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Home Publications Blogs Beat the Press George Will Spreads Some Lies About the Economic Crisis

George Will Spreads Some Lies About the Economic Crisis

Sunday, 03 July 2011 07:52

It really is incredible to see such a concerted effort to rewrite history in front of our faces. There is not much ambiguity in the story of the housing bubble. The private financial sector went nuts. They made a fortune issuing bad and often fraudulent loans which they could quickly resell in the secondary market. The big actors in the junk market were the private issuers like Goldman Sachs, Citigroup, and Lehman Brothers. However, George Will and Co. are determined to blame this disaster on government "compassion" for low-income families.

The facts that Will musters to make this case are so obviously off-base that this sort of column would not appear in a serious newspaper. But, Will writes for the Washington Post.

The first culprit is the Community Re-investment Act (CRA). Supposedly the government forced banks to make loans against their will to low-income families who did not qualify for their mortgages. This one is wrong at every step. First, the biggest actors in the subprime market were mortgage banks like Ameriquest and Countrywide. For the most part these companies raised their money on Wall Street, they did not take checking and savings deposits. This means that they were not covered by the CRA.

Let's try that again so that even George Will might understand it. Most of the worst actors in the subprime market were not covered by the CRA. The CRA had as much to do with them as it does with Google or Boeing.

The second CRA problem is many of the worst loans would not have been covered even if the institution was. Many of the worst loans were made to finance homes purchased in newly created exurbs. The CRA is about having banks make loans in inner city areas where they take deposits. So we have the wrong location and wrong institutions for the George Will story.

Step 3, the big subprime issuers (Ameriquest, Countrywide, New Century, IndyMac) were making money hand over fist on their subprime mortgages. Their profits and stock prices soared in the peak years of the housing bubble. Does George Will think that bankers need government bureaucrats to tell them to make money? What sort of free market believer is he?

Finally, the CRA has no enforcement power. In the worst case the government tells you that you have been a bad boy. If a bank wants to merge, they may be forced to pledge to do better in the merged company. (With the pledge generally being unenforceable.)

So we have banks that are not covered by the CRA, being forced to make loans that are not covered by the CRA, which were hugely profitable, by a rule that had no enforcement mechanism. Welcome to the world of George Will logic.

The beating up on Fannie Mae as the main cuplrit in this story is similarly short on logic. Fannie Mae and Freddiie Mac lost market share at an incredibly rapid pace in the peak bubble years precisely because they were not buying the worst of the junk. That was going to the private investment banks.

This is not a secret. They did start to get into the junk market late in the game in 2006, precisely because they were losing market share.

Here's what Moody's had to say about Freddie Mac in their December 2006 assessment:

 Freddie Mac has long played a central role (shared with Fannie Mae) in the secondary mortgage market. In recent years, both housing GSEs have been losing share within the overall market due to the shifting nature of consumer preferences towards adjustable-rate loans and other hybrid products. For the first half of 2006, Fannie Mae and Freddie Mac captured about 44 percent of total origination volume -- up from a 41 percent share in 2005, but down from a 59 percent share in 2003. Moody’s would be concerned if Freddie Mac’s market share (i.e., mortgage portfolio plus securities as a percentage of conforming and non-conforming origination), which ranged between 18 and 23 percent between 1999 and the first half of 2006, declined below 15 percent. To buttress its market share, Freddie Mac has increased its purchases of private label securities. Moody’s notes that these purchases contribute to profitability, affordable housing goals, and market share in the short-term, but offer minimal benefit from a franchise building perspective." (p. 6)

This puts things about as clearly as they possibly could be. Moody's was concerned that Freddie (the same applied to Fannie) was losing market share to the private issuers because they were not big actors in "adjustable-rate loans and other hybrid products [i.e. junk]." However, they were cheered by the fact that Freddie was moving in this direction. In other words, the private issuers were very clearly the big actors and Fannie and Freddie were jumping in as a business decision to preserve market share. In other words, it was profit, not government compassion that drove this bubble.

