Clinton Democrats are to blame for the credit crunch

Our current financial turmoil is not the fault of greedy bankers, says Dennis Sewell. In fact, the banks were bullied into lowering their lending standards by left-wing idealists intent on equal opportunities at any cost

1 October 2008

‘Let us be clear: this is a crisis caused on Wall Street,’ insisted Speaker Nancy Pelosi in her consensus-strangling speech on Monday, shortly before her fellow members of the House of Representatives voted to reject the President’s $700 billion bail-out plan. Out on the campaign trail, Barack Obama ventured that the root cause of the trouble in the markets was that ‘too many people in Washington and Wall Street weren’t minding the store’.

Pinning the blame for the crisis on greedy bankers and incompetent regulators may have seemed plausible enough during the turmoil of the past few days. Writing in The Spectator last week, the Archbishop of Canterbury noted how ‘we find ourselves talking about capital or the market almost as if they were individuals, with purposes and strategies, making choices, deliberating reasonably about how to achieve aims’. Not this week, we didn’t. We talked about the markets as if they were thoroughly unreasonable, out of control, perhaps even raving mad. Following Monday’s rejection of the bail-out plan, stock markets, impatient with Congress’s delay in tying up a deal, threw a massive hissy fit, which wiped billions off the value of shares. The next day, they made a partial bounce back, based presumably upon a belated recognition that talks to thrash out another bail-out plan were already in progress. Meanwhile, the sullen banks remained obdurate in their reluctance to lend to one another, let alone anyone else, despite a massive injection of liquidity from central bankers around the world. Not much there to inspire confidence in the system.

Consequently, this hardly seems the most appropriate moment to mount a defence of capitalism in general, and American bankers in particular, against the threats posed by meddlesome politicians and excessive regulation. But, what the heck. Unless we take advantage of this hiatus between the crashing of financial institutions to take an honest look at the origins of our current predicament, then today’s spin and myth-making will quickly harden into tomorrow’s firm conviction. Let us be clear: this crisis was not caused on Wall Street — it was caused in the White House. The root problem was not financial — it was political, and those truly responsible for this fiasco were not bankers, nor even Bush Republicans; they were Clinton Democrats.

For generations, America’s bankers have been firmly refusing credit to those they judged unworthy of it. Yet the mountain of toxic subprime debt that has threatened to overwhelm the entire financial system, and the astonishing number of mortgage foreclosures across the United States, is proof that, at some point in the relatively recent past, bankers radically altered their behaviour and began to shower mortgages on borrowers who had no realistic prospect of keeping up their repayments. What could possibly have induced them to act so recklessly, and so out of character? The facile answer to that question is greed, the lure of a fast and easy buck. The correct answer is that banks were bullied, cajoled and coerced into lowering their lending standards by politicians in pursuit of an ideological agenda.

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Let’s wind back to 1993 and Roberta Achtenberg’s arrival on the Washington political scene. Achtenberg had made her name in San Francisco as a civil rights lawyer and activist, campaigning to keep open the city’s gay bathhouses, and (I promise I’m not making this up) pressing for an increase in the number of gay Scoutmasters. Bill Clinton offered her a job in his new administration, and Roberta Achtenberg became the first openly lesbian nominee ever to receive a Senate confirmation. She duly took up her post as Assistant Secretary for Fair Housing and Equal Opportunity at the Department of Housing and Urban Development (HUD).

The main thrust of the Clinton housing strategy was to increase home ownership among the poor, and particularly among blacks and Hispanics. White House aides, in familiar West Wing style, could parrot the many social advantages that would accrue: high levels of home ownership correlated with less violent crime, better school performance, a heightened sense of commun-ity. But standing in the way of the realisation of this dream were the conservative lending policies of the banks, which required such inconvenient and old-fashioned things as cash deposits and regular repayments — things the poor and minorities often could not provide. Clinton told the banks to be more creative.

Meanwhile, Ms Achtenberg, a member of the kickass school of public administration, was busy setting up a network of enforcement offices across the country, manned by attorneys and investigators, and primed to spearhead an assault on the mortgage banks, bringing suits against any suspected of practising unlawful discrimination, whether on the basis of race, gender or disability. Achtenberg believed racism was a big factor in keeping minorities from enjoying the same level of home ownership as whites. She doubted if much could be done to change people’s attitudes on racial matters, but she was confident she, in cahoots with Attorney General Janet Reno, could use the law to change the behaviour of banks.

However, when little or no overt or deliberate racial discrimination was discovered among the mortgage lenders, HUD’s investigators turned to trying to prove ‘disparate treatment’ of minority groups, a notion similar to that of unintentional ‘institutional racism’. If a bank refused loans to proportionally more black applicants than white ones, for instance, the onus would fall on it to prove it had good grounds for doing so or face settlement penalties running into millions of dollars. A series of highly publicised cases were brought on this basis, starting in 1994. Eventually the investigators would turn somewhat desperately to ‘disparate impact’, a form of discrimination so abstract and rarefied as to be imperceptible to its supposed victims, and indeed often only discernible at all through the application of multivariate regression analysis to information stored on regulators’ databases. In fact, by 1995 Achtenberg was actually having to rein in her zealots, issuing a clarification that the use of the phrase ‘master bedroom’ in a property advertisement was, despite its clear patriarchal and slave-owning resonances, not actually an actionable offence under the anti-discrimination laws.

These mortgage banks, which have been responsible for issuing about three quarters of the dodgy subprime loans that are proving troublesome today, quickly took the hint. From the mid-1990s they began to abandon their formerly rigorous lending criteria. Mortgages were offered with only 3 per cent deposit requirements, and eventually with no deposit requirement at all. The mortgage banks fell over one another to provide loans to low-income households and especially to minority customers. In the five years from 1994 to 1999, the number of African-American and Latino homeowners increased by two million.

The national banks, responsible for the remaining quarter of the current subprime loans, were put under a different kind of pressure by the Clinton team to boost their low-income and minority lending too. Changes were made to the Community Reinvestment Act to establish a system by which banks were rated according to how much lending they did in low-income neighbourhoods. A good CRA rating was necessary if a bank wanted to get regulators to sign off on mergers, expansions, even new branch openings. A poor rating could be disastrous for a bank’s business plan. It was a different kind of coercion, but just as effective. At the same time, the government pressed Freddie Mac and Fannie Mae, the
two giants of the secondary mortgage market, to help expand mortgage loans among low and moderate earners, and introduced new rules allowing the organisations to get involved in the securitisation of subprime loans. The first package was launched in 1997 in collaboration with Bear Stearns.

So, by the end of the 20th century most of the ingredients that would combine to cause today’s subprime crisis were already in place. Nevertheless, the 1990s can seem a long time ago, and to grasp the connection between the situation then and what is happening now, it’s important to realise that only a small proportion of the subprime loans made since George W. Bush became President have gone to new, first-time buyers. A huge number of them have been refinancing loans, replacing mortgages originally taken out perhaps eight, ten or 12 years ago.

Imagine yourself in the place of one of those low-income householders who acquired a property in the late 1990s as a result of the Clinton home-ownership drive. What happened next? Chances are you managed OK for a while, but after a few years found that like most poor Americans, your income wasn’t going up, it was declining. Around 2003, with your credit cards maxed out, you desperately needed to release some equity from your home. Luckily there was equity there to release, so you refinanced for the first time and enjoyed having some real money for a change. A couple of years later a pushy mortgage broker called to suggest you do it all again, squeezing out the last drops of equity and opting for a low-start mortgage. So you did — and that was fine while it lasted, but the interest rate just sky-rocketed. You will never pay off that loan, it is pure poison to you, just like it’s pure poison to the investment bank that ended up with it on its books. You will just walk away. It’s not your fault. It’s not the bank’s fault. And it certainly isn’t George W. Bush’s fault — every attempt he has made to reform the mortgage market has been blocked by Congressional Democrats.

So that’s how we get from there to here, from crude attempts at social engineering during the early, heady days of the first Clinton administration to the turmoil on Wall Street today. There may be many technical lessons to be learned about selling and buying mortgages, about the best ways to price and manage risk, and about the regulation of financial markets, but I believe the most important lesson of all is an ethical one: it’s about not behaving ruthlessly when trying to change the world for the better.

Bill Clinton’s team, like so many progressives here in Britain, were not content to wait and see what fruits equal opportunities might bring. They felt compelled to secure their equal outcomes by any means necessary, even if that meant debauching institutions, corrupting professions and trying to skew the operation of markets. That only ever leads to chaos.

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Show comments
  • Anonymous

    Something for economy learning.
    Read for 10 minutes.

  • Frank P

    Glad to see that the Magazine has at last got up to speed with the Coffee House (still not quite as much detail, though).

  • David Lindsay

    So it wasn’t the banks, it was the blacks.

