One Version of How the Meltdown Happened

Filed in archive General on October 20, 2008

© w.marsh

Most of us have no clue how things got so bad so fast. It's like it happened in another world, a world that unfortunately holds a lot of our money via our retirement funds. Ferris Bueller's teacher is here to sort it all out:

I don't know what the future will bring. If I knew the future, I would be the richest man on the planet very soon and I assure you I am very far from that.

But I now see what has happened and I can explain that, and it might give a tiny bit of insight into what will happen in the future.

Ben Stein goes on to give a generally understandable explanation of the subprimes mess and credit swaps and other financial instruments you and I will never grasp completely. It's a pretty good article, although with Ben Stein's decidedly Republican nature, it seems very glaring to have this be how he leads into it:

Start around 1995. Groups involved with civil rights issues and activities for poor people began to complain that poor people and especially non-white poor people got mortgages much less often than white well to do people. Many economists, including me, explained that it was not at all surprising that poorer, less credit worthy people were often turned down for credit. That's how credit is supposed to work: you lend to people who will pay you back.

But the advocates for poor and Black people had immense political clout. Under President Bill Clinton, they passed legislation that called on banks to be required to lend to non credit worthy borrowers. The laws, including the Community Reinvestment Act, the CRA, required two large government sponsored enterprises, Fannie Mae and Freddie Mac, to buy those lower quality mortgages from the banks, guarantee them, and sell them to the public. These were bundled into immense pools of subprime mortgages as they were called, and sold all over the world.

I don't know that I can even argue whether this is true or not, in terms of how this all started. But what I can argue is that by leading off in this way, Stein appears to argue that it's the fault of poor, black people. However, in his very next paragraph, he states:

Soon, the private sector got into the act in a vast way.

Yes, it did. And regardless of what happened with Fannie and Freddie, I don't think too many would argue that they were the main cause of what has transpired. And only Ben Stein would suggest that if advocates for the poor hadn't muscled their way in and forced the government to help poor people buy homes, everything would be fine.