Alex Blaze

Scapegoating's getting more complicated... and scarier

Filed By Alex Blaze | October 15, 2008 3:00 PM | comments

Filed in: Politics
Tags: Barack Obama, Barney Frank, economic policy, Fannie Mae, finance industry, financial crisis, Freddie Mac, George Will, herb moses, John McCain, Mallard Fillmore, over regulation, palin, Sarah Palin, subprime lending crisis

For the past month everyone's trying to explain just why the financial crisis happened. To anyone paying attention, massive deregulation caused an explosion in the buying and selling of arcane and opaque securities, creating a huge bubble (bigger than all the money in the whole world put together!) that burst as real wages dropped, bad loans stopped being paid, and investors started to ask for real money on their investments.

But that explanation is woefully inadequate to a certain segment of Americans for several reasons:

  1. It finds fault with free market fundamentalism, the foundation of conservatism
  2. It places the blame on Republicans and a smaller group of "fiscally conservative" Democrats
  3. It might usher in an era of increased regulation and raise class consciousness to where Americans are less willing to accept income inequality

So conservatives have started a counternarrative, blaming the current housing crisis on any of a number of factors, such as Fannie Mae, Freddie Mac, the Community Reinvestment Act, and poor people who couldn't repay their loans. By extension, the assault is on Democrats, social justice, and racial minorities.

I believe that if I had more faith in humankind's ability to mature over time I wouldn't be so worried about where all this is going.

No doubt about it, the conservative meme that the whole problem was caused by lending to dangerous minorities is getting around. Here's one of America's most prodigious teachers of snooty, intellectual racism, George Will:

It is hard to state the truth with more elegant imprecision. In fact, much of the crisis we're in today is because the government set out to fiddle the market. That is, we had regulation in effect with legislation that would criminalize as racism and discrimination if you didn't lend to nonproductive borrowers. We had Fannie Mae and Freddie Mac existed to rig the housing market because the market would not have put people in homes they could not have afforded.

The legislation he's talking about is the Community Reinvestment Act, which requires lenders to give money to certain low-income borrowers. It was meant to attack the practice of "red-lining," where banks would refuse to lend to people who live in a certain neighborhood.

Here's Mallard Fillmore, blaming the crisis on Barney Frank (and, by extension, all Democrats) and his refusal to give up on Fannie Mae and Freddie Mac, two of the largest firms that lend to low-income neighborhoods.

Mallard_Fillmore.gif

Notice the small but intentional homophobic reference to sodomy with that Herb Moses button.... Is that the conservative "tolerance" of gay people?

And then they have their contempt for the homeowners themselves:

That is why Congressmen have been crying about the plan's "accountability." Do they want to protect taxpayers? Or is it their own privilege to dispense public money that concerns them?

How else can you explain the crazy logic of additional homeowner aid now demanded by the Democrats to be included in the bill?

Here is how their plan would work: The government buys a defaulted mortgage from a bank. The government then hands more money to the homeowner who defaulted on the mortgage in the first place so that the homeowner can make a payment on the mortgage now owned by the government.

Wasn't the original problem that the homeowner couldn't afford the house?

No, actually, it wasn't. But they're a convenient scapegoat if you're a Wall Street banker who doesn't want even basic oversight to prevent another crisis.

There are thousands of other examples out there, but the narrative is clear: Democrats created a sort of affirmative action program for mortgage borrowers, and unqualified minorities got so many loans that they didn't know what to do with them. So they weren't paid back, because you can't expect those sorts to keep a job....

The counter-narrative is patently ridiculous for many reasons, but here are the four biggest ones:

  1. The 1977 Community Reinvestment Act didn't cause the subprime crisis:

    Second, it is hard to blame CRA for the mortgage meltdown when CRA doesn't even apply to most of the loans that are behind it. As the University of Michigan's Michael Barr points out, half of sub-prime loans came from those mortgage companies beyond the reach of CRA. A further 25 to 30 percent came from bank subsidiaries and affiliates, which come under CRA to varying degrees but not as fully as banks themselves. (With affiliates, banks can choose whether to count the loans.) Perhaps one in four sub-prime loans were made by the institutions fully governed by CRA.

    Most important, the lenders subject to CRA have engaged in less, not more, of the most dangerous lending. Janet Yellen, president of the San Francisco Federal Reserve, offers the killer statistic: Independent mortgage companies, which are not covered by CRA, made high-priced loans at more than twice the rate of the banks and thrifts.

  2. Fannie Mae and Freddie Mac aren't at fault here. Nobel Prize winning economist Paul Krugman explains:

    But here's the thing: a few years ago, an explosion that dwarfed the S.& L. fiasco. In fact, Fannie and Freddie, after growing rapidly in the 1990s, largely faded from the scene during the height of the housing bubble.

    Partly that's because regulators, responding to accounting scandals at the companies, placed temporary restraints on both Fannie and Freddie that curtailed their lending just as housing prices were really taking off. Also, they didn't do any subprime lending, because they can't: the definition of a subprime loan is precisely a loan that doesn't meet the requirement, imposed by law, that Fannie and Freddie buy only mortgages issued to borrowers who made substantial down payments and carefully documented their income.

    So whatever bad incentives the implicit federal guarantee creates have been offset by the fact that Fannie and Freddie were and are tightly regulated with regard to the risks they can take. You could say that the Fannie-Freddie experience shows that regulation works.

  3. If we're going around to place blame for people not repaying loans that their banks knew that they weren't going to be able to repay when they granted them, the blame should fall on the banks. They're the experts. They're the ones who say that they don't need to be regulated because they know what they're doing. And they're the ones whose money (in a sane system) would be put at risk.

