How kinder, gentler lending caused the Panic of '08

Today it's called "subprime lending," or, if you're of a more Marxist bent, "predatory lending." But back before the bubble burst, it was called "affordable housing." Today it's called "greed" and "corruption," but until the bottom fell out it was progress for "minorities and the poor."

Sloganeering has been a handy stand-in for understanding of this credit crisis. "Crony capitalism," "neocons," "politics of greed," and on and on. That may have been good enough for Soviet poster printers, but it does nothing to explain exactly what happened.

Between 2000 and 2006, the average home price in the United States rose by some 93 percent. It was the good times for that mania of these first years of the 21st Century: house-flipping. A fixer-upper might be bought for $100,000, renovated for $35,000, and re-sold for $200,000. But it was all too far, too fast. Inflation at that rate was insupportable, and the painful but necessary correction started in 2006.

In the boom years of '00 to '06, a fellow who found himself unable to manage his mortgage payments might simply put his house up for sale, and sell it within a few months for considerably more than he had paid for it. And the lender which had approved that bad mortgage was not much bothered by the borrower being a bad risk, so long as there was an out -- a quick turnaround in a market that could only go up.

But then, interest rates returned to more realistic levels. And the other side in the bargain -- the people who buy homes -- decided that home prices were getting to be higher than home values. Buying slowed, and the music stopped in the musical chairs game of moving from home to better home. New home construction slowed. Existing home prices deflated. Then the bad risk borrowers were back on the hook, and started defaulting. And finally the lenders and securitizers found themselves holding "bad paper."

It may fairly be said that conservatives had no problem at all with sellers and lenders playing the housing game and getting rich quick. And until 2007, the Bush Administration often touted the record numbers of home owners, and the new stake in America for millions which that homeownership represented. But there was nothing very conservative or capitalistic about lending to bad risks in the first place. That was a policy of progressives, leftists, and Democrats.

It all started with President Carter's Community Reinvestment Act of 1977, revised and enhanced in 1995 under President Clinton. The progressive set urged and mandated lax lending practices, particularly through Fannie Mae and Freddie Mac -- the two formerly quasi-governmental lending houses which accounted for the largest share of American mortgage holdings. The idea was to open homeownership to the sort of people who had traditionally been shut out of it, for the now clearly sensible reason that they were unlikely to meet their mortgage payments. Bad risks. Or, according to the CRA's supporters, "minorities and the poor."

The election-season fever-dream, that subprime lending was some Bush Administration/John McCain "neocon" ponzi scheme, is perverse. Fannie Mae and Freddie Mac are no friends of conservatives and Republicans. Their address books and campaign contributions skew in the other direction. And as it happens, the Bush Administration proposed that Fannie and Freddie be subject to "the most significant regulatory overhaul in the housing finance industry since the savings and loan crisis," all of five years ago, in September of 2003.

This has been the way. The Administration tried to open domestic oil drilling in 2001 and 2005, when limited supply first started driving oil prices into troubling territory. The Administration made a Quixotic run at reforming Social Security in 2005, trying to move younger Americans off of Social Security dependence before the Baby Boomer retirement tab came due.

And cranky old John McCain was about the most vicious critic of Fannie Mae and Freddie Mac in American public life. In 2005, McCain co-sponsored the Federal Housing Enterprise Regulatory Reform Act, and assailed Fannie and Freddie as monstrosities, exposing the market and the taxpayer to untold risk.

But all these measures were blocked in Congress by a certain party which considers it a Golden Rule that any and every utterance and action by the president and his party must necessarily be wrong, stupid, and bad. The 2003 Bush Administration attempt to regulate Fannie Mae and Freddie Mac was received by the Fannie and Freddie Party as an assault on the poor, and on the good work of those two progressive friends of the little guy. Fannie and Freddie were "not facing any kind of financial crisis,'' and ''the more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing.'' That, according to the now-Chairman of the House Financial Services Committee.

The true indictment against the Bush Administration is that they failed to fight and win those political battles, not that they didn't see the trainwrecks coming, or that they supported the status quo. They saw the problems clearly enough. But their proposed fixes were pronounced "dead on arrival," in the words of a Senate Majority Leader, and the Administration invariably dropped the issue and returned to fighting wars, or other more immediate concerns.

The Panic of '08 was not the product of some scam to take from the poor and give to the rich; it was the end result of government-directed "kinder, gentler" lending that spiralled into the stratosphere when it combined with low interest rates and the housing boom. But what's done is done. Now all that's left is to absorb the bad debt and restrict the bad risks -- as the U.S. government is doing -- and let America get back to business. And save the musty Socialist rhetoric for the museums.

Andrew W. Smith

Published in The Chronicle-Herald, Halifax, Nova Scotia