News and views from the award-winning author of the novels The Skinny Years, America Libre, House Divided and Pancho Land

Sunday, October 12, 2008

The subprime blame game

There is a lot of partisan finger pointing going around about the causes for the subprime debt that has contaminated U.S. financial markets and pushed the world to the brink of economic collapse. In truth, neither U.S. political party is blameless for this disaster.

Not surprisingly, the GOP blames the Democrats for passing the first bill to push home ownership for the poor, the Community Reinvestment Act of 1977. The Republicans also accuse Bill Clinton of forcing banks to raise the percentage of risky loans to minorities in 1995--with Attorney General Janet Reno threatening to levy fines against banks that did not comply. Finally, the GOP faithful claim it was the Dems who resisted repeated attempts by the Republicans to regulate Fannie Mae and Freddie Mac from 2003 through 2005.

Of course the Republicans studiously avoid any mention of the Gramm-Leach-Bliley Act of 1999, the landmark legislation authored by Texas Republican Senator Phil Gramm that broke down the barriers between commercial banks and investment banks. These regulations had been in place since the Great Depression when the 1932 Wall Street bubble went bust and spawned the infamous run on banks.

Without Gramm’s unprecedented deregulation in 1999, the subprime loans that defaulted in the last two years would have become simple foreclosures. But thanks to the geniuses on Wall Street, these loans were metastasized into the junk bonds that have poisoned the entire financial markets. (Bill Clinton did sign the 1999 Gramm bill into law, by the way. So the Dems are hardly blameless. But the GOP had enough votes in congress at the time to override a presidential veto anyway.)

Another way the subprime loans mutated and spread to dangerous levels was by the complicity of the private sector. There was a lot of money to be made from collecting closing fees and origination charges on subprime mortagages, to say nothing of realtor commissions. Poor people were encouraged to buy beyond their means by realtors and banks who knew full well many of them could not pay.

More importantly, over half the mortgages that have gone sour are from middle income households that got greedy and overbought. The government's push for more loans to the poor had nothing to do with these bad debts which make up the bulk of the toxic bonds.

So it’s fair to say both parties, along with the government and the private sector, helped create the mess we’re in today. The most important question is this: Will these factions be willing to work together to resolve our dilemma—or continue to play the blame game?

Raul Ramos y Sanchez

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