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October 15, 2008

Weird NYT editorial ignores its own reporting

Ed Lasky
The New York Times tries to whitewash Democratic responsibility for the housing disaster in today's editorial "Misplaced Blame" by holding that the Community Reinvestment Act is blameless for the problems that beset America.
The Community Reinvestment Act was signed into law by Jimmy Carter in 1977. The Times editorial states that it is hard to fathom how a law signed 30 years ago is certainly partly (if not mostly) responsible for the crisis we have now.

Well, first of all, the Act was made more potent when Bill Clinton, in 1999, beefed up its provisions and enforceability so the thirty -year statue of limitations that the Times creates out of thin air is not applicable.

Secondly, does the Times understand economics? When house prices are in a bubble -- as they have been for many years -- problems do not surface. Inflation protected unqualified homebuyers from their own mistakes. Low interest rates also helped protect mortgages from defaulting. However, economics changed: housing prices went into a free fall, money supply constricted, interest rates increased. These conditions would not have caused the harm that they did had there been an adequate cushion (a big down payment) or qualified borrowers who could fulfill their obligations.  These requirements were not imposed on home purchasers by the Community Reinvestment Act.  

As Peter Wallison points out in today's op-ed in the Wall Street Journal (Obama Voted "Present" on Mortgage Reform ), Bill Clinton shoulders much of the blame for the mortgage crisis stemming from actions that he took in 1998:

...when the Clinton administration ruled that Fannie Mae and Freddie Mac could satisfy their affordable housing obligations by purchasing subprime mortgages. This ultimately made it possible for Fannie and Freddie to add a trillion dollars in junk loans to their balance sheets. This led to their own collapse, and to the development of a market in these mortgages that is the source of the financial crisis we are wrestling with today.

The root of this problem -- or at least one of the main roots -- was the Community Reinvestment Act and the proliferation of purchases of homes by people who could not afford them if conditions changed.

The Times skirts one of the major causes of the crisis: the Democratic push for Fannie Mae and Freddie Mac to lower the standards of mortgages they would guarantee and market. The banks, savings and loans, and mortgage brokers would not have been able to market these products without Fannie Mae and Freddie Mac backing.

Evidently the Times did not look at its own archives. A 1999 article pinpointed this risk when reporting on Democratic efforts to loosen Fannie Mae and Freddie Mac standards.

Posted at 02:12 PM | Email | |

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