baseline you wish to set - will see their taxes rise this year. Spending is the problem. The mandatory spending programs (Medicare, Medicaid and Social Security) all face demographic issues and control issues. People live longer now. People work longer. There are fewer people in the generations behind the baby boomers. The ponzi schemes are broken. Until we address those programs with concrete solutions to include things like means-testing, raising eligibility ages (or at least providing a gradient effect to the benefits), and controlling the benefits and waste and fraud, we will continue to face a fiscal problem. The Democrats, just like the CRA initially and its expansion, are not seeing or refusing to acknowledge the bigger picture and face this head-on.
And again, there will be those conservatives who will point back and say, "here's where we should have fixed things."