    Taki’s American Conservative (
    http://www.amconmag.com/article/2008/oct/06/00004/) takes issue with this thesis:

    “Who’s to blame for the unfolding financial crisis? According to many conservatives, poor black people and, of course, Democrats.
    National Review Online indicts President Carter’s Community Reinvestment Act for the meltdown. The CRA emboldened community organizers—like you-know-who—to force banks to make loans to uncreditworthy minorities, you see. Terry Jones of Investor’s Business Daily blames Clinton’s “multicultural housing policy” and his mandates to increase home ownership among blacks and Hispanics.
    But as economist Michael Barr points out, about half of subprime loans came from mortgage companies that were unaffected by CRA’s mandates. Perhaps only a quarter of all subprime loans were made by banks governed by “multicultural housing” policies. Nothing excuses politically correct credit, but did community organizers really force lenders to infect all financial markets by repackaging their bad mortgages into securities? Did poor blacks invent credit default swaps?
    Of course not. While these so-called conservatives criticize the misguided do-goodism of Democrats past, they ignore the present Republican administration that is pioneering socialism for the rich.
    Bush proposed an “ownership society,” saying that Americans would prosper when they were given more economic freedom and accountability. Now the same administration insists that prosperity depends on bailouts, that accountability means disaster. Instead of Americans owning their own homes as free individuals, the Bush administration has made all of us collective owners of the worthless banks and lenders that ruined the real estate market. Never have so many owed so much to so few.”

    Give me the conservative Old Right over the capitalist New Right any day. At least we can now all see who the real racists are.

  • Dean

    So left wing idealists are to blame for the worst financial crisis in sixty years? That’s strange, because I thought a Republican administration had been in power for the past eight years. The general consensus – amongst people not blinded by right wing ideological dogma – is that this has been the most disastrous administration in US history. It had already earned that reputation prior to the credit crunch, thanks to its incompetent handling of the Iraq War. One catastrophic policy error in eight years could perhaps be regarded as a misfortune, but two? The Conservative Party is fortunate to be led by a man who realises that centre right parties will never get anywhere by clinging on to extreme free market fundamentalism. It’s a pity the same cannot be said for some of your contributors, who continue to peddle this sort of tripe.

  • David Short

    Electronic publishing means that dumb management can dumb down a respected title like the Spectator quicker than it dumbed down the old Sunday Times.

    Siding with the bankers won’t make the bootlickers at the Speccie rich. Just contemptible.

  • Novus

    Looks like Dean read the headline but struggled with the actual text….

  • Hysteria

    Dean – what’s your point – ? Are you denying the facts of the imposition of poor lending criteria due to left wing ideology? It’s not just this article sayinmg it – there is plenty of evidence.

  • Dee Desert Rat

    One might imagine (if one had done any research) that the WIDESPREAD damage was not minority homeowners unable to pay a bill. Market analysts throughout the financial sector rated as AAA+ F- funds, all for “filthy lucre.” In fact the bill Clinton inked could not been vetoed due to the GOP 106th Congress.

  • Dennis Sewell

    David Lindsay

    So it wasn’t the banks, it was the blacks

    A cheap shot – and well wide of the mark. I do not blame poor blacks, I blame the Clinton administration. I could not have been clearer about that.

    But as economist Michael Barr points out, about half of subprime loans came from mortgage companies that were unaffected by CRA’s mandates. Perhaps only a quarter of all subprime loans were made by banks governed by “multicultural housing” policies.

    About 25% came from banks subject to CRA. The other 75% the from mortgage banks of the sort targeted by HUD’s enforcement teams, as I explain in the article.

    Did poor blacks invent credit default swaps?

    No, but Fannie Mae and Freddie Mac bought up many of the bad loans and pioneered securitization in the subprime sector, encouraged and facilitated by the Clinton administration.

    So the case against Clinton et al holds up.

    At least we can now all see who the real racists are.

    Pistols or swords?

  • Verity

    “…were bullied into lowering their lending standards by left-wing idealists intent on equal opportunities at any cost?.

    You jest, of course. “Left wing idealists” like ACORN, for example, the thuggish Association of Community Organisers blessed with the assistance of Barack Obama and all the usual suspects?

    I believe the term is not “left wing idealists”, but “hard core communists”, for whom Obama has long been the poster boy.

  • Verity

    Hysteria – Quite.

    Dean, no need to pump out all your toxicity in such detail. Just label it Commie Rant No 164, and we will take it as read. Many thanks.

  • Hayward Maberley

    What is missing from this article is that Clinton never encouraged banks/finance & mortgage providers to…
    Aggressively sell loans/undercut each other;
    Take on “CEO’s” with obscene amounts in bail out packages/short term bonus payments;
    Lend people more money than the house they were buying was worth;
    Managers neglecting the fundamental principles of lending that they were taught in economics/finance at university through greed/hubris/stupidity;
    Provide ever more finance to developers when it was evident that buyers were defaulting on mortgages.
    All happened under the current Republican Administration.
    Then there is the ultimate in financial/fiscal irresponsibility
    The SEC decision to allow a certain five firms to legally violate existing net capital rules that, in the past 30 years, had limited broker dealers debt-to-net capital ratio to 12-to-1. Instead, the 2004 exemption, only given to these five firms ,allowed them to leverage up to 30, even 40 to 1!
    Who were the five that received this special exemption?
    Bear Stearns, Goldman Sachs, Lehman Brothers, Merrill Lynch and Morgan Stanley. And the result?
    Three of the five broker dealers have gone to the wall!
    The SEC should shoulder the blame itself for the current crisis. An allegation being made by Lee Pickard, a former SEC official,, who says that rule change in 2004 led to the failure of Bear Stearns, Lehman Brothers and Merrill Lynch.
    “The SEC allowed five firms,the three that have collapsed plus Goldman Sachs and Morgan Stanley , to more than double the leverage they were allowed to keep on their balance sheets, and remove discounts that had been applied to the assets they had been required to keep to protect them from defaults.”
    Making matters worse, according to Pickard, who helped write the original rule in 1975 as director of the SEC’s trading and markets division, is a move by the SEC this month to further erode the restraints on surviving broker dealers by withdrawing requirements that they maintain a certain level of rating from the ratings agencies.
    “They constructed a mechanism that simply didn’t work,” Pickard said. “The proof is in the pudding — three of the five broker dealers have blown up.”
    Fiscally responsible Republicans?
    Fiscally Risible Republicans!

  • Hayward Maberley

    Fiscally Risible Republicans cont.
    Dubya thecurrent encumbrance in the White House and Friends have managed to accomplish yet another unenviable record. That is to beat “The Gipper” in “growing” the deficit and the National Debt. For until now, Reagan in terms 1&2 followed by Bush with 1 term, comfortably held the record for the largest deficits
    In 1981, shortly after taking office, Reagan complained of “runaway deficits” that were then approaching $80 billion, or about 2.5 percent of gross domestic product. Within only two years, however, his policies had succeeded in enlarging the deficit to more than $200 billion, or 6 percent of GDP. Under the “fiscally responsible” Republicans, from when Reagan took office, the National Debt standing at $995 billion from the Carter era, by the end of Bush1’s presidency, had exploded to $4 trillion. Clinton managed hold/wind them both back returning the budget to a surplus of some US$280 billion. Now thanks toDubya and Friends the deficit will be $482 billion in the 2009 budget moving from black to red ink in the order of US$750 billion. Now they intend to add another US$700 billion!
    Let us not forget the US$3 trillion and climbing cost of the Iraq Fiasco and the Afghan Imbroglio. The first conflict since The War of Independence to be fought on credit, as mentioned in the Stiglitz and Blimes book.
    National debt, owed to creditors who hold U.S. debt instruments. Debt held by the public is all federal debt held by states, corporations, individuals, and foreign governments, but does not include intra governmental debt obligations or debt held for Social Security.
    As of September 2008, the total U.S. federal debt was approximately $9.7 trillion, about roughly $5.3 trillion is non government debt . But when unfunded Medicaid, Social Security, Medicare are added, this figure rises to a total of $59.1 trillion. In 2007, the public debt was 36.9 percent of GDP with a total debt of 65.5 percent of GDP. From 1980-1990 under Reagan and Bush Republican Administrations it climbed as a % of GDP from 26% to 42%. Under Clinton it fell to 35% but is now at c.38%. In 2005 it had gone out by a factor of 9 over the debt in 1980.
    Risible indeed

  • Herbert Thornton

    It is hard not to draw a parallel between Marxist economic foolishness and the Clintonian policy that Dennis Sewell describes in his very lucid and persuasive article.

    Before the Soviet Union collapsed, Marxist apparatchiks “managing” Siberian diamond production organised the cutting of the diamonds so badly that the cut stones were worth less on the world market than the raw stones would have fetched. Similarly, many cameras manufactured in East Germany, could only be sold to the rest of the world for less than the value of the materials that went into them.

    Dennis certainly adds much weight to Mark Steyn’s pointedly succinct opinion that “US politicians …..chose to turn the mortgage industry into just another branch of the affirmative-action racket…..(and) …. in effect decreed credit a human right rather than a privilege judiciously granted by one independent contractor to another.”

    At the same time, the top people in the various insolvent financial institutions must surely have understood where it would all lead? It would seem that – like the Soviet Union’s leading apparatchiks – they made sure that they personally would not be impoverished – and indeed that they continue to be eager to enrich themselves from the proposed bailout.

