With Architects of Ruin, Peter Schweizer again delivers a knockout punch of a book that is the must read of the season for conservatives and should be a main topic of conversation for conservative media.
Schweizer blows the lid off the 30-year leftist war on banking standards in the name of "equality" that created the housing bubble and caused the foreclosure crisis. (Somebody get this book to Glenn Beck as he recovers from his appendectomy- it'll give him at least a week's worth of blackboard material when he returns.)
For just over a year, Republicans have half-heartedly tried to point toward Democrat politicians for being too close to federal mortgage lenders Fanny Mae and Freddie Mac. They pointed out that Barack Obama got lots of campaign contributions from the lenders and protested that Democrats from Franklin Raines to Barney Frank and Chris Dodd have their fingerprints all over the housing meltdown that tipped the economy into crisis.
But these dark rumblings don't really explain what happened. Instead, people see the Wall Street disaster, companies going under (or worse, getting bailed out by taxpayers' money) and their 401ks tanking. Egged on by the media, most folks pin the blame on Big Capitalism, aka Republicans. At best, the public wishes a pox on both parties.
In succinct, witty and easy-to-understand language, however, Schweizer lays bare how radical activists spent 30 years undermining the banking system for their own benefit, and he exposes how liberal social engineering led to disaster.
The Racial Shakedown
Since 1977, when Jimmy Carter signed the Community Reinvestment Act pushed by fellow Dems with a lot of support from squishy-soft Republicans, the most important bank examiners in the United States have been Jesse Jackson, ACORN and a housewife named Carla Cincotta, a Saul Alinsky disciple from Chicago.
The CRA effectively gives community organizers a hecklers' veto over bank mergers and other major banking decisions. They were given the statutory power to hold up deals worth billions until they received million-dollar payoffs. Since the shakedowns were enforced by federal law, banks inevitably buckled, surrendering one lending regulation at a time.
This led to such "reforms" as accepting food stamps as income on a loan application and the introduction of such previously unheard of "innovations" as no-money-down mortgages.
Think of how many times in the past three decades you've heard the terms "fair housing," "affordable housing" and "community investment." When you substitute those euphemisms with the words "lower lending standards," it becomes pretty freaking obvious how we got into a banking crisis.
That's the most important revelation in Architects of Ruin. For 30 years, the vast majority of so-called banking reforms and regulations have been at the behest of "community organizations." Banks initially buckled under to the pressure under the threat of being labeled racist by Congress and a willing media, but the sums at risk grew from billions to trillions under the Clinton administration, when ACORN's agenda was backed by the full force of the Justice Department.
In a nutshell (an acorn?): For 30 years, radical socialist groups who view banks as racist hoarders of the downtrodden proletariat's money have had the power to block normal business activity unless a bank pays them gobs of cash in tribute.
This is something that has only been hinted at in the debates over the causes of the financial meltdown. Leave it to Schweizer — who proved in his bestselling Do As I Say, (Not As I Do) — that he is the master of exposing liberal hypocrisy and fecklessness to bring us the story.
Schweizer reveals how Alinsky-inspired Chicago radicals from Jesse Jackson to ACORN dragged banks, kicking and screaming, into what are now called "predatory lending" practices, and the institutions that actively resisted the tide were painted as racists. As the author writes:
"(I)t has now become an article of faith for American liberals that the mortgage industry is pervasively (if unconsciously) racist. … Having ceded this argument to the Left in the 1960s, conservatives have allowed home ownership to be defined as a new civil right, one that must be guaranteed by the federal government, rather than as a privilege to be earned by hard work and wise financial management."
Once home ownership was made a civil right, banks were viewed as both the obstacle to that right and the means for securing it. The process became so upside-down that a bad credit score became a way to get favorable lending treatment.
Clinton 's Bail-out Capitalism
But even this wasn't enough to bring down the system. The loans may have cost more, encouraged bad habits and were bad for banking, but it was a matter of a few nuisance billions. They were, after all, secured loans. The system could absorb it, and we all paid for it.
To overload the system to the tune of trillions took the full faith and credit of the U.S. government — and a slick President willing to play the system for votes and cash.
Bill Clinton filled his administration with both fair housing activists and Wall Street masters of the universe. While experts knew housing discrimination was largely a myth by the early 1990s, Attorney General Janet Reno — with Clinton's blessing — paid back their campaign supporters by sending hundreds of Justice Department lawyers to harass banks into making more "community investments," based on bogus "studies" that took race but not credit history into account to "prove" racism in lending.
More importantly, Schweizer writes, Clinton began the bail-out culture that meant Wall Street gamblers — most notably the Clinton-connected firm of Goldman-Sachs — could make millions even while making bad investments.
