In my recent Utah Law Review piece, Racial Coding and the Financial Market Crisis, I painstakingly lay out the underlying causes of the 2008 mortgage crisis. I identify fourteen (14) primary causes of the crisis, noting that the complexity of the forces that gathered to nearly derail the global economy, should not be piece-meal identified as singular causes of the crisis, because doing so fails to recognize the true nature of the collapse and is simply dangerous partisan politicking. Among the fourteen causes of the collapse, I identify (a) the Commodity Futures Modernization Act; (b) predatory lending; (c) credit rating agency failure; (d) predatory borrowing; (e) the Gramm-Leach-Bliley Act; (f) governmental cover (including HUD and the GSEs); and (g) Fed policy failure, amongst several others.
As if from a script of "what not to do in the face of financial failure," and as identified by nobel laureate Paul Krugman in his "Rabbit Hole Economics" NY Times Op-Ed, the Tuesday, October 11th Republican Presidential debate highlighted a series of candidates who are attempting to "piece-meal" identify a singular cause of the crisis and it is this: The Government. Failing badly to deliver economic messages of job creation and recovery, instead the candidates appear hell-bent on tasking the government with the fault of the financial crisis. Nothing proposed even begins to deal with the underlying causes of the crisis, and how to protect against one in the future. In addition, the same policy positions that led to the mortgage meltdown in the first place are now being touted as economic messages of hope (i.e., more tax cuts, less regulation of the capital markets, etc.).
In my Utah piece, I name this governmental blaming as "racial coding." If we can deflect attention from the failures of deregulation, shadow markets, unregulated over-the-counter trading of derivatives, and Wall Street executive recklessness, and instead, shift the blame onto our nation's minority poor, entering into loans they had no business purchasing through "governmental social engineering," then we will forever fail to deal with the true causes of the crisis and will bind ourselves to a repeat performance of economic failure.
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I agree that the government is not the sole factor in the 2008 financial crisis however, they hold a substantial portion of the blame and this cannot be discounted. I think that focus should remain on the government and how they can affect change in policy in order to alleviate a similar crisis in the future. For example, the article mentions that the nation's poor is to blame and that this is a problem that must be resolved to avoid a recurrence. How can this problem be corrected? The government is in the best position to prevent the nation's poor from getting into loans that they "had no business." This is problem that can be achieved by raising borrowing standards, tweaking the system that sets your loan amounts according to your risk level, or creating programs that educate borrowers before they enter into loans. I can't think of a solution to prevent people from getting into loans when the government is in the best position to educate and change the borrowing system. Thus I believe that the attention on the government is correctly focused.
ReplyDeletekenneth w:
ReplyDeletethe point of the post is that the nation's poor are NOT responsible for the mortgage crisis of 2008. blaming minority borrowers for causing the financial market crisis is subterfuge for the real causes of the meltdown, i.e., non-bank lenders, wall street executive short-termism, politicians, fiscal policies influenced by wall street lobbyists, credit rating agencies, amongst many other causes. the "racial coding" is evident in the blaming of minority borrowers now transmogrified into blaming the community reinvestment act, fannie mae and freddie mac, as the primary drivers of the crisis. this is just another way to say governmental social engineering OR minority borrowers, are responsible for near global economic collapse. this is simply not true.
while governmental policy, through hud, fannie and freddie did play a minor role in the crisis, it was not the primary role. as to whether the government is in the best position to educate and change the borrowing system, sadly, congress has already failed to initiate these needed reforms in its passage of the far-too-weak dodd-frank act.