  • Mark Sedgwick

    A ggod article. I have been of the opinion for last three years plus, that the Blair/Brown Government ultimately is responsible for the financial chaos we are in now in the UK, and I do not buy the story that the banks and the hedge funds are primarily responsible. The main mistake made has been the BOE not putting up interest rates significantly three years ago to quell the housing market and inflation (it was obvious that the latter was occurring from just watching how the price of say Heinz Tomato Soup spiralled upwards in the Supermarkets). The BOE ultimately had a conflict of interest because the Monetary Committee members are chosen by the Government, and it kept the Political Masters happy to allow the economy to remain very bouyant. Lending has therefore just got even more out of hand since then. I cannot help thinking that all the Government’s actions are doing now is slowing down the rate at which “the dominoes fall over”. Sorry to be so pessimistic.

  • Charles Smyth

    In a modern democracy, the problem begins with the electorate and works its way along the chain:


  • Nick Gulliford

    Excellent! Very informative article, especially “at some point in the relatively recent past, bankers radically altered their behaviour and began to shower mortgages on borrowers who had no realistic prospect of keeping up their repayments.”

    I am not so much concerned with whether the bankers were greedy or the regulators sloppy, but ask who were these “ borrowers who had no realistic prospect of keeping up their repayments?”

    The mortgage brokers ask applicants for their marital status. The mortgage lenders classify borrowers as ‘single’, ‘joint’ or ‘multiple’. Why are the lenders now being so coy about telling us the marital status of those in arrears?

    Couples experiencing marital breakdown are about 4.5 times more likely to be in arrears with mortgage payments. Cohabiting couples break up about 5 times as fast as married couples. There has been a massive increase in cohabitation both in the UK and the US. This may turn out to be the final trigger which precipitated the crisis.

    Since the Northern Rock and Bradford and Bingley loan books have been nationalised, some parliamentary questions should elicit the answer to the marital status of borrowers in arrears.

  • George Tsapanos

    People begin understanding DINALLY what took place the last 10-15 years.
    Time to “dig” a little more in the UN and everything will fall in its place.

  • ushekim

    In today’s world where bankers have slipped on banana peels right and left, you are blaming the banana peel.

  • Lance L Irvine

    Who ever heard of a lefty admitting a mistake, even after refighting the battles of the 30s and 40s for nearly 70 years, without a new idea. Had any politician tried to mitigate the subprime crisis, he would have been crucified. Whatever happened to helping people help themselves, rather than by micromanaging society?

  • Scott, East Anglia

    Ushekim rather over simplified matters. However, to follow his/her analogy, I believe that those who wish to apportion blame are pointing at the droppers of the banana skin, not the banana skin itself.

  • Ian C

    The Clinton era kicked this whole thing off – and those of us onthe right that would do well to remember that we all thought that the expansion of home ownership was a good thing.

    What none of us – or Clinton I suspect, but maybe not so the wider Democratic left – anticipatyated was the extent to which Fannie Mae and Freddie Mac would grow to on the back of it. But it continued under Bush and although he did try belatedly to rein in the two they had a head of steam that was unstoppable in boom years.

    Blame for the mess should not lie with one such identified source. The banks, the regulators, governemts who wnated low interest rates and high tax takes, not to mention those of us who have drunk from the cup of cheap and easy credit all sahre the blame.

    If it is not apportioned correctly the wrong lessons will be learned and the next bust will be created from the dust of this one. We, on the right, must be responsible in making arguments on the matter, however our political opposites try to make their case.


  • Malcolm woodriffe

    After eight ten or twelve years of capital gains on their homes did the Clinton Administration force the banks to allow people to re mortgage their properties ?

  • Henry David

    A ridiculous article, lifted straight from some of the crazier US blogs. Some of the safest mortgage lending in the US has been under the CRA, as this study shows: http://www.traigerlaw.com/publications/traiger_hinckley_llp_cra_foreclosure_study_1-7-08.pdf

    Why didn’t the author blame Jimmy Carter, under whose presidency the Community Reinvestment Act was passed in 1977? Perhaps because that would have been even dafter than blaming the Clinton era. This must mark a new low for the Spectator.

  • Stephen Fox

    Ian C
    I think you are being too diffident.
    One may be in favour of home ownership, without supporting subprime mortgages forced on banks and mortgage lenders by activists making accusations of racism. There are many anecdotal reports of this occurring. You may say, why would business executives care about being labelled racist. Perhaps they understood the consequences, and preferred to go along with what after all would earn them money in the short term.

    Concerning attempts to get on top of the situation, those who are interested may visit:
    http://uk.youtube.com/watch?v=_MGT_cSi7Rs , film of Senate committee proceedings from late 2004, in which a succession of Republicans allege fraudulent accounting procedures at FM/FM and advocate urgent action, opposed by a succession of Democrats, mostly black, it has to be said, who say everything is just fine, one even having the gall to say he was ‘pissed off’ about the allegations.

    It may be that Bush ‘trumpeted’ wider home ownership, but Republicans undoubtedly saw the danger in a way many Democrats failed to through their ideologically rose tinted spectacles. Many of the latter seem so obsessed with finding racism that the only word which describes them is ‘bigot’.

    This was financial ‘affirmative action’, a screw up of the Democrats’ and wider left’s own making, and conservatives should shout about it.

  • Andrew Boughton

    From within the Big 4 Assurance firms and regulatory world, since 1990 we have written papers pushing the view that all general recessions including the Great Depression are credit and consumer crunches brought on by major real estate cycles each decade, and shared this view with the BIS (which published without acknowledgement) and bank clients. One major practical challenge is and has always been that no one in the decision process has a right to second guess a property valuation even on the most extreme of rising markets. Real estate loans come with their own collateral, however inflated (per Malcolm Woodriffe on re-mortgaging). The larger issue is that economics does not address real estate cycles effectively for political-historical reasons. Thus there is no authoritative framework for major judgement calls on the cycle, even when it is clearly out of control.

  • John Bull

    Fascinating and very convincing article.

    Whilst I can go along with the concept of the instigator of the crime being the Clinton Administration and its insane left-wing enforcement policies, I just cannot accept the proposal that the institutional bankers, mortgage lenders and Financial Dealers are in any way absolved of blame for their greedy and immoral feasting on the proceeds of selling engineered ‘financial instruments’ which, given five minutes study, would have been recognised as highly ‘suspect’ by any ten year old in school !

    So, Yes I accept the Clinton social engineering as probably being the driving force to initiate this grand FRAUD, but then I still very firmly believe we have finally exposed another set of parasites to stand in line with our friends “the lawyers” – their grasping hands firmly and deeply fixated in our pockets.

    I remain of the opinion that a “Few Hangings” would ‘send the right signals’ and ensure it will be at least a couple of generations before the snake-oil salesmen try it on again !

    Once we move on to the more global picture, it becomes more difficult to avoid the facts – greedy immoral trading in fraudulent ‘shares’ heavily bought into by banking’s ‘Fund Managers’ thereby artificially and corruptly inflating their ‘bonuses’ is not something we can blame on even the likes of Clinton or Brown / Blair – except their political responsibility to ensure the proper and efficient regulation of these ‘markets’ – which they failed miserably in doing.

  • A.C.R.Bull

    OK we are in a mess but how to unravel it?
    Get the loans parcelled out and sliced up back to the original source.
    This will concertina them and automatically shrink them
    It is too difficult to do this?

  • Peter Warden

    Oh yeah, Mr Sewell?

    According to today’s New York Times(http://www.nytimes.com/2008/10/05/business/05fannie.html?hp):

    “Between 2005 and 2008, Fannie purchased or guaranteed at least $270 billion in loans to risky borrowers — more than three times as much as in all its earlier years combined, according to company filings and industry data… Between 2005 and 2007, the company’s acquisitions of mortgages with down payments of less than 10 percent almost tripled… The White House also pitched in. James B. Lockhart, the chief regulator of Fannie and Freddie, adjusted the companies’ lending standards so they could purchase as much as $40 billion in new subprime loans.”

    Remind me. Who was in power during those years?

  • Hayward Maberley

    Messrs Sewell, Pulley, Thornton, Gulliford, Tsapanos, Irvine, Fox and of course the inimitable Verity plus Novus and Hysteria,
    No sensible response from any of you to my posting on the major cause of the WS SHTF or the fiscal risibility of this and previous Republican Administrations.
    For as Messrs Woodriffe, David and Warden, and Desert Rat have indicated, most of the malfeasance took place during the current Republican Administration “management “ of the economy.
    I agree with Mr Short in his assessment concerning the e debasement of The Spectator.

  • Tilda

    Sorry but Bill has been out of the White House for 8 years now. If it was a terrible decision you would think that Bush would have stop it. It was the fault of the poor and the stupid, whose delusion of grandeur caused the whole things, funny that. The bankers have nothing to do with it, so I guess that’s why the tax payers have to pick up the bill. I thought it was short sellers last week. When is the invisible hand when you need it?
    The Conservative at good with your money but when things go wrong on their shift, it’s the fault of the Liberals. Lol.

