Bloomberg on the Financial Crisis

If anything, it has significant entertainment value.

Democratic thought leaders, from politicians to the cognoscenti, are twisting their minds into pretzels to explain how they can possibly nominate Michael Bloomberg, a man who has been known to traffic in racist, sexist, and transphobic tropes, as their candidate for the presidency. Forget the aversion that Democrats have toward billionaires. And, forget the pretense that Democrats cannot be bought. 

For a party that has made its mark by fighting against thought crimes, the irony in nominating someone who, if he had been a Republican, would have long since been drawn and quartered, is rich indeed. 

Better yet, we are also being treated to the spectacle of Michael Bloomberg, supreme tech oligarch, groveling before the masses of Democratic voters, eating one helping after another of humble pie. 

Then again, today’s Democrat Party has become home to sanctimonious hypocrites, so we should not have been surprised.

Among the issues that have agitated Democratic voters was Bloomberg’s suggestion that the financial crisis of 2008 was generated by government policies that forced banks to give mortgages to unqualified individuals. As it happened, most of these unqualified individuals belonged to minority groups. Ergo, anyone who points this out is a stone-cold bigot.

Christopher Caldwell opined about the matter in a New York Times op-ed. He argued cogently that Bloomberg had been right all along. The crisis was caused by an abundance of bad loans… thus, loans that threatened the banking system.

He opens:

Certainly there were many elements that brought on the finance crisis, but Mr. Bloomberg correctly identifies the major one: a flawed attempt to use credit markets to broaden access to housing.

It began in 1992, under the leadership of one George H. W. Bush:

On Oct. 28, 1992, at the end of an election campaign shadowed by the outbreak in Los Angeles of the deadliest race riots in a quarter-century, President George H.W. Bush signed a Housing and Community Development Act. Mr. Bush wanted to put Fannie Mae and Freddie Mac — the so-called government-sponsored enterprises that purchase, guarantee and securitize trillions of dollars in home loans — behind the cause of fair housing in “underserved areas.”

That meant lowering underwriting standards. The government-sponsored enterprises, or G.S.E.s, would now be able to “establish a down payment requirement for mortgagors of 5 percent or less” and “approve borrowers who have a credit history of delinquencies” as long as the borrower could show that his credit had been reasonably good for 12 months.

Giving loans to people who do not have the means to service them is not a very good idea. It was such a bad idea that President Clinton adopted it as his very own. The new policy was based on the assumption that minority group members did not own their homes because banks were redlining certain neighborhoods, thus excluding them from the mortgage markets. The new initiatives were a way to overcome systemic bigotry:

Bill Clinton, elected president in 1992, made this mission his own. Starting in the summer of 1994, he crusaded against the dearth of private housing credit in poor, black, urban neighborhoods. It was he who, without strong evidence, made the incendiary accusation of “redlining.”

Mr. Clinton enlisted and empowered community organizers, using the Community Reinvestment Act, a nearly forgotten piece of legislation from 1977 that gave community groups a way to stymie banks by accusing them of discrimination. He brokered deals. In the quarter-century after 1992, $850 billion in loans was steered through these community groups. The banks took the precaution of showering gifts and grants on the community groups directly, too. After 1993, the Association of Community Organizations for Reform Now, which would later attract controversy for its role in helping elect Barack Obama president, received $13.5 million from Bank of America, $9.5 million from JPMorgan Chase and $8.1 million from Citibank.

By the time Mr. Clinton left office, the Department of Housing and Urban Development required that low-income loans make up 50 percent of the G.S.E.’s portfolio. Republicans never objected. They seemed to assume that, as long as the costs of fair housing came in the form of a risk distributed across society, with no increase in any line item in the federal budget, then they must be unimportant. Jack Kemp campaigned for vice president in 1996 calling for “a new civil rights agenda based upon expanding access to credit and capital.” As part of its program of “compassionate conservatism,” George W. Bush’s administration raised the G.S.E.s’ quota for low-income loans to 56 percent.

If you would like to have another good laugh, consider that America, in the midst of the financial crisis of 2008, elected a president who had been a community organizer. The result was to shut down debate over the causes of the crisis.

It is important to note that many Republicans also embraced these new policies, unthinkingly.

By 2007, high-risk mortgages made up 22 percent of the G.S.E.s’ portfolio, up tenfold from a decade before. The economists Atif Mian and Amir Sufi discovered that, between 2002 and 2005, income and mortgage credit growth were “negatively correlated.” The less likely you were to pay off a mortgage, the more likely you were to get one.

The G.S.E.s’ underwriting standards became those of the whole industry. By 2006, 46 percent of new homeowners were making no down payment at all on their houses, and banks had trillions of dollars in loans on their books that would never have been made, absent government pressure. No well-informed accountant thought these loans could survive an economic downturn, and they did not. The politicization of poor people’s mortgages in a single country — the promise to make loans to everyone, as Mr. Bloomberg put it — brought the world to the brink of economic disaster.

So, it was not the banking system. It was political interference in the banking system. As Caldwell notes, it was about the “politicization of poor people’s mortgages.”

Caldwell continues:

The result was reckless government extension of credit under both Democratic and Republican leadership. As a remedy for downturns, expanding credit has two practical advantages over government spending. First, it does not bother fiscal conservatives as much. Second, as Mr. Rajan put it: “Easy credit has large, positive, immediate, and widely distributed benefits, whereas the costs all lie in the future. It has a payoff structure that is precisely the one desired by politicians, which is why so many countries have succumbed to its lure.”

And also:

It is easy to call Bill Clinton a mountebank for raising Fannie Mae’s low-income quota to 50 percent or George W. Bush a fool for raising it to 56 percent. But is there any doubt that they would have faced the same accusations of racial insensitivity that Mr. Bloomberg is now facing had either of them sought to lower it?

Who was it who said that the road to Hell is paved with good intentions?