By Tom Suhrbur
Soon after the collapse of the economy in 2008 and the election of President Barack Obama, Fox and Friends, Rush Limbaugh, Newt Gingrich and other conservatives came up with a narrative that blamed the economic turmoil on the Democrats.
According to this narrative, the federal government forced banks and the home mortgage industry to loan money to poor people who could not afford the homes that they were buying. When these poor people started defaulting on their loans, the economy collapsed.
In particular, conservatives focused their blame on liberal Democrat Barney Frank, chairman of the House Financial Services Committee, for pushing the financial services industry into making bad loans. By inference, conservatives blamed the federal government, Democrats and the poor for the Great Recession. The banks were innocent victims of liberal Democrat’s excesses. Of course, for many Americans, “poor people” are code words for African-Americans and Hispanics — a subtle but clear appeal to racist sentiments.
What is the truth? It is true that Frank and Democrats supported policies to help low income people to own home, but so did President George W. Bush and Republicans.
When Bush took office in 2001, he announced his vision of an “ownership society,” which included expanding home ownership to more Americans. Bush strongly supported the deregulation of the financial service industry to take on more risk, in part, to achieve this goal.
Even though the U.S. lost millions of manufacturing jobs to overseas investment in low wage countries, the Bush economy grew from 2001-07. The growth was fueled by deficit spending on foreign wars and, domestically, by the financial bubble that spurred the housing industry.
It makes no sense to blame Frank and Democrats for the Great Recession. Republicans controlled both houses of Congress from 1994-2006. In 2005, Frank and Republican Mike Oxley co-sponsored a bill to impose tighter regulation on Fannie Mae and Freddie Mac when it became apparent that their lending practices were getting too risky.
The bill easily passed the House with bi-partisan support, but died in the Senate under a veto threat by President Bush. According to Lawrence Lindsey, a former economic adviser to President George W. Bush, Frank “is the only politician I know who has argued that we needed tighter rules that intentionally produce fewer homeowners and more renters.”
Frank did not become the chair of the House Financial Services Committee until 2007. By that time, defaults on mortgages were already increasing largely due to subprime lending practices by Countrywide and other mortgage companies. Republicans still controlled the Senate as well as the White House until 2009 after the economic collapse. Somebody other than Barney was at fault.
How about the poor? If you want to blame low-income people for the bubble, you must assume that they are much more powerful that the banks and other financial service corporations. In fact, mortgage companies and banks successfully lobbied for deregulation and the easy credit.
They believed the risks were worth the potential for profit. It was assumed that housing prices always go up, thereby, lowering the risk on loans, even if some people with low down payments defaulted. Why not take the risk? Lenders could make huge profits as the volume of mortgage transactions increased due to easy credit.
Lured by easy credit terms, many middle-class homeowners also refinanced during the housing bubble and later defaulted. When the financial bubble burst, a large number of very expensive homes went into foreclosure.
Some of the most unscrupulous lending practice actually targeted low-income people. When Countrywide — the largest U.S. mortgage company fell into bankruptcy — Bank of America purchased it.
Last December, Bank of America agreed to pay a $350 million penalty for Countrywide’s subprime lending practices that targeted African-American and Hispanics homeowners who qualified for conventional (prime) mortgages but were steered into risky, high interest sub-prime loans that they could not possibly afford. Many of these people later defaulted. Had they been given conventional loans, they most likely would not have defaulted. In these cases, minorities were victims.
Conservatives also like to blame the Federal National Mortgage Association (Fannie Mae) and Federal Home Loan Mortgage Corporation (Freddie Mac) because they are Government Sponsored Enterprises (GSEs).
The federal government created Fannie and Freddie to help lower income citizens to purchase housing. Fannie Mae was chartered in 1938 and Freddie Mac in 1971. As deregulation of the financial services industry gained momentum since the 1980s, Fannie Mae and Freddie Mac are into quasi-private, for-profit corporations and, like the banks and mortgage companies, got caught up in the financial mania of the Bush years.
The fact that Fannie Mae and Freddie Mac served the public interest for so many years — under federal tutelage until era of fiscal deregulation — points out the fatal flaw of unregulated, free market policies and privatization. It should be noted that the Government National Mortgage Association (Ginnie Mae), an agency of the U.S. Department of Housing and Urban Development that lends to low-income homeowners, did not face financial ruin like Fannie Mae and Freddie Mac.
During the Bush years, Wall Street became a giant casino: Easy credit for all and making a fast buck became the norm in the financial services industry. Derivatives, easy credit cards, sub-prime mortgages, swaps and other “exotic” financial arrangements caused the financial bubble.
Fox and Friends and the right-wing media have tried to shift the blame for the economic meltdown away from the policies that they have championed, rather than recognize the basic fact that unregulated greed is not a virtue and, certainly, not good public policy.
Currently, Tom Suhrbur is the Vice President of the Illinois Labor History Society. He recently retired after 26 years as a union organizer for the Illinois Education Association. Prior to his work with IEA, he taught social studies for 17 years. His last teaching job was at Geneva High School. Suhrbur also co-authored the book “Union Brotherhood, Union Town: The History of the Chicago Carpenters’ Union, 1863-1987.”
Tom Suhrbur currently is the Vice President of the Illinois Labor History Society. He recently retired after 26 years as a union organizer for the Illinois Education Association. Prior to his work with IEA, he taught social studies for 17 years. His last teaching job was at Geneva High School. Suhrbur also co-authored the book “Union Brotherhood, Union Town: The History of the Chicago Carpenters’ Union, 1863-1987.”