  • Hayward Maberley

    That “invisible hand” of Mr Smith just became very visible. But unfortunately instead of punching out the lights, metaphorically speaking, of the erstwhile Masters of The Universe it is being used to carry a very large cap to Congress for the bail out Paid for by taxes from those who pay taxes. Not the stinking rich who under successive fiscally risible Republicans pay less and less tax.

  • Herbert Thornton

    Mr Hayward Maberley attempts to identify the “major” cause of what he calls the WS SHTF and (I think) the U.S. national deficit. The meaning of “WS SHTF” isn’t entirely clear, though I incline to think it is also part of what he calls the debasement of the Spectator’s standards. I gather that he believes that the blame falls largely on the Republicans.

    Apportionment of blame is a topic that not surprisingly brings out strong opinions on both sides but it seems to me that all parties involved – including society as a whole, which has become accustomed to speedy gratification of all its material fancies – have a share in the blame.

    More important, I suggest, is – what to do now? To my mind, one of the most urgent and important needs is for the U.S. (and western Europe) to become self-sufficient in energy so as to stop the haemorrhage of money into the oil producing countries, many of which are our mortal enemies. We need, as quickly as possible, to begin the construction of nuclear power stations to supply, so far as this is possible, all our energy needs. As for aircraft fuel, it can certainly be produced from coal and we have plenty of that.

    I suggest too that we need to examine our entire system of carrying on business in the same spirit as our forbears in the 19th century did when it was realised that the existing, rather simple law about people carrying on business together was inadequate and the then new principle of the limited liability company was introduced. (People made fun of it at the time, as when W.S.Gilbert created the Duke of Plaza Toro Ltd.) It has worked fine for decades, but now it has metamorphosed into a system of labyrinthine financial complexity. We have been repeatedly told – proudly – that London is one of the world’s major centres of these ‘financial’ activities. But is this sort of complexity desirable? Conrad Black has pointed out that it engages a very large part of the population – and a highly intelligent part at that – in what is, in reality, non-productive work. As he put it, a man making paper clips at least produces something.

    Ideas, anybody?

  • Rafaelo

    Here in Virginia, I heard an opinionated Republican mouth exactly these sentiments last week. Only in his case, he was so eager to blame the opposition that he took it all the way back. Our conversation: “Not only was Clinton to blame, but –who was the guy before Clinton?” “Bush the First?” “No, before that.” “Reagan.” “No, before that–the peanut farmer.” “Jimmy Carter?” “That’s it! That’s who made this mess! Another Roosevelt! ” He was elderly and flushed with outrage, so to avoid putting his pounding heart at further risk I suppressed the impulse to ask how mortgages more than thirty years old and long since defunct, could contribute to today’s problems? From his diatribe I gather the Powers That Be are circulating wingnut “blame the Democrats” talking points, to help the intellectually myopic see the point. Mr. Sewell faithful reproduces them. In truth a few soured mortgages in hyper-inflated markets in California and Florida (and here in Northern Virginia) were only a catalyst for the underlying problem. Which was and is leverage. Speculating with borrowed money. That’s always the problem. It was the problem in 1929, and is the problem now. Speculating in this case in mortgage backed securities which are so far removed from the original mortgages, as to have essentially nothing to back them but faith, faith in math so complex that the whole calculation is unraveled and undone by the breeze from the flap of a disappointed realtor’s coat tail. Much like a pyramid scheme, when more and more money stops flooding the real estate market, the whole thing collapses. You can blame Ma and Pa mortgage holder if you like, but I know some of them in Northern Virginia they were responsible people who got caught in a bad squeeze. Lost a job; divorce; cancer, that sort of thing. No, Ma and Pa did their best to muddle through and pay what they could, in some cases never getting a response when they tried to renegotiate the loan to make it manageable. I’ll go with greedy ambitious investment bankers and incompetent regulators creating an anonymous, unresponsive and irresponsible, ungoverned financial Titanic that could not survive even the encounter with a snowflake, thank you.

  • rudyard

    Here’s a factual account of the pressure to act irresponsibly that brought down the American mortgage buyer and re-packager Fannie Mae.

    Which occurred during the BUSH administration.


    Of course, if Mr. Sewell would rather not let mere facts get in the way of his ranting . . . .

  • tom mcdermott


  • Hayward Maberley

    Mr Thornton,
    Just as a start may I enquire whether you are related to the Henry Thornton, banker, economist, parliamentarian and philanthropist W ho wrote “An Enquiry into the Nature and Effects of the Paper Credit of Great Britain”, founder of the Clapham Sect and Slave Trade Abolitionist?
    I maybe right, I maybe wrong.
    This concerning the apportionment of blame for the current Wall Street now world wide SHTF. The use of the acronym is accepted as are many others on blogs. If we are to discuss debasement of the currency of The Spectator you may be correct in that it is an inappropriate use. But what Mr Short may also have been alluding to was the somewhat nasty even venomous tone used in the contributions. That and the wonderful conspiracy theories that are pulled off some very strange web sites.
    Agreed that previous Democratic Administrations had enacted legislation that may have given rise to some of the financial and fiscal malfeasance.
    However the last big bail out was that of S&L which occurred in the Reagan Bush years. It was, until this latest WS debacle, “the largest and costliest venture in public misfeasance, malfeasance and larceny of all time.” The ultimate cost of is estimated to have totalled around US$150 billion, about $125 billion of which was directly subsidised by the U.S. government, ie the taxpaying citizen , again not the stinking rich who thanks to Reagan, Bush, paid very little tax. This plus the the Gulf War military action contributed to the large budget deficits of the early 1990s and led to the economic downturn and recession of the early 1990s. A debacle that again hit the many but not of course the rich few, including Neil Bush.
    The next example, LTCM, not so large, occurred in the Clinton Administration, though I do not believe that the Democrats could be held responsible for this. The Federal Reserve Bank of New York organised a bail-out of $3.625 billion by the major creditors in order to avoid a wider collapse in the financial markets. In spite of this the fund folded in early 2000. Why did the Fed step in to organise the bail out of LTCM?
    A quote from the report that Chairman Alan Greenspan gave to the Committee on Banking and Financial Services, U.S. HoR.
    “..Had the failure of LTCM triggered the seizing up of markets, substantial damage could have been inflicted on many market participants, including some not directly involved with the firm, and could have potentially impaired the economies of many nations, including our own…”
    This was Chairman speak for the fact that many very rich people (market participants) would lose their shirts as would some banking and finance institutions. Adding the threat to “the economies of many nations including our own” was there to reassure the House Committee that this was really the act of a patriot!.
    In other words, this intervention would prevent the market from operating as it is supposed to according to all the gung ho free marketeers. To put it bluntly the Fed stepped in to stop the very rich from becoming very poor. The very rich can become even richer with no risk. For them there is no downside as they will be bailed out by Governments or through government intervention.
    Yes, to some extent, society as a whole in the developed countries is to blame for the ease with which credit is obtained and then used in the “speedy gratification of all its material fancies” But that also hinges very much on the banks and other finance bodies wanting to increase their market share and hence the increase in “cash flow” in the form of debt. That is why people are always receiving unsolicited phone calls, emails, mailouts offering credit cards or more credit on the cards already held. Often accompanied by shills for goods/services/holidays etc. Our family uses credit cards wisely by paying off the balance monthly and not over extending.
    Oil. The second most addictive substance in the world after credit/money!
    More efficient use of it plus the use of renewables and the building/converting of/to more energy efficient building would help. Efficient use would mean amongst other things no more Hummer/SUV type vehicle being driven around cities. But do not forget that the major reasons the US visited shock and awe and began the Iraq Fiasco was Oil. The PNAC Manifesto premises US hegemony on the availability of oil for US military forces.
    Nuclear power is one of the greatest consumers of government largesse, really the tax payer’s. Christopher Crane, Senior Vice President of Exelon, April 2007 in address to the US Congress said that loan guarantees for new power plants must cover 100% of project debt, as otherwise financing of new power plants would be extremely difficult. So nuclear power is competitive only if the financial risks are largely taken over by the public. Also the insurance costs have to be underwritten by the public. Why? Because actuaries, who decide what real risks are, advise insurance companies not to go there. Coal to oil is very energy intensive, uses huge volumes of water and creates large amounts of waste.
    I agree, Mr Thornton, the current “business model” needs to be seriously examined and shaken up. All leveraging, paperhanging, vapour money management and other such quasi Ponzi schemes need putting down. If The Masters of the Universe wish to gamble, let them do it in a Casino with their own money that they have earned in real job.

  • Hayward Maberley

    Thank you for your boots on the ground report from Virginia. When reading some of the opinion on subject matters such as this I recall that this Republican Administration claimed early on that it was “Faith based” . Even truer now, for they certainly are not “Reality based” Here Down Under , in Australia , it is good to hear some common sense from across the pond. Which is how we regard the Pacific in diminutive terms, The Atlantic being merely a ditch.