After Clinton bailed out Wall Street firms for wildly speculative investments in Mexico, Russia and South Korea, derivatives based on stodgy, old federally insured American mortgages — no matter how the regulations had been diluted — could hardly raise an eyebrow.
Fannie Mae and Freddie Mac suddenly were more than just housing assistance agencies –they became the biggest players in the mortgage business, and everyone in the banking business realized they could make money by writing mortgages and passing off the risk to Uncle Sam.
You see, once banking requirements were lowered, they were lowered for everyone, not just those intended to be helped. The middle class and the well-off used the new mortgage instruments to move into increasingly larger homes — and, even worse, used the inflated housing values to get equity loans on their property so they could get money to spend on other things.
By the end of Clinton's reign, such mortgages had mushroomed from a nuisance level of $5 billion to more than $4 trillion — an amount equal to a good portion of the GNP. Still it was only a fraction of what would later be revealed to be troubled mortgages based on illusory housing values.
The Bubble Bursts
While George W. Bush's administration eased back on the throttle and put forward a few reform attempts, Schweizer writes, the efforts were beaten back by Democrats quick to cry racism.
Although Schweizer doesn't mention it, Bush also liked to brag a lot about the "ownership society" and the fact that more minorities owned homes during his administration than in any other time in history. Like spending discipline, this was just another conflict the Bush administration avoided while fighting two wars.
But as the title of a good new economics text by Guy Sorman, Economics Does Not Lie, reminds us, the chickens came home to roost. One of the first major banks to fail after the Fed had to bail out Freddie, Fannie and AIG was Washington Mutual, a bank that spent an inordinate amount of time bragging about its "multicultural loans."
In the end, George W. Bush panicked and pushed TARP, the mother of all bailouts, but it did not work and may not have even have been necessary. The move may have pushed the correction down the road, and once again, Goldman Sachs was not only protected from bad losses but also made out like bandits.
Schweizer lists many of the politically powerful people and groups that also became rich through Fanny, Freddie and the whole "equal housing" scam:
- ACORN was not only able to spread the wealth around and accrue political power, it also received $9.5billions in direct funds.
- Rahm Emmanual, a senior advisor to Clinton and now Obama's chief of staff, made $46,000 an hour serving on Freddie Mac's board.
- Obama not only was one of the Senate's top recipients of Freddie and Fannie campaign donations, but also, as a young ACORN attorney, sued Citibank for declining the mortgage of a black woman who had bad credit. The case generated $1 million in attorney fees.
- Various other Clintonites — including Raines, Richard Holbrooke, Henry Cisneros, Webster Hubbel and Harold Ickes — were rewarded financially through Fannie or Freddie even though they had no background in finance, just a history of activism on behalf of "affordable housing."
The Next Bubble?
So what has Washington learned from the last 30 years blowing up in their faces? Not a damned thing.
Less than a year after easy mortgage lending blew up the economy, Barney Frank has suggested the fix is: more easy mortgage lending.
Obama, who advocated Robin Hood policies against banks and corporations as an ACORN community organizer, has gone beyond bailouts with General Motors and Chrysler by taking them over. Since then we've had the "Cash for Clunkers" program, which produced a mini-bubble in auto sales, and an increase in the CAFE regulations that contributed mightily to the automakers' ruin in the first place.
Now Obama wants to take over health care, the most complex and personal industry and tells us it will "save money."
But, Schweizer warns, the biggest boondoggle of alli s likely to be the "green economy." It will seem to have value in the short run, but as we saw with housing — which actually does have intrinsic value — something does not attain real economic value through government declaration.
"At the heart of the problem lies the American liberal Left and its continued inability to understand the nature of capitalism and the process of wealth creation. Saul Alinsky and the activists who pushed through this CRA recognized that by tapping the assets of private corporations they could accomplish great things that could not be achieved through the federal government. There simply wasn't enough money in federal coffers to do that. Today's activists continue to embrace this strategy even more than in the past."
Fasten your seatbelts, it's going to be a bumpy ride.
Sidenote: While Architects of Ruin focuses mainly on the political culprits, Thomas Sowell, in his typically masterful fashion, gives a more complete economic picture in The Housing Boom and Bust. Sowell, gives aFreakonomics-style look at the incentives that got everyone on board this disastrous gravy train — including a fascinating look at how California environmental regulations not only drove up housing prices but also how they rippled across the nation.
While Sowell's book is wider ranging, he still traces the ultimate problem back to the CRA and the fact that banks were forced to adopt social goals rather than financial soundness. Both books are essential reading, though Architects gets the nod as a recommendation for the lay reader.