An Economic Red Herring
Oct 8th, 2008 by nick
The latest Republican talking point, as parroted by my local paper and Thomas Sowell, seems to be that the current economic crisis is not actually due to the deregulation of the investment banks and insurance companies. Instead, it’s because of the Community Reinvestment Act that encouraged housing loans to poor minorities.
In his excellent rebuttal in Slate magazine, Daniel Gross points out the absurdity of this line of reasoning. He says,
“…lending money to poor people and minorities isn’t inherently risky. There’s plenty of evidence that in fact it’s not that risky at all….
“On the other hand, lending money recklessly to obscenely rich white guys, such as Richard Fuld of Lehman Bros. or Jimmy Cayne of Bear Stearns, can be really risky. In fact, it’s even more risky, since they have a lot more borrowing capacity. And here, again, it’s difficult to imagine how Jimmy Carter could be responsible for the supremely poor decision-making seen in the financial system. I await the Krauthammer column in which he points out the specific provision of the Community Reinvestment Act that forced Bear Stearns to run with an absurd leverage ratio of 33 to 1, which instructed Bear Stearns hedge-fund managers to blow up hundreds of millions of their clients’ money, and that required its septuagenarian CEO to play bridge while his company ran into trouble. … How about the hundreds of billions of dollars of leveraged loans—loans banks committed to private-equity firms that wanted to conduct leveraged buyouts of retailers, restaurant companies, and industrial firms? Many of those are going bad now, too. Is that Bill Clinton’s fault?…
“Lending money to poor people doesn’t make you poor. Lending money poorly to rich people does.”