Economics 101: Repeating a bad mistake doesn’t make it not a mistake

Thanks to Karen, the Lonely Conservative, I found this article from Investor’s Business Daily:

Clinton Added Teeth To CRA, Obama Turned Them Into Fangs

By Paul Sperry | Posted 01/24/2013 06:56 PM ET

Despite new evidence the Community Reinvestment Act led to riskier lending and played a key role in the subprime mortgage crisis, the Obama administration is broadening the anti-redlining regulation’s authority and scope, spooking bankers.

A recent study by the National Bureau of Economic Research, the nation’s pre-eminent economic research group, states that the CRA “clearly” had a major impact on the flood of subprime loans made in the late 1990s and 2000s, which directly led to the housing crisis.

By quietly expanding the regulation, analysts say President Obama is picking up where President Clinton left off in April 1995, when he rewrote rules for what had been a largely toothless law as first drafted in 1977.

Through executive orders, Clinton set strict numerical lending targets for banks in “underserved” neighborhoods, while ordering regulators to crack down on alleged bank redlining.

The new rules for the first time mandated that banks use “innovative” or “flexible underwriting practices.” Compliance required banks to pass a heavily weighted “lending test” or suffer holds on expansion plans.

More at the link.

Republicans rightly pointed to the Community Reinvestment Act’s misuse under the Clinton Administration, to point out the reason for so many shaky mortgage loans going bad in 2008, but that was not a story which had sufficient political strength to undercut the Democrats’ meme that it was the evil George Bush who destroyed the economy, and the Democrats have used that meme to win not one but two national elections; that has to be good politics on their part. But the fact that the left were able to ignore the part the CRA played in the mortgage crisis politically doesn’t mean that, in economic terms, they ought to ignore it as well.

The editorial continues to note that the Clinton rules forced banks to use “innovative” or “flexible underwriting practices” in underserved areas. This, many borrowers who could or would not have qualified for a mortgage loan otherwise were granted mortgage loans.

The Obama Administration is moving along similar lines, to push banks to open more branches and install more ATMs in less profitable, riskier inner-city areas, and is pushing banks to make more loans in minority areas, and on terms “more advantageous to the applicant” than usual.

The mistakes of the Clinton Administration can’t quite be duplicated. Since the housing bubble burst, there has been one huge change in the mortgage lending market: the property for which the mortgage loan is being written is no longer both the necessary and sufficient collateral for the loan. It remains necessary, but borrowers have to be able to demonstrate more of an ability to repay the loans than before; the banks have such large inventories of properties either in foreclosure or simply non-performing but not yet foreclosed upon that they just can’t afford more of them. These huge inventories of properties are simply beyond the abilities of the banks and mortgage companies to manage. And the top bank management which approves a change in policies adopted since the economic crisis of 2008-2009, just to go along with the pressures of the Obama Administration, is going to have a very unhappy Board of Directors to which to answer . . . and perhaps by which to be dismissed. Your Editor would expect such top bank managers to take such decisions to their Boards of Directors, to get any such decisions signed onto more widely, before such are taken, but that your Editor would expect such does not mean it would happen in every case.

Secretary of the Treasury-Designate Jacob Lew

Fortunately, this is President Obama’s last term in office; come Hell or high water, he will be replaced by someone more sensible on January 20, 2017.1 The banks will resist these changes for as long as they can. They might not be able to resist the government’s pressure for four whole years, but every month that they can resist them helps the economy.

President Obama and his minions want to use economic tools to achieve their political goals. That’s understandable — every President does — but the Obama Administration seems to understand less about economics than almost anyone. People who should know better act as if they don’t, and, for the second term, people with solid economic credentials from the first term — people who still made plenty of mistakes — are being replaced by the loyalists and sycophants.

William F Buckley, Jr, famously said, “I should sooner live in a society governed by the first two thousand names in the Boston telephone directory than in a society governed by the two thousand faculty members of Harvard University.” Mr Buckley was referring to the educated elite, and their seeming inability to actually understand the real world. President Kennedy tried to assemble a governing team of the highly educated, a team David Halberstam labelled The Best and the Brightest, a team of top men like McGeorge Bundy and Robert McNamara, and for all of their expertise and all of their brilliance, they totally fouled up American policy in Vietnam.