Just to be clear, Fannie and Freddie were horrible actors in this story. I criticized them throughout this period and raised the possibility of these two mortgage giants being sunk by the bubble as early as 2002. Housing is all they do, how could they have totally missed the largest housing bubble in the history of the world?

There were also numerous cases of some really seriously misguided "compassion." There were many community groups and foundations touting the rise in homeownership even when it should have been apparent that this increase was being driven by people were using junk mortgages to buy homes at bubble-inflated prices. If there was truth in labeling, the "asset building" programs pushed by many of these outfits would be called "asset shrinking."

But it is a tremendous re-write of history to blame misguided do-gooders for the core problem. Good old-fashioned capitalists were making money hand over fist and they were doing it largely without government support, except for the implicit too-big-too fail (TBTF) guarantees that ensured that outfits like Citigroup and Bank of America would survive no matter how reckless they had been. If Will wants to blame the government because of the implicit subsidy of TBTF then he has somewhat of a case. But the argument in this article belongs in the fiction section.

Comments (19)Add Comment
Will Wrong on Who What When Where Which and Why, Low-rated comment [Show]
Southern Strategery Rises Again!
written by Matt, July 03, 2011 12:20
The attacks on the CRA are pretty obvious - it's just another coded way to fire up the neo-Confederate racists at the base of the GOP, now that actually saying, "n-words blew up the economy" isn't politically acceptable. Lee Atwater would be SO proud.
written by AndrewDover, July 03, 2011 12:24
The attempt to blame everything on the GSEs is just as wrong as the attempt to deny their major role. Look at the historic market share numbers of mortgage backed securities:


written by Peter K., July 03, 2011 12:54
izzatzo doesn't try to confront the fact or history. Is that because he can't?

Will is writing about Morgensen and Rosner's new books. Seems he's arguing things they don't in their book.
Re-write Wins BC of Ignorance
written by JL, July 03, 2011 1:12

As an insider/observer throughout the most recent debacle as well as the S&L crisis, I am impressed by your research and relatively depth of knowledge.

You are right that CRA has nothing much to do as CRA requires institutions make investment back into their primary service market area where they obtain deposits. And br TARP, those smart WS boys didn't have a bank-holding company or back to get cheap deposits.

You are wrong in that CRA does have some teeth. The CRA performance could prevent banks from acquiring another institution. Bad CRA performance could also result in the bank's performance rating which affects their deposit risk premium payments.

It could just get bad PR.

written by JL, July 03, 2011 3:19

The company doesn't concede that it's outsourcing the Ontario plant to save money on wages. It says it brought in outside logistic contractors at Ontario and four of its other five parts depots nationwide because it prefers to focus on its "core expertise" of engineering and making cars. Of course, nonunion workforces generally receive lower pay and benefits than union — that's the power of collective bargaining — so the math is hardly a secret.

If there are operational efficiencies to be gained from the outsourcing, as BMW contends, the firm presumably expects them to translate into higher profits, but it won't be sharing the money with the warehouse workers. Among the most likely beneficiaries are its shareholders — maybe via another dividend boost on top of the $950-million raise the company gave them out of its $4.7-billion profit last year.

BMW's defenders will point out that the company has a perfect legal right to outsource any jobs it wishes. Fair enough. Yet by the same token, American taxpayers had a perfect legal right to tell BMW to drop dead when the firm's credit arm asked the Federal Reserve for a low-interest $3.6-billion loan during the 2008 financial crisis. BMW got the money then because U.S. policymakers saw a larger issue at stake: saving the economy from going over a cliff. Just as there's a larger issue involved at Ontario, which is saving the American middle class from going over the same cliff.