  • Mark

    first off … anyone citing the NYSlimes as a referenece is a TOOL.
    I’ll type this slowly so the socialist out there can read it 😉
    Jimmah Cahtah was responsible for the CRA in 1979. Bill ‘it depends on what the definition of “is” is’ Clinton furthered the CRA with his multicultural housing policy. Dems were put in charge of Fannie n Freddie and took MILLIONS$ from that boondoggle. Barry O had a hand in it early on and then hired some of the more corrupt (Raines, Johnson) for his run from FannieFreddie.
    So poor folks black, white, hispanic, whoever got taken for a ride that they’re partialy responsible for and now the US taxpayer (the endless well) will foot the bill and bail em out.
    Now the dhimmicraps are trying to outright steal the election here in Ohio and may well get away with it with the help of the lamestream media.
    For all you liberals/socialists out there try to cite facts instead of regurgitating the typical lines. Look at the history of it all and anyone with a brain will see the truth b/c ….. the Truth is out there.

  • Peter Warden

    It’s encouraging to see the spirited fight that responsible Republicans put up against wicked Democrats’ attempts to stop adequate regulation of the US banking sector.

    An example of this is to be found in the current edition of Contingencies magazine, the journal of the American Academy of Actuaries. One John McCain (who, apparently, is a Republican senator) said: “Opening up the health insurance market to more vigorous nationwide competition, as we have done over the last decade in banking, would provide more choices of innovative products less burdened by the worst excesses of state-based regulation”


    So, given a Republican victory in the forthcoming presidential election, Americans can look forward to a health insurance industry that is every bit as much a beacon of commercial excellence as its banking sector is.

  • dennis

    Peter Warden/Mark

    Actually, the New York Times does occasionally come up trumps. It published a particularly good….prophetic even… article on this subject in September 1999. I’ve picked out the money quotes for you:

    the Fannie Mae Corporation is easing the credit requirements on loans that it will purchase from banks ……..

    ……Fannie Mae, the nation’s biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people …….

    …… Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue …….

    In July, the Department of Housing and Urban Development proposed that by the year 2001, 50 percent of Fannie Mae’s and Freddie Mac’s portfolio be made up of loans to low and moderate-income borrowers……

    The change in policy also comes at the same time that HUD is investigating allegations of racial discrimination in the automated underwriting systems used by Fannie Mae and Freddie Mac to determine the credit-worthiness of credit applicants.

    Blimey, the HUD commissars were even accusing software of racism…….

    Oh – Peter W, that increase you point to in dodgy lending after 2005….. how much of that is new lending to first time buyers? I’d bet it was mostly refinancing to get onto a lower interest rate/ squeeze out any equity that I describe.

  • Hayward Maberley

    Just the facts, sir. Which I did. Just those in my posts. No reference to the NYT.
    However concerning the Wall Street Debacle with all that hard sell, the wallpaper, the vapour cash and the collapse of three of the special five. What facts would you care to dispute.
    Dubya and Friends “growing ” of both the deficit and the national debt to record levels. What facts would you care to dispute?
    As for typing slowly, considerate of you. But no need thank you I am a fast reader!

  • Hayward Maberley

    May I suggest to all and in particular Mr Sewell to read this:
    A Futile Bailout as Darkness Falls on America
    It is probably the most accurate and balanced, best and most knowledgable article on the whole sad and sorry WS mess written by someone who knows, for Mr Roberts was Assistant Secretary of the Treasury in the Reagan Administration. He was Associate Editor of the Wall Street Journal editorial page and Contributing Editor of National Review. read at

  • Mike Colonial

    In squabbling about whether Democrats or Republicans are to blame is surely to miss the point, the context and the greater picture.

    Universal franchise was always going to mean that the will of the less educated masses would prevail. With power came the chippy “I am as good as you” attitude – and then a huge sense of entitlement. Mix in the dominant left’s anti religion attitude and soon there was no moral compass. Materialism on a grand scale had arrived. The politicians obliged by ensuring endless credit.

    Any doubts? Have a look at Hullo next time you are in a news agent. It almost make you wonder whether a depression might not be a bad thing.

  • Peter Warden

    First, thank you, Mark, for raising the standard of debate. I’m sure that you’ll know what I mean when I say that your contribution was was an example of the sort of of analysis, reasoning and delivery that would make Governor Palin herself proud.

    Then Dennis chipped in with a question: “Oh – Peter W, that increase you point to in dodgy lending after 2005… how much of that is new lending to first time buyers?”

    Well, Dennis, I don’t know the answer to that. What I do know is that neither the Carter (or ‘Cahtah’ as Mark, with his rapier-like wit, put it) nor Clinton administrations were in power at the time. Whether it was new lending to first time buyers, or second or replacement mortgages for existing borrowers, Mr James B. Lockhart, at the time the chief regulator of Fannie and Freddie, was serving then at the pleasure of President George W. Bush.

    As I recall, he’s a Republican.

  • Herbert Thornton

    Mr Maberly –

    It would be nice to think that I was descended from the Henry Thornton you mention, but from what little I know of my ancestry (i.e. back to the late 19th century) I think it is unlikely.

    Your points about the economic obstacles* to obtaining energy from nuclear power are of course valid, but the demand for energy exists, is increasing and will continue to do so and must be met. It is, after all, the taxpayers who are the end users of energy, and it follows that they – i.e. we, society – must pay for it. I would prefer to pay for it by using our own resources rather than pay foreign countries, especially our enemies, to supply us with oil, albeit for the time being more cheaply.

    For the same reasons, I would prefer to obtain all our oil from our own coal despite the environmental and cost drawbacks.

    As between oil from coal and nuclear power, I would like to see oil used only where nuclear power cannot be used – e.g. to fuel aircraft.

    I heartily agree with your last paragraph. “…leveraging, paperhanging, vapour money management and other such quasi Ponzi schemes…” is a very apt description of the current financial evils. They need putting down and that should be the duty of government. Suitable legislation is needed.

    *On the matter of whether an energy source is economic, I recall hearing a lecture around 40 years by, I think, a statistician, who made the point that building dams to produce hydro-electric power had not (in those days at least) been a sound investment, because it was calculated that the cost of building them was so great, compared with the value, over time, of the electricity that they would produce. Be that as it may, I have not yet heard of hydro-electric power stations being closed down and I should think we would all now think of them as being highly desirable, no matter what was the cost of building them.

  • Herbert Thornton

    Mike Colonial –

    You have raised a very worrying topic. Universal franchise is such a sacred cow that questioning it has become akin to blasphemy, but I sometimes suspect that the Chinese may be developing a system of government that is nearer to the ideal than ours…..

  • Fact checker

    What a pathetic piece. The amount of half-lies and misinformation in this piece is just staggering. Let’s begin with a fact that the author surely knows, but somehow never finds the place to mention. The amendments to the Community Reinvestment Act were not the work of a crazed lesbian (btw, what does this literally below the belt shot have to do with the topic?), but they occurred in 1989, that is, during the George Bush Sr. Administration, almost four years before Clinton actually took office. The legislation regarding Freddie and Fannie passed in 1992, before Clinton took office.

    Then the author never mentions the effect of derivatives (CDOs, CDSs etc.) on the current situation. Did these too come from poor blacks?

    And what about the eight years Bush has been in office? Our author realizes that is in a bit of problem here, so he relies on his readers short memory. Apparently, Bush couldn’t anything because of the “Democrats in Congress”. Only problem with this claim is that it was only since January 2007 that there has been a Democratic majority in both House and Senate. Before that, there has been a Republican majority in both House and Senate for almost the entire Bush presidency. Oh, and it probably is just me, but thought a leader is a person who sees trouble ahead and then manages to create the required coalition to address it.

    What’s more? (ex-)Saint Greenspan, not exactly a card-carrying Democrat and not someone shackled by any (imaginary) Democratic Congress kept interest rates at historically low rates and ignored calls to raise them to deal with the house prices bubble. His answer? There was no bubble (a claim reiterated by many right wing writers). And it’s not as if there were no indications. Read Paul Krugman’s NY Times piece from 2005 called “That Hissing Sound”.

    In short, whatever fault there may have been in the CRA, it is pathetic to put the blame on the “left” as the Spectator cover does, and to suggest that it is wholly responsible for what we see now.


  • Eddie Miles

    If you believe that this situation is the fault of the blacks & poor then there is no way to help you. You fell for it. Please try not to let the old class warfare trick control your mind.

  • John Lubeck

    I’m not sure who would take this drivel by Dennis Sewell seriously. I guess here in the good ol’ USA about 50% of the population – we call them conservatives. Some of us call them whack jobs.

    Dennis your leaps of logic (and facts) are fairly amazing. From overzealous pursuit of “fair” housing for minorities to a global crisis. And just think, all of those innocent bankers like Richard S. Fuld whose only minor misstake was to not get a government bailout while he was handing 100s of millions out in extra compensation for corporate executives.

    Dennis, we have an idiot as big as you are here in the US – his name is Glenn Beck. You’d like him, give him a call.