    Blaming the borrowers, who most likely were assured by a bank that they could pay back the loan, if for nothing else other than the fact that they were granted the loan, only proves how incompetent these so-called Masters of the Universe are.

    But then, given the short-term profit a bad loan promised for these banks....


  4. The subprime lending crisis caused only a fraction of this financial crisis. There was that credit default swap market that decreased transparency, the buying and selling of bonds whose value, and the overturning of the Glass-Steagall Act's protections set in place in 1933 to prevent, well, exactly what's happening right now.

    There were bigger things going on that some people not paying back their loans. How else could firms like Lehman Brothers and AIG get involved?

But the counter-narrative is definitely attractive, mostly because of where it moves the blame. Instead of deregulation, the problem is over-regulation. This satisfies free market fundamentalists like George Will (who are currently living up to the more dangerous side of the word "fundamentalist"). It satisfies Republicans, because the policy at fault was mostly sponsored by Democrats. And it satisfies those people who always have that aching suspicion, deep in their minds, that all of America's problems are caused by dangerous minorities.

Even though it's not true, it's definitely an attractive conspiracy theory to many.

But the timing for marketing this racism couldn't be worse. our country's racists have already awakened at the prospect of the country's first black president. They're making up a dangerous black-supremacy conspiracy theory to bring down Obama, and creating that sort of libel leads to materially dangerous action.

McCain and Palin continue to march around the the country stoking flames of racism, and conservative pundits in the hundreds are aiding and abetting by providing propaganda in support of the idea that we're all fucked if Obama wins the presidency.

Take the humiliation to the racist mind that an Obama win would be with three other humiliations that conservatives have suffered and blamed on the left:

  1. The failure in Iraq. They're already constructing a narrative that America was doing wonderfully in its efforts there. Rest absolutely assured that as soon as Obama takes office and starts to get us out of that quagmire, they'll be shouting about how America was stabbed in the back by liberals.
  2. Conservative followers themselves aren't immune from the financial crisis, and have been suffering tightened family budgets and foreclosed homes along with the rest of us. But, as noted above, that personal resentment is being channeled to blame the left.
  3. Sarah Palin is the closest to one of them that movement conservatives have seen running for high office, and McCain's entire strategy is that he's a real, American war hero. The Republican ticket is tribalism at its worst, and it's being humiliated in public and will, most likely, lose in November. As we're seeing at those McCain/Palin rallies, that humiliation is being taken personally. And the personal resentment will be palpable.

The hatred is going to continue to become more and more palpable, and with the depression expected to last a good, long time, it'll have plenty of time to fester and develop.

I don't actually believe that America is somehow exempt from acting on its worst impulses. Years of the Bush administration has disabused anyone paying attention of the idea that America won't do what other dictatorships around the world have done because we're above that. The people running this country have faults, like all other world leaders have had, and the temptation to abuse xenophobia and racism to advance a political agenda is simply too strong for many people to resist.

The only way to oppose this is actual vigilance against violence and abuses of the public's trust. If there was ever a time where we should all be paying attention to what our fellow Americans are trying to do, this it.

Me, I'll be listening for McCain to repeat the counternarrative's keywords tonight, blaming the financial crisis on the Community Reinvestment Act, Fannie Mae, Freddie Mac, House Democrats, and homeowners. He did it in the last debate, and while I think even he is too smart to actually blame minorities on TV as George Will was willing to do, using the code language of conservatism is just as bad.


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You have just painted a terrifying picture...

I was on active duty when Bill Clinton was running for president. In 'safe spaces', those senior enlisted and officers who were Kool-Aid-drinking conservatives showed open and utter contempt for 'slick willie'.

Now, they took an oath to protect and defend the constitution and to owe ultimate allegiance to the Commander in Chief, whoever that may be.

For the 8 years of Clinton's presidency, I heard on numerous occasions statements that were (at least) borderline treasonous.

Those who were contemptuous of President Clinton also had another habit. They all would have a period of the day of 'closed office' -- supposedly to catch up on paperwork, but actually to listen to Rush Limbaugh.

Thank God they were in the minority...

Barack Obama WILL be dogged the whole time he is in office, make no mistake.

But the alternative is too terrifying to contemplate.

Rev. Rick Elliott | October 16, 2008 2:00 AM

I agree that the loan machinations were very destructive. Banks did solicit loans. I got one of the subprime loans, but I stayed well within my means.
We still need to pass out some of the people who bit off more than they could chew. All those folks got pay stubs or knew what their income was and would likely be, so they should have had a very good idea how much they could borrow. It's one of the symptoms of our society mistaking "needs" that are really "wants."
Of course this doesn't apply to those who were victims of lay-offs or other circumstances
.

beachcomberT | October 16, 2008 8:49 AM

I agree with the analysis that pins the lion's share of the blame on banks and mortgage brokers who made their fast bucks on big closing fees and handed off the risky loans to investment banks. The Federal Reserve and banking and securities regulators should have hollered much louder.
But ultra-conservatives will continue to find ways to escape blame. Notice we still haven't been given any concrete specifics on what limits, if any, will ever get applied to the salaries or golden parachutes of bankers who are getting bailed out.
I think there is a real danger of fascism setting in, especially if we have a replay of the 1968 RFK assassination and urban riots breaking out. Not hard to imagine Bush declaring martial law and postponing the election. Time to check the Constitution on just how far he could go -- but remember, this is a guy who thinks the Constitution is "just a piece of paper." I hope my nightmare is no more than that, but I'm plenty nervous.