The Ontario union, Teamsters Local 495, got Sen. Barbara Boxer (D-Calif.) and Reps. Joe Baca (D-Rialto) and Loretta Sanchez (D-Garden Grove) to write painfully polite letters to Jim O'Donnell, chairman of BMW North America, asking him to reconsider. When I say that's the least they could do, I'm talking literally — it's the very least. How about hauling him before a televised hearing and having him balance out a $3.6-billion taxpayer loan with the firing of 70 American workers? The company surely wouldn't characterize its federal loan as charity, but neither is maintaining its parts distribution workers on a living wage.

written by joe, July 03, 2011 8:56
Look at the historic market share numbers of mortgage backed securities:


That graph shows they lost half their market share to Wall Street in 2002. Look at the bubble and you see a rapid increase in prices after 2002.

Look at Phoenix for example:

Countrywide & the CRA, Low-rated comment [Show]
..., Low-rated comment [Show]
CRA is not to blame...
written by MGDub, July 04, 2011 12:23
Look, CRA loans were highly regulated. Full stop. The data shows CRA loans issued under law through highly regulated banks had very little to do with the housing bubble or the crash of the US economy. While there was a very small portion of CRA loans that were ARMs or sub-prime mortgage, 6%, CRA loans by FAR out performed other housing loans issued by regulated banks.

Why? For one simple reason: Because they were frickin' regulated!

It is insane for anyone to look at the performance of CRA loans from 1995 - 2008 and argue that CRA caused the financial crash. Insane. The Fed conducted a study and said as much. Major banks will tell you if you ask them about how well their CRA loans performed. Go ask the banks, they have the data.

In our witch hunt political environment where banks and the Fed are despised, neither the Fed or the regulated banks are willing to freely point this out or volunteer this information. They are both more than happy to see Freddie, Fannie and CRA take the hits from the FOX News viewers and conservative talk radio listeners.

The Fed has already bowed to political pressure and the banks are back to gambling at the international casino of derivatives. Why should they draw attention to themselves? Neither one of them has a political interest in pointing out that poor, brown and black people are blameless for the financial crash. Both have data that exonerate CRA recipients, but they fear an even larger populist backlash than they're already getting.

Now, when forced to do so, Bernanke does admit the obvious. In a response to a US Senator's director question about CRA being to blame, Bernanke writes “We are aware of such claims but we have not seen any empirical evidence presented to support them.” You won't see this quote on Fox News or hear it conservative talk radio.

Here are some quotes from credible sources.
written by Ellyn O'Toole, July 04, 2011 12:57
Is Will being paid to lie? He seems to lie a lot. His opinions and pronouncements are so predictable and unchanging. He's like a petrified dinosaur turd. I stopped reading Newsweek long ago because I didn't find Will credible and I stopped watching TV because there are so many dinosaur turds on corporate TV and PBS.
written by ComradeAnon, July 04, 2011 8:21
More of China drilling off the coast of Florida. This is another example of the illegitimacy of conservatism.
written by PeonInChief, July 04, 2011 8:35
What's interesting is that Morgenson and Rosen don't exactly say that the CRA is responsible for the junk mortgages. For instance, they note that "because higher-quality borrowers were still at this time [2001] the domain of Fannie Mae and Freddie Mac, Wall Street could not hope to compete in this arena. So the big investment firms stepped up their interest in alternative mortgage products offered to subprime or near-prime borrowers." Federal regulators helped this process along (as they did many other not-so-good processes), but the GSEs weren't the prime movers and didn't get into it (by purchasing some of the crap) until quite late in the game.

But what's most irritating is that most of the "not everyone should own a home crowd" doesn't then ask, "well, what should they do?" The private market doesn't work very well for tenants, particularly low-and moderate-income tenants and both Democratic and Republican administrations have touted homeownership as a way to avoid dealing with the issues of both cost, and arbitrary and capricious landlord behavior in most tenancy agreements in the US.
written by David R, July 04, 2011 8:57
Why has George Will been able to get away with this stuff for all these years? And here is a site that also questions his logic (and yes the term logic is an attempt to be kind)


written by David R, July 04, 2011 9:01

That George Will has been able to get away with things like this all these many years says more about the integrity of the WP and ABC News than Mr. Will's lack of concern with the truth.

