Political

The financial crisis: who is to blame for it starting?

Iain Dale blogged recently:

A reader has alerted me to an article from the New York Post which seems to allege that the present credit crunch crisis is at least in part due to political correctness on behalf of US legislators. Read the full article HERE and make up your own mind. Here’s an excerpt…

“At the crisis’ core are loans that were made with virtually nonexistent underwriting standards – no verification of income or assets; little consideration of the applicant’s ability to make payments; no down payment. Most people instinctively understand that such loans are likely to be unsound. But how did the heavily-regulated banking industry end up able to engage in such foolishness?”

I’d certainly agree that at the heart of the problem is the large number of unsuitable loans made by US firms. But why were so many such loans made? The article Iain quotes blames political correctness, claiming that moves to shake out discrimination from financial firms resulted in them having to lend to people who couldn’t afford the loans.

It’s certainly a provocative view, and it’s also wrong. Because the truth is that the dishing out of unsuitable loans left, right and centre was driven by out-of-control firms and sales staff that were indulging in all sorts of dodgy (and often illegal) activities to push loans upon people.

A common practice, for example, was to make loans with hidden charges, so the sales person got their sales targets and commission, and it wasn’t until later that the person with the loan discovered that it cost more than they had been told, so they then couldn’t afford it any more and defaulted.

Many of their activities make the behaviour of electricity firms here (remember all the problems about door-to-door sales staff conning people into changing their supplier?) seem rather tame by comparison.

And why was action not taken to get this industry back on the straight and narrow and to ensure sales staff were honest about loan details? Not because of do-gooding anti-discrimination campaigners, as in the version Iain quotes, but actually because the Bush Administration blocked action at every turn, as this recent piece from (now ex-Governor) Eliot Spitzer explains:

Several years ago, state attorneys general and others involved in consumer protection began to notice a marked increase in a range of predatory lending practices by mortgage lenders. Some were misrepresenting the terms of loans, making loans without regard to consumers’ ability to repay, making loans with deceptive “teaser” rates that later ballooned astronomically, packing loans with undisclosed charges and fees, or even paying illegal kickbacks. These and other practices, we noticed, were having a devastating effect on home buyers. In addition, the widespread nature of these practices, if left unchecked, threatened our financial markets.

Even though predatory lending was becoming a national problem, the Bush administration looked the other way and did nothing to protect American homeowners. In fact, the government chose instead to align itself with the banks that were victimizing consumers.

Predatory lending was widely understood to present a looming national crisis. This threat was so clear that as New York attorney general, I joined with colleagues in the other 49 states in attempting to fill the void left by the federal government. Individually, and together, state attorneys general of both parties brought litigation or entered into settlements with many subprime lenders that were engaged in predatory lending practices. Several state legislatures, including New York’s, enacted laws aimed at curbing such practices.

What did the Bush administration do in response? Did it reverse course and decide to take action to halt this burgeoning scourge? As Americans are now painfully aware, with hundreds of thousands of homeowners facing foreclosure and our markets reeling, the answer is a resounding no.

Not only did the Bush administration do nothing to protect consumers, it embarked on an aggressive and unprecedented campaign to prevent states from protecting their residents from the very problems to which the federal government was turning a blind eye.

This view – blaming criminal activity, not anti-discrimination moves – is backed up by evidence from the FBI that in 2005 criminal proceeds from mortgage fraud topped $1 billion.

Hat-tip: Liberal Eye for the Spitzer article.

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