According to Mr Halberstam, Sam Rayburn once said of the brilliant crew President Kennedy was assembling, that he’d feel a lot more comfortable if just one of them had run for sheriff once.2 I have yet to be persuaded that brilliant men like Timothy Geithner and Lawrence Summers and Jacob Lew and Gene Sperling really have any inkling of how economics operates in the real world.
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  1. It almost doesn’t matter by whom; it’s almost impossible that he could be replaced by someone less sensible.
  2. I am working from memory on this; Mr Halberstan reported the remark, but I will not swear that it was attributed to Mr Rayburn. It has been almost twenty years since I read the book.

7 Comments

  1. I have yet to be persuaded that brilliant men like Timothy Geithner and Lawrence Summers and Jacob Lew and Gene Sperling really have any inkling of how economics operates in the real world.

    Again, you assume left wingers don’t understand economics because they make decisions that aren’t good for the economy. It could be they understand economics just fine, but prosperity isn’t their goal. Their goal is POWER, and they get power by persuading voters, especially poor voters, that their goal is really fairness. So economic decisions that don’t make any sense to a free marketeer make perfect sense from the power grabbing perspective of left wing politics.

    Again, Dana, you need to learn this is not about economics, but ideology. When that happens, you will stop posting pieces like the above that profess apparent bewilderment at the economic decisions these left wingers make.

  2. Fortunately, this is President Obama’s last term in office; come Hell or high water, he will be replaced by someone more sensible on January 20, 2017

    I wouldn’t bet on that for even a second. If Obama’s left wing policies are seen by Democrats as politically successful (and, so far, they have), he may well be followed by someone even more left wing than himself. They will see that spending and spending and spending with no way of paying for it WORKS, that the economy doesn’t matter, only paying off their favored groups in return for votes.

    Remember, for left wing politics to work, all you have to do is convince 51% of the country that they are entitled to the wealth of the other 49%.

  3. Oh, for God’s sakes, York, now you are being as naive as Dana!

    I keep saying – left wing politics make PERFECT SENSE so long as you see it from the perspective of gaining ever more political power. Obama isn’t screwing up the economy because he’s stupid, he’s screwing up the economy because it gets him VOTES! His base WANTS him to stick it to the rich and give the money to themselves, and if it turns the country into East Germany, where everything is “Fair”, so much the better!

  4. Eric wrote:

    Again, you assume left wingers don’t understand economics because they make decisions that aren’t good for the economy. It could be they understand economics just fine, but prosperity isn’t their goal. Their goal is POWER, and they get power by persuading voters, especially poor voters, that their goal is really fairness. So economic decisions that don’t make any sense to a free marketeer make perfect sense from the power grabbing perspective of left wing politics.

    Their goal is power, but the surest path to retaining power is to be successful. President Obama was re-elected, but it was hardly a sure thing, but if the economy had been a lot stronger, it would have been. Had the economy recovered the way we were promised with the stimulus bill, the Democrats would have retained the House as well, giving them even more power.

  5. Their goal is power, but the surest path to retaining power is to be successful. President Obama was re-elected, but it was hardly a sure thing, but if the economy had been a lot stronger, it would have been.

    Again, you misunderstand. The economy didn’t matter AT ALL! That was Romney’s first mistake, assuming someone with a Jimmy Carter type economic record could easily be beaten. But Obama slipped his own shoddy record with the skill of a bull slipping the matador’s cape. He simply blamed it all on Bush, and Romney and the Republicans let him get away with it.

  6. Their goal is power, but the surest path to retaining power is to be successful.

    Right, but successful at what? Economics? Politics? Lies? Bullshit?

    Think about this. The black unemployment rate, last I checked, was at least 14%. Under Rommey, with his economic skill, that almost ceretainly would have gone down, but Obama got about 95% of the black vote anyway. Proving that economics, per se, simply don’t matter to many of his core constituency groups.

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