I was musing about the current state of panic in the financial markets. Now that the initial shock and surprise has worn off, a rough consensus in conservative circles has begun to form: “It’s the Democrats’ fault”.
The narrative starts with the Community Reinvestment Act of 1977, enacted during the Carter administration. The CRA was intended to address the difficulty of obtaining credit, in particular mortgage credit, in decrepit and declining inner cities. It did so by creating incentives for banks and mortgage companies to lend money to people who didn’t meet traditional credit requirements. The narrative continues through the idle years of Clintonian trisection and on to the contemporary, successful efforts of Frank and Dodd to stonewall reform of FNMA and FHLMC (despite the heroic efforts of Bush & McCain).
The conservative critique is outlined in fair detail by Roger Kimball at Pajamas Media. It’s a vaguely interesting story, although I suspect the truth is somewhat more nuanced.
But what I want to explore is whether this narrative fits a familiar template.
One of the most cherished beliefs of the Marxist Left is that capitalism is merely a transitional form between feudalism and universal socialism. In the Marxist view of history, capitalism will eventually collapse because of its “internal contradictions”.
Now, I am about as virulent an anti-communist as one will find these days. But what would a Marxist make of the current panic? On the one hand, the Western financial system is undergirded by the rule of law, a detailed practical understanding of how wealth is generated, and a detailed economic understanding of supply, demand, and the time value of investment. On the other hand, Western democracies have not been “laissez-faire” for more than a century – that went out the window when Teddy Roosevelt started busting trusts, if not before. The consistent trend has been towards a mixed economy, incorporating a “safety net” – Social Security, Medicare/Medicaid, WIC, etc. – to mitigate the economic hazards of the capitalist system. Nowadays, something like 1/3 of the GDP of the U.S. is due to government at various levels.
But about a generation ago, we moved beyond the “safety net” to active intervention to promote socialist ideals. CRA is one instance where government has mandated economic behavior which has turned out to be not just hazardous, but deadly, to the financial entities burdened with these requirements.
So, on the one hand, the efficient functioning of the capitalist system requires adherence to a set of principles governing risk and reward. But on the other hand, well-meaning democratic governance has led to policies that directly and direly undermine these principles. From the conservative perspective, leftists simply do not understand how their social programs are economically untenable. From the leftist perspective, conservatives simply do not understand how capitalism is inherently incapable of meeting the minimum requirements for social justice. How’s that for an internal contradiction?
Ironically, the sweetest aspect of this to a dedicated Marxist is extent to which the media in our ostensibly free country are so committed to the candidate with Communist ties. They are so committed that dissent from the storyline — that the crisis is due to lack of regulation on the part of a Republican administration — is not tolerated. Representative Frank has stated that even suggesting that loans to underqualified recipients were a bad idea is – racist!
Once upon a time – maybe three weeks ago – it seemed that we had achieved a pretty good compromise between freedom and economic security in this country. Now it appears that the folks who brought this crisis to a head by stoking our internal contradictions are about to be rewarded with more power. It’s going to be a bumpy ride.
Friday, 3 July 2009 at 00:01
Numerous economists have looked at the GOP claims that the CRA is a major contributor to the mortgage fiasco. Various Fed branches, as well as the central Fed, find no relationship- as in zero. Bankers themselves report liking CRA loans because of their low risk. The overwhelming majority of subprime mortgages were made by entities not covered by the CRA.. And, of course, it’s odd that it worked basically as intended for 30 years, and then suddenly brought the world to its knees.
All of the people promoting the idea that the CRA did are people with an anti-regulation/anti-affirmative action axe to grind. Literally no one without a deep-seated desire to blame everything on Carter (with help from Clinton) find any merit in the claim at all
Saturday, 4 July 2009 at 15:52
It did so by creating incentives for banks and mortgage companies to lend money to people who didn’t meet traditional credit requirements.
Saturday, 4 July 2009 at 16:01
again, most of my reply was deleted.
The CRA explicitly forbade lending to people who didn’t otherwise qualify for credit.
The consensus among bankers subject to the CRA is that it was an unimtigated success, and should in fact be strengthened and expanded Sheila Baird, the Dole protege whose FDIC is the primary overseer of CRA covered institutions, argued insistently that the chorus promoting your view was simply and flatly wrong
The subprime fiasco eruped after the FBI warned of an epidemic of mortgage fraud, and still the Bush administration continued to follow their combination of radical laissez-faire/crony capitalism tenets, elminating as much enforcement of regulations-such as the CRA- as they could. To reiterate, for 25 years the CRA failed to cause a credit crisis (and in fact led banks to make , in their view, exceptionally sound and profitable loans), and then largely sopped being enforced:I suppose you could call that “the CRA causing the subprime crisis”- if you were perverse and/or had had a WSJ Editorial pahe pod attached to your brain.