Warning, long post ahead:
One of the biggest chestnuts on the whole debate about what led to the financial crisis is the whole harping about Freddie Mac, Fannie Mae and CRA, one which Ron Paul wholeheartedly endorses. It is extremely frustrating to hear the CRA meme continuing to thrive after all this time, not least due to the "fair and balanced" media.
"Subprime" DOES NOT EQUAL "POOR" or "MINORITY".
When you hear that 80 percent of all loans were subprime, and that TRILLIONS AND TRILLIONS AND TRILLIONS of loans were made during the bubble, you have to be unthinking to take that to mean they were loans given to minorities. It is ignorance of the scale of the loans being made. EVERYONE was given a sub-prime loan. Even if you had perfect credit, you were conned into a sub-prime loan. Upper middle class people were put into sub-prime loans.
The idea this was a problem traced to getting minorities into homes is a stupid, racist joke!
And to believe the rules were changed to get more loans to minorities ignores the fact that the subprime bubble EXISTED ALL OVER THE INDUSTRIAL WORLD, NOT JUST IN THE US!
The reasons the number of loans were ramped up is simple. Banks needed cash. Interest rates were low because Greenspan wanted to goose the economy, which meant safe investments had worthless returns. So to make money, you had to take big risks on gigantic economies of scale. And that requires a boatload of cash and lots of leveraging. So borrowing began to skyrocket so that hedge funds and Wall Street dealers could leverage their bets in the markets. In order to provide the cash those dealers needed, banks had to come up with cash to loan to them. The banks came up with cash by selling securities. To sell securities, you have to create securities. To create securities you have to get people to take out home loans, auto loans, home equity loans, and run up their credit cards. It's all about the carry trade. You get people to take out home loans and then sell those loans to investors and then use that money to loan out in the commercial paper market for quick-turnaround funding to the bettors on Wall Street. Extremely profitable.
Understand? A whole lotta long term debt is financed with short term loans that have to be constantly rolled over. That's the way of the world now. That's why things crashed. The short debt was unable to be rolled over. Credit freeze because no one knew who was insolvent.
The idiot Cavuto and the Fox minions still haven't gotten it through their thick heads yet that the CRA had NOTHING to do with their operations. This was some idiotic idea some Republicans in Congress got into their heads in the first days after Lehman collapsed. And yet when asked, Nick Fuld plainly said "de minimus" when asked if getting loans to minorities had anything to do with his brokerage imploding.
It was an idiot question asked by clueless lawmakers who don't know a CDO from a booger in their nose. The finanical world had moved way, way, way, way past their Old Testament understanding.
So loans were made on an unprecedented scale. Which meant that EVERY demographic was increasing home ownership. Gee, what a shock the politicians of the time took credit for something which happened to "benefit" the poor. This ignores the fact these schemes were "benefitting" everyone.
The INTENT of the increase in loans was not to get more minorities into homes. That was an effect, not the cause or the motive. The intent of the increase in loans was to get as many people as possible all over the first world to borrow money so those loans could be securitized and sold to raise cash.
When your aim is to get as many people to borrow as much money as possible, you are naturally going to throw the old underwriting rules of the Universe out the window.
You see, a guy like Cavuto zeroes in on some black woman who works at Wal-Mart who got a loan for $200,000 and says, "See? It's all about the minorities!" And he will work hard to feed that confirmation bias by showing you an over-representation of minorities who screwed up.
He is absolutely correct that a minimum wage worker should not borrow $200,000.
What he ignores, though, is that you also have a guy who makes $60,000 who got a loan for $500,000. He ignores the fact that everyone was being pushed into borrowing more than they could afford, not just minorities.
The more money you make, the more you can borrow. And that means the more that can be securitized. Understand? So the goal is to get everyone to borrow as much as possible.
Once you understand that simple plan, then the idea the banks were somehow focused on minorities becomes ludicrous. Why limit yourself to minorities who can't borrow anything near what better off people can borrow?
You see how stupid it is to believe this was all about getting minorities into homes? They aren't the ones with the big bucks that are needed to be moved up to the boys on Wall Street. They are just a drop in the bucket that needs to be filled. A $500,000 sub-prime loan made to a middle class sucker will make way, way more profit than a $200,000 sub-prime loan made to a minority. So let's fudge everyone's paperwork, get this crap out of our hands as quickly as possible into the hands of our misled investors, and then make some REAL money.