  • Hayward Maberley

    Mr Lubeck and Fact Checker,
    Thankyou for bringing some facts and rationality to this topic. Like much of The Spectator these days for what is presented as fact is pasted in from web sites run by, as you put it Mr Lubeck, whack jobs. It used to be that the so called “left” was where the whack jobs were suppose to reside but it appears the pendulum has swung the other way, all the way, when reading some of the postings by those on the “right”.

  • dennis

    Fact Checker

    You should seriously consider a name change.

    The amendments to the Community Reinvestment Act … occurred in 1989, that is, during the George Bush Sr. administration.

    The changes I mentioned relating to the CRA (which rated only a brief mention in the article, anyway) came in 2 parts: the legislative change was incorporated in the Interstate Banking and Branching Efficiency Act of 1994, under Clinton. (This made a high CRA rating a condition of interstate expansion etc ) The key regulatory changes were made in 1995, again under Clinton.

    So you are just plain wrong about that. Of course the CRA had existed since the late 70s and had been amended before.

    John Lubeck

    From overzealous pursuit of “fair” housing for minorities to a global crisis……

    I’ve already quoted (see above) a 1999 article from the New York Times describing the Clinton administration’s folly and warning prophetically of the likely consequences.

    If you go trawl through the Journal of the American Bankers Association 1993-9, you will find the same complaints about the behaviour of the Clinton administration …. and the same warnings.

    These were contemporary accounts
    that you guys didn’t listen to back then, so I doubt you’ll listen to me now you’re trying to pretend history never happened.

  • Nick Kaplan

    Why is it that so many of the comments here are posted by individuals posing as knowledgeable but who really haven’t the slightest understanding of the American system of government.

    The main complaint against this article, as presented by posters such as Dean, Hayward Maberley, Tilda and Peter Warden is the banal assertion that the Republicans have held the Presidency for the last 8 years so they must be responsible.

    NEWS FLASH: The American system does not work in the same way as the British system. Congress is not the same as the British parliament and does not just bow down to the superior will of the executive branch.

    The Republicans did try to respond to the emerging crisis, for example in 2003 Bush tried to have a bill passed that would have reformed the way Freddie Mac and Fannie Mae operated, introducing new regulations to curb its irresponsible policies. However this was blocked by Democrats on the Committee for Banking, Housing and Urban affairs (now chaired by Chris Dodd- Dem). Committees have significant power in the Congressional system and due to the influence of this committee the Bill never even made it to a vote on the floor, where Republicans were better represented. McCain retried to get this bill through congress by co-sponsoring something very similar in 2005 and again in 2007 (after Dodd took the chairmanship). But again the Bill was blocked by Democrats claiming there was ‘no problem with Fannie Mae.” (see here: http://www.youtube.com/watch?v=_MGT_cSi7Rs)

    Some others claim that the CRA made up a very small proportion of sub-prime so it cannot be responsible. This is again nonsense. The point is the CRA was the trigger for 2 reasons: 1) House Price inflation: before the Clinton administration bolstered the CRA in 1994 house prices increased at almost exactly the same rate as general inflation. After 1994 however House prices skyrocketed at a rate far in excess of the inflation, this meant that sub-prime had to be expanded to get more individuals into homes (this is the reason why the blame is placed on Clinton and not on Carter). 2) Competition: Sub-prime proved initially to be highly profitable to those banks that were forced to make these loans. This meant that other banks (operating under a competitive system) had to adopt a similar model in order to remain competitive, to attract investment, and to deliver returns to their shareholders. Yes this was irresponsible, it was greedy, but under a proper free market system in which Politicians (with noble intentions) had not passed a law (the CRA) that created bad loans, this would never have happened.

    My point is not that one party isn’t responsible (Republicans were responsible for promoting the idea of cheap credit with extremely low interest rates for far too long) but that it is absurd to call this crisis a failure of capitalism. The problems have occurred within a very specific (and in relative terms a highly regulated) sector of the market. These problems are the result of numerous errors including greed by bankers. However the key reason for the crisis is due to the strange hybrid of market methods and socially engineered ends. The solution will not be to lurch one way or the other but to deal with the specific issues that have become apparent by taking a calm and measured approach. In my view what is needed is not more regulation by bureaucrats (which will only decrease efficiency and pave the way to the next crisis) but instead more supervision by experts in central banks, along with a more sensible monetary policy which operates in an anti-cyclical pattern (i.e. higher interest rates during booms and lower rates during down turns, the reverse of what we are now experiencing).

  • Daniel Danon

    Quite an amusing view on life. Poor banks being squeezed by Clintonians into accept subprime loans. The author also says: “only a small proportion of the subprime loans made since George W. Bush became President have gone to new, first-time buyers”. Could he mention his sources?

    Fact is most loans were taken in 2003, when house prices were booming and Fed rates were at 1%, well bellow inflation. Fact is, there was a flood of cheap cash that banks needed to invest and they figured out that real estate was safe as gold. Doesn’t matter people don’t afford them, real estate prices always go up and banks can get their money back if the worse comes to worse.

    Blaming White House anti-discrimination policies and the excesses they showed for a worldwide financial crisis is simply ridiculous in statistical terms.

    Thank you Dennis. You made us laugh.

  • Robert Fenske

    what a waste of cyberspace.

  • Fact checker

    Well, it’s nice to see that of all my comments only one got a response. I assume this means DS accepts the others as valid criticism. But even his comment is inaccurate.
    Here is a quote from an article published March 1993 and referring to the situation as left by George W.H. Bush:

    “In 1989 … Congress greatly enhanced the CRA’s impact as
    part of the comprehensive banking legislation of that year. Consequently, CRA-based challenges to bank mergers and other transactions subject to CRA scrutiny are now routine, even when the institution in question has received high marks for CRA compliance in recent examinations.”

    (From Macey & Miller, “The Community Reivestment Act: An Economic Analysis”, Virginia Law Review, vol. 79, p. 291.)

    Perhaps Clinton expanded on this, but the basics, including the ranking for compliance with CRA, is Bush I’s legacy. Not mentioning these facts is nothing short of dishonesty.

    And one more thing: from January 1995 until the end of Clinton’s presidency the majority in both House and Senate was Republican. Why didn’t they do anything about this reckless statute? Clinton might have vetoed them, but wasn’t it worth trying? Oh, sorry, I forgot, they were engaged in something much more important: Monica Lewinsky…

    So it turns out that a false Democratic Congress was the reason why Bush couldn’t do anything about this, but a real Republican Congress is not in any responsible.

    I’m sticking to my name.

  • Jay

    Bush was just as eager to get poor people and minorities into home ownership. Bush knew that once these communities were saddled with mortgage debt, they would become more docile and easier to control. The Bushes and Clintons were working together all the time. There is no difference. Buckminster Fuller laid out the idea years ago that if you give people access to industrial technology, they become more passive and prone to crime. The elites realized that by spreading modern conviences, they could control wayward populations. You can’t understand what’s going on in Iraq and why the US is so eager to get into Africa until you understand this. Its reverse Marxism in a sense; share enough wealth to make people preoccupied with preserving what little they have gives them a stake in the process and makes them more easy to control. Read Thomas Barnett if you really want to understand this.

  • Fact checker

    Oh, and by the way, I don’t mean to say that the CRA has not contributed to what is now happening in the credit markets. Perhaps it did.

    I make two different points: one is about journalistic honesty, which is completely lacking from this piece; the second is that the claim that *everything* that we see now is completely the result of the CRA’s – and so by implication that “This is All the Left’s Fault” is ridiculous.

    If you want to read a book published a couple of years ago, and which is not directly about the current crisis, but is enlightening about it, read Eric Beinhocker’s The Origin of Wealth: The Radical Remaking of Economics and What It Means for Business and Society (2006). It explains why what we now know about human nature undermines some of the assumptions of the capitalist model. And don’t worry, this isn’t the work of some left-wing tree hugger. Beinhocker is a McKinsey employee and the book was published by Harvard Business School Press.

  • catesby

    Mr Danon

    What is truly laughable is the argument put implicitly by you and other left-wing visitors to this thread: that somehow investment banks are responsible for homeowners from Fort Myers Fla. to Detroit having their mortgages foreclosed, when clearly you have it arsy versy.

    The crisis on Wall Street and in the City of London was caused by a rash of mortgage foreclosures, not the other way about.

    The facts certainly appear to support Mr Sewell’s case.

    For example, data released by Experian show that the age-profile of defaulters is different this time. Usually defaulters tend to be young people who haven’t had their mortgages for long.

    But Experian’s figures show that 1.3 million delinquencies in 2007 featured householders over 50 years of age.

    Also, according to the Center for Responsible Lending, the majority of subprime mortgages issued since 1998 have been refinancing as opposed to original purchase mortgages.

    Both these facts support Dennis Sewell’s contention that the rot set in a dozen years ago and not in 2003, when President Bush took his eye of the ball to invade Iraq, or whatever Spartist nonsense you are peddling.

  • dillon

    Fact Checker

    Bush I’s 1998 changes to the CRA were designed to strengthen the act in fulfilling its original purpose – to stop the foul practice of red-lining.

    Bill Clinton’s 1995 changes were designed to turn the CRA into a weapon with which to browbeat banks into lending to the Democratic Party’s political client groups.