Here is another comment

All You Need to Know About George Will
written by memory, July 04, 2011 10:08
"Let's try that again so that even George Will might understand it."

Not going to happen. His salary depends on not understanding it.
Even Congress Thinks the GSEs were huge in Subprime
written by whatever, July 05, 2011 11:28
Did you read the sense of congress in the dodd frank bill. You should. The GSEs were nearly HALF the subprime market. That is real history. See section 1491 of the Dodd Frank bill. I will excerpt below. I hope you aren't one of those "dont bother me with the facts" types.

FINDINGS.—The Congress finds as follows:
(1) The Government-sponsored enterprises, Federal
National Mortgage Association (Fannie Mae) and the Federal
Home Loan Mortgage Corporation (Freddie Mac), were chartered
by Congress to ensure a reliable and affordable supply
of mortgage funding, but enjoy a dual legal status as privately
owned corporations with Government mandated affordable
housing goals.
(2) In 1996, the Department of Housing and Urban Development
required that 42 percent of Fannie Mae’s and Freddie
Mac’s mortgage financing should go to borrowers with income
levels below the median for a given area.
(3) In 2004, the Department of Housing and Urban Development
revised those goals, increasing them to 56 percent of
their overall mortgage purchases by 2008, and additionally
mandated that 12 percent of all mortgage purchases by Fannie
Mae and Freddie Mac be ‘‘special affordable’’ loans made to
borrowers with incomes less than 60 percent of an area’s
median income, a target that ultimately increased to 28 percent
for 2008.
(4) To help fulfill those mandated affordable housing goals,
in 1995 the Department of Housing and Urban Development
authorized Fannie Mae and Freddie Mac to purchase subprime
securities that included loans made to low-income borrowers.
(5) After this authorization to purchase subprime securities,
subprime and near-prime loans increased from 9 percent of
securitized mortgages in 2001 to 40 percent in 2006, while
the market share of conventional mortgages dropped from 78.8
percent in 2003 to 50.1 percent by 2007 with a corresponding
increase in subprime and Alt-A loans from 10.1 percent to
32.7 percent over the same period.
(6) In 2004 alone, Fannie Mae and Freddie Mac purchased
$175,000,000,000 in subprime mortgage securities, which
accounted for 44 percent of the market that year, and from
2005 through 2007, Fannie Mae and Freddie Mac purchased
approximately $1,000,000,000,000 in subprime and Alt-A loans,
while Fannie Mae’s acquisitions of mortgages with less than
10 percent down payments almost tripled.

Read more: http://www.businessinsider.com...z1RFV2DLHN
Another chart showing heavy GSE & Govt involvement
written by AndrewDover, July 06, 2011 7:22
Yes, but they stoked the fire; see 2003

Will is correct in one aspect- private profits, public losses.

It continues with the recruitment of a new Finance chief at Fannie Mae:
"Ms. McFarland will receive an annual salary of $600,000 plus bonus compensation and long-term incentive pay valued at an additional $2.6 million. She will also receive a $1.7 million signing bonus to compensate for equity grants that she will forfeit after leaving Capital One. Fannie said that its regulator, the Federal Housing Finance Agency, had approved those terms."

I guess it is a stressful job though:
Liberals doing poor job cause splintered
written by ezra abrams, July 10, 2011 8:57
1st, the case with CRA is easy; lets set it aside.
the case with Fannie and Freddie (FnF) is a lot harder; the widely shown graph, which shows FnF loosing market share just before the crash is NOT
repeat NOT a case closed graph - if you stop and think for even a minute, you should be able to think of several reasons why that graph needs, at a minimum, a lot of additional info.
It is sad that the liberals like baker and delong who have been working on this have not done a good job - because they are not united; they are each an independent, doing his own thing; if they united, and split up the work, they might get somewhere.
It is really sad that all these socalled liberal econ types - baker and delong and krugman and reich and etc are each a little egomaniac, each trying to grab blog eyeballs, either for their own ego or $$, and they can't get together and deliver really cogent, well thougth out data rich arguments

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.