    There’s a big difference.

    Anyhow it is you and not Denis Sewell who is making a big deal out of the CRA. He only makes passing mention of it. So to suggest that he’s claiming ‘everything we see now’ is down to the CRA is, to use your own word, dishonest.

  • Roger Steer

    Dennis is to be congratulated on the aricle -it hits all the right notes- But my mother always said if someone says put your head in the oven you dont have to.
    In other words there is no excuse for individual fallibility, corruption and incompetence.
    There are always young men (and women) in a hurry; always pressures on managers to take the politically correct route. Thats why seniors are appointed to credit committees and old heads kept on the boards. Thats why governance is such an important issue.
    There is no excuse . The backwoods republicans are right. Once you allow the principal of disallowing market failure you are allowing the other side to win!

  • Gautam

    It’s obvious that many in America still don’t see that their country has already had its first black president: Bill Clinton. Barack Obama must never hope to ‘improve’ upon Clinton. The southpaw confidence trickster at the White House, in his glib attempts to appear politically correct (and turn, in the process, intellectually dishonest) — and this obsession with ‘political correctness’ has historically been the undoing of all infantile Leftists — has perfectly botched up the capitalist economy by ‘trying to skew the operation of the market’. This has been the trouble with all progressives: they seem ever convinced that the means justify the ends. Because it isn’t so, and the credit crunch that the US is keeling over with is proof.

    Now, all that the Republicans need to do is campaign hard against the sheer wooly-headedness of the Democrats, argue that Obama stands for the same Clintonian fuzziness of logic in all respects, and they would be on strong wicket to see the McCain-Palin ticket through to the White House. Unless, of course, the Americans get taken in yet again by a glib Democrat trying to sell impossible dreams…

  • Norman Mason

    This is too simplistic. What about the entities that hid bad debt with safer debt, making it difficult to assess risk properly. Without this deviousness loan foreclosures wouldn’t have poisoned the financial system the way they did.

  • Shirley Aamidor, Ph.D.

    According to your article, the bailout amounts to wealth distribution, under the guise of legislative mandate, or as some might say, state socialism. As one who is watching the day-to-day politics of the nation, I can assure you that this information is not being disseminated (?) in the popular US press, and so we have a virtual censorship or ‘wink-wink.’ This economic debate/discussion that will define who will bed the next president of the US and yet the press has effectively self-muzzled!!

  • Winner, Most Uninformed Article, 2008

    Perhaps you could cite to us some legislation or reg — come on, you can do it — urging, or even allowing, banks to approve of “income stated” (no income verification required) loans? It’s all about churning closing fees. The internet made every podunk owner of a computer a mortgage broker (3 page application, money back at closing) and the banks ate it up because they knew they would assign the paper, and Wall Street knew it would bundle it up and sell it as “secured,” “insured” investments to foreign countries hungry to invest. Minorities? Get out of here. You’re a moron.

  • Judy

    Great article! It takes a Brit news org to communicate it so well! Thank you. I agree with your take on it.

  • Harry

    Dennis, this really doesnt hold up. First of all, multivariate regression analysis is an entirely acceptable way of establishing the existence of discrimination. It is the same way we established the link between smoking and lung cancer. If the analysis was poorly done then you might have a point. But you havnt said that.

    Secondly, 2mn new black and latino mortgages tells us absolutely nothing about whether this is disproportionate. These ethnic groups have been increasing as a proportion of the US population for some time. Is this really disproportionate? What should this number have been?

    Finally, do we have evidence that the banks were unhappy with the credit quality of their portfolios? Did they complain or seek to mitigate risk in any way? Or did they happily pile it on and ignore any consequences?

    How did HUD or the CRA cause the banks to run their capital ratios down so massively? Surely this is transparently the crux of the issue. If they had raised new capital to back their activities it would have reduced their rate of return on equity. This has nothing to do with default rates. Why hasnt your piece addressed these numbers?

    If you want to be taken seriously then lets take a look at comparative default rates, and absolute scale of default by geography and ethnicity.

    Instinctively I think this analysis is wrong. But the burden of proof isnt on me. Some numbers please.

  • Hayward Maberley

    Thank you whoever/whatever you are. I presume an actuary/mathemetician/statitician, for your running, in imperial terms, of a yardstick over this whole sad/sorry episode. I would like to think that your approach to the problem will be recognised as entirely rational but do not bet on it, on this particular site.
    Something else that has occurred to me while reading your contribution concerns something that is in the actuarial field, possibly the ther two areas as well? That is Moral Hazard.
    The erstwhile Masters of the Universe seem to have no worries in that area. They cast their avaricious minds back to previous bail outs most recently S&L & LTCM. They knew an Administration would organise bail outs/ support for any of their noisesome aggrandizement.

  • Dennis Sewell


    Here are some numbers to chew on:

    Mortgage loans made to individuals with poor or non-existent credit records rose from $20 billion in 1993 to $150 bn in 1998.

    Minorities accounted for 40% of the net increase in homeowners during the 1990s. (In 2000, White Americans made up 75.1% of the total population.).

    The percentage increase in homeownership among whites 1994-2005 was +8.28%. Among African Americans it was +13.59%. Among Hispanic/Latino households it was +20.14%.

    In 2000, the median net worth of a household headed by a white adult was $79,400. The median net worth of a household run by a black adult was $7,500. The figure for Hispanic households was $9,750.

    In 2006, some 3.2 million sub-prime loans were made, of which only 354,000 were to first-time buyers. An estimated 1.8 million were refinancing packages replacing already existing mortgages. In the same year 625,000 sub-prime loans were foreclosed.

    According to a study carried out in Minneapolis and St Paul during 2005 and 2006, close to half of the homeowners counseled by the Minneapolis Foreclosure Prevention programme were African American.

    On average, homeowners consulting the MFP programme had lived in their homes for 9 years.

    These figures suggest that:

    a. Default is tending to be disproportionately higher among minorities.
    b. The people in trouble tend to have first become homeowners around 1996-7.


  • Mike Colonial


    Some celebrated writer, and I wish I remember who, said that on the basis that the majority is stupid it stands to reason that when the majority rule they will make stupid rules.

    I suspect that by the end of this century universal franchise will have metamorphosised and that we will have something like two houses. An upper which make the real decisions and a lower related more to the likes of council matters. Education, income, tax paid, ownership of a business and so forth will be the qualifications for an upper house vote.

    There is nothing wrong with a drive to succeed, acquisitiveness and the like. They are essential to progress. The recent problems were due to the crass manner in which they were expressed. The problem is going to be to find the points around which society can build its core values. To carry on towards becoming a totally Hullo society under Queen Posh Spice and King Kicker Spice with a rap version of the national anthem will mean the demise of the West.

  • Frank D

    David Lindsay missed a subtle point in Sewell’s thesis (ripped off wholesale from the editorial pages of the Wall Street Journal, Fox News, the National Review and the McCain campaign) – i.e. it is blacks and *lesbians* who are to blame.

    This is a pathetic farce of commentary, and pernicious because of its racist, bigoted roots. The people writing the bad loans were unregulated retail lenders outside the purview of CRA (which started, with bipartisan support, under Carter not Clinton). Argent and American Home Mortgage, among many others, have nothing to do with CRA. Bear Stearns and others who sliced and diced, then got the credit agencies to slap a AAA rating on the sleazy package of loans, have nothing at all to do with CRA. But oh how convenient, particularly in an election year where one candidate is not white, to raise the bogeyman of feckless blacks and other minorities who either are irresponsible or stupid,if you believe Sewell, as the cause of the global economic meltdown.

    The cause, my friends, is the failure yet again of the lenders to get past their own greed. It is their active contribution to the creation of the property bubble that (this time, really!) wouldn’t burst, even as people borrowed 110% mortgages at 8 times their earnings, and refinanced again and again. Surprise, guess what? People – all kinds of people, rich and poor – were paying too much for their homes and were only able to do so with the active complicity of the banks and the failure of governments everywhere to regulate them. The propagation of the belief in a party that would never end was too valuable politically for anyone to call time.

    Mischievous political critique is one thing – blatant racism is another. Shame on you.

  • barbara

    You silly little, You seem to have forgotten about the made in the US Credit Default Swaps. It’s amazing how pompous little people like you with access to the web use it to spread lies against the poor.

  • John Hall


    I don’t think anyone here is ‘blaming the poor’. Bill & Hillary Clinton are multi-millionaires.

  • Herbert Thornton

    Mike –

    It will be recalled that early in the 19th century there was a property qualification for voters – you had to own property worth so many pounds a year to get on the voters’ roll.

    The basis for it was a much healthier respect for property than there is now, and there was fear that voters without property would make irresponsible choices. It was a fairly simple approach, but I incline to think that it reflected a very sound principle.

    Your suggestion is certainly worth thinking about. Our current electoral systems have, over the last century and a half, handed power to increasingly shallow politicians, but alas, to fewer and fewer statesmen.

  • Sam

    I wouldn’t claim to understand fully what’s going on; anybody who does is lying or delusional. But to make this situation what it is several things do seem necessary. Aggressive and predatory loan originating practices seem necessary; mortgage-backed security and derivatives traders claiming ‘bulletproof’ models that could repackage this stuff into AAA instruments seem necessary; highly leveraged investment banks and other institutions using these securities for leverage seem necessary; these institutions also serving as counterparties deeply entrenched in the system seems necessary; a global asset bubble based on years of easy credit and unprepared for sudden lockup seem necessary; and yes, some poor folks who should have read and understood their loan agreements are also probably necessary. But Clinton’s HUD?

    This might be an interesting side note to the current crisis – roots in Clinton-era minority lending policy. While a case could be made this was a contributing factor (one of many) to the current meltdown, it’s pretty difficult to argue that it’s a necessary condition for the crisis – let alone sufficient to cause it, as you’re claiming. Harry raised many good actuarial questions – your skimpy and haphazard set of statistics do not ‘prove’ your argument in any meaningful way. Sadly a ‘QED’ flourish does not an argument make.

  • Makiba

    Ed McMahon an American Millionaire house went into foreclosure he is not poor or a minority. Explain that.

  • Makiba

    Many upper middle class people homes are in foreclosure who is to blame there?

  • Purple Mountains Majesty

    Sewell’s piece ignores the fact that the Republicans controlled Congress from 1994 until 2006, and that “oversight” of Fannie, Freddie and the rest was supposed to come from Congress. And it was Bush’s SEC regulators (Chris Cox) who reduced the “net capital” requirements for investment banks in 2004, enabling Bear Stearns, Goldman Sachs, Lehman et al, to dive headlong into the then-lucrative mortgage-backed securities and credit-default swaps markets. Only then did the trickle of bad loans and derivatives become a gusher. The Wall Streeters’ request for relief from the capital requirements was led by Goldman’s Hank Paulson, who is now stuck cleaning up his own mess. So while it may be true that reduced lending standards played a role in the tidal wave of bad loans, it was a GOP Congress and GOP regulators who loosened the reins so the meltdown could happen. Clinton-era pressure to lend to minority borrowers is but a teaspoonful in a vast ocean of Republican ineptitude and capitalist greed.

  • Francois

    The best way I can respond to this story which blames Bill Clinton for the current economic crisis is to point out that way back in 1991, when my husband and I bought our first house in Chicago, we were neither poor, nor black — we were in fact coming in with a hefty down payment (so, plenty of equity from day one)– and every bank we talked to about a loan tried to sell us on borrowing much more money than we needed to buy the house. It was as if they were telling us we were naive to only borrow what we needed verus what we ‘qualified’ for. I was shocked at how much debt those banks were pushing us to take on. And it has never stopped– we were always getting calls and letters from lenders trying to get us to borrow more, certainly much more debt than we wanted. When we did take out a modest line of credit ($10,000) every lender I talked to tried to get me to take out more than triple that amount, pointing out how much a kitchen rehab or master bedroom suite would add to the value of our house. You may not appreciate over there just how much of the US economy has been based on home improvement, home supersizing, and home trade-ups, funded by banks happy to add another $100k to your existing debt. All so you can have a magazine home! This had nothing to do with Bill Clinton. This aspect of the economy had everything to do with banks knowing they could resell these loans and have no subsequent responsibility for how they performed –or whether the homeowmers wound up on the street.

    I did find this article very interesting, but it only tells a fraction of a very complicated story which has plenty of blame to go around.

  • kissel


    Check for yourself! Search for “Fannie Mae” on NYTimes.com.

    Read the articles from the 1990s!

  • rdg

    ACORN is to blame! NY Times has interesting history going back to the early 90’s. Search keywords… “racial mortgages ACORN” and see what they have been doing.

  • Carlo

    If banks hadn’t packaged and securitized subprime loans, transferring to risk to someone else, they would have been more cautious with their lending. Tell me, was it Clinton who encouraged such securitizations, or was it the bankers’ greed?
    How come don’t you say anuthing about Paulson? If most ministries of health in a country were former Big Pharma CEOs,I think people would mind. Yet no one seems to object when most Treasury secretaries come from Goldman. And no one seems to remember that Paulson profited enormously from this risky operation which Goldman did, too, and that he lobbied to relax regulatory requirements. How come?

  • Jim B

    Excellent article. Here’s a chilling piece from the NY Times in 1999:


    Hauntingly familiar, huh?

  • David Miloz

    Although, Democrats and liberals in general are the culprit for this crisis (in which the economic side is only its surface) the republicans that have occupied important positions for so long are just plain bad conservatives.
    They don’t fight. They don’t organize. They don’t have any strategy to block the progress of the bad guys.
    For a comprehensive explanation of this state of affairs and how unelected liberal bureaucrats have dominated all invisible power in Washington see The Failure Factory – Bill Gertz.
    There is a lack of testosterone in republican politicians that is leading us to ruin.

  • David Paterson

    I have tried to email this excellent article but without success. Is there something wrong with your software?

  • David Paterson

    Amazing the comments below. Social engineering was reasonable – everyone has the right to own their home even though the potential investor cannot afford it. Bankers were at fault for succumbing to the political pressure. Wet!!!

  • Kent Bayley

    Wow thats amazing. The banks were forced into it and this story rolls out the spin. If the author believes all this chronological fantasy and that all forced the Banks to take huge risks then he also believes in fairies at the bottom of the garden. Its greed and more greed and avarice by the ton. Do yourselff a favour and stop writting rubbish. The world is a dark place where community no longer exists except in the dictionary. Too many academics and journalists and politicians who neither sew nor reap . Too many pretend jobs that do nothing. Get back to basics and dont listen to would be journalists or anyone else. We came with nothing and you can be sure we will leave with nothing. Just search out happiness no matter how meager and be honest with others. If the explanation takes more than a few words on any issue then be very careful. An empty vessel makes the most sound.

  • Harry

    Thank you for replying Mr. Sewell.

    And in particular thank you for giving figures.

    I’m sure you realise that the numbers you gave don’t prove your point – they provide some prima facie support for your thesis but its hardly proof. If you want to prove it, you would dig up the ethnicity of default if the agencies provide it. On its own this wouldnt prove anything cos clearly ethnic groups tend to be poorer. So one would control for the income status, and the date of house purchase – simply cos equity in the new home purchase is clearly an important predictor of likelihood to default.

    It is also particularly important to control for demographic profiles. Blacks and Latinos are younger than other americans on average. I would wager that the age profile makes them more likely to have formed a new family unit in the last 10 years than the average american.

    But let me be clear. I doubt that this idea – that weaker lending standards to ethnic minorities caused the recent spike in mortgage delinquencies – is valid. I am biased against this idea. However, if the numbers are there then they are there. But you have to be careful which numbers you quote to make your case. New houshold formation should be taken into account.

    The burden of proof is on he that suggests the thesis.

    Anyway, thanks again for your willingness to engage on this.

  • Caledonian

    The US department of Urban Housing and Developments mandated Fannie Mae and Freddie Mac buy sub-prime mortgages. When they were nationalised, 60% of what they were mandated to buy were sub-prime garbage.

    This is a financial crisis completed caused by the same regulators and politicians that are gaining from turmoil. Look at Chris Dodd; point made!

    They tell us greed was at fault, like that hasn’t been around since the beginning of time.

    Stop playing the race card. This has nothing to do with picking on races, but pointing at which policies resulted in this crisis. The democrat promotion of minority housing was racist, not pointing out the root of this crisis.

  • Hemi

    I have to say, this story is the biggest crock I’ve ever heard. I just love these lines. Chances are you managed OK for a while, but after a few years found that like most poor Americans, your income wasn’t going up, it was declining. Around 2003, with your credit cards maxed out, you desperately needed to release some equity from your home. Luckily there was equity there to release, so you refinanced for the first time and enjoyed having some real money for a change. Yeah, that’s a hot one. The truth is, people had no problem paying the bills for all those years, then they got suckered into an adjustable rate mortgage. People were doing fine until their interest rates went up, then their payments doubled. And lets not forget how these loans were bundled into a security and pushed on to the market. Why do I get the feeling that these loans were easier to get rid of because of the way they were bundled. If they’re easy to get rid of, it really don’t matter how many you make because you’ll just let some poor slob get stuck with them that don’t know any better. Only it didn’t turn out that way did it. The market started to cave in and the know it all’s got stuck holding the bag to. If the Democrats did this by providing loans to poor people in the United States, how did we get into a world wide financial crises? Maybe this story is a little light on the facts.

  • Comrade_Tovarich

    A hundred years of failed policies of social and economic justice proves nothing, except that progressives are not.

  • Sergio

    So true! I’m writing my thesis on this

  • KeithT

    The credit crunch is just a smoke screen. Banks don’t need money, they own it anyway. So as far as them going bust its’s no more than a smoke and mirrors. The real desire is to own the debt – debt of Nations and debt of individuals. That’s where real power lies. Credit crunch my backside. We are all being hoodwinked into slavery.

  • Gift Kabenga

    Developed countries are to blame for the global melt down we are experiencing today.

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