Kill the CRA

This is a great article from the Investor's Business Daily, urging the repeal of the CRA. The CRA (the Community Reinvestment Act) is a federal regulation that is doing tremendous harm to the economy, and is on the top of the list of government regulations and institutions that should to be abolished alongside the Federal Reserve and Fannie Mae/Freddie Mac.

Stop Covering Up And Kill The CRA

By INVESTOR'S BUSINESS DAILY

Regulation: The Community Reinvestment Act is to blame for the financial crisis, but it so powerfully serves Democrats' interests that they'll do anything to protect it — including revising history.

The CRA coerces banks into making loans based on political correctness, and little else, to people who can't afford them. Enforced like never before by the Clinton administration, the regulation destroyed credit standards across the mortgage industry, created the subprime market, and caused the housing bubble that has now burst and left us with the worst housing and banking crises since the Great Depression.

The CRA should be abolished, along with the government-sponsored enterprises that fueled the secondary market for subprimes — under pressure from Clinton, who ordered HUD to set quotas for "affirmative action" lending at Fannie Mae and Freddie Mac.

But powerful Democrats in Washington want to protect the act — along with Fannie and Freddie — and spin the subprime scandal as the result of too little regulation, not too much.

"Repealing or weakening the CRA would be a mistake," warns Senate Banking Committee Chairman Chris Dodd, D-Conn., who argues that the CRA should be strengthened.

Dodd, the top recipient of Fannie donations and himself a beneficiary of a sweetheart mortgage brokered by a subprime lender, recently invited one of Clinton's top enforcers of the CRA to testify.

"The notion that CRA has caused this problem is a pernicious thought," said former Comptroller of the Currency Gene Ludwig. "These are not truthful statements. The CRA has helped to create a better and sounder world for finance, not the opposite."

Dead wrong. But the mainstream media believe it, and have attacked those, including this paper, who dare to tell the truth about the crisis. Already the debacle has erased $13 trillion in wealth, while putting taxpayers on the hook for up to $8 trillion in bailouts.

"The latest salvo from conservatives began via a Sept. 15 editorial in Investor's Business Daily, titled 'The Real Culprits In This Meltdown,' " grumbled a column distributed by Scripps Howard News Service. "Its editorial blamed President Clinton for today's mess."

As we said, Clinton beefed up the CRA and used it to force banks to subsidize poor communities with close to $1 trillion in high-risk loans and other commitments that flouted underwriting rules.

Yet, somehow, these media-driven myths keep getting in the way of actual facts, such as:

Fact: The 1977 law was only lightly enforced until Clinton added teeth to it in 1994 and launched an anti-redlining campaign against banks, led by Ludwig, Housing Secretary Henry Cisneros (and later Andrew Cuomo) and Attorney General Janet Reno that lasted into this decade.

Minority homeownership rates, which had been flat, began a steep rise in 1995, and home prices soon followed, stoked by easier lending. Numerous bank officials complain that they still feel pressured by CRA regulators to make inner-city loans they know are at great risk of defaulting.

Myth: The CRA could not have led to financial Armageddon, because the overwhelming share of subprime mortgages came from lenders that were not banks and not regulated by the CRA.

Fact: Nearly 4 in 10 subprime loans between 2004 and 2007 were made by CRA-covered banks such as Washington Mutual and IndyMac. And that doesn't include loans made by subprime lenders owned by banks, which were in effect covered by the CRA.

Last year, when the bubble burst, bank subprime loans totaled $142 billion, dwarfing those made by lenders.

What's more, the biggest subprime lender, Countrywide, while not subject to the law, still came under federal pressure to make risky loans in minority communities.

Clinton created a separate department at HUD to police "fair lending" at Fannie and Freddie and also at lenders like Countrywide, which became Fannie's biggest client. In 1994, Countrywide became the nation's first mortgage lender to sign with HUD a "Declaration of Fair Lending Principles and Practices."

As a result, Countrywide made more loans to minorities than any other lender — and not surprisingly, was one of the first lenders swamped by loan defaults.

Other lenders felt the heat from Reno's Justice Department, which prosecuted them for failing to operate enough branches in black neighborhoods. Reno put the entire banking industry on notice about the CRA and her enforcement program.

Myth: The CRA did not force anyone to do subprime loans or take excessive risks.

Fact: Subprime loans were the vehicle banks used to satisfy CRA compliance, and Clinton and his regulators encouraged their use. Before Clinton took office, subprimes were virtually unheard of. By the time he left, they made up more than 9% of the market for mortgage originations. Today they're 20%.

"It's instructive to go back to the early stages of the subprime market, which has essentially emerged out of the CRA," ex-Fed chief Alan Greenspan said in recent testimony on the roots of the crisis.

Clinton pushed banks to grant mortgages to minorities with poor credit by using "flexible" underwriting standards — or risk being branded racist. Rules were weakened to the point where welfare and unemployment checks were accepted as qualifying income.

Myth: Greedy investment bankers, who securitized and sold subprime mortgages, drove us to the credit crisis, not government.

Fact: Clinton's regulatory policies led to the creation of this new risk on Wall Street. His CRA amendments created the subprime market, and only after he pressured Fannie and Freddie to socialize the risk and guarantee the profit from the subprime loans did Wall Street get involved in a big way.

The exotic securitizations that have gotten so much of the blame were a symptom, not the cause, of the crisis.

The architects of the crisis want to divert attention from their own culpability by blaming the markets rather than their own regulations mandating that banks make high-risk loans based on race.

In fact, regulations had almost everything to do with this mess. And instead of strengthening them to atone for the alleged "sins of capitalism," we should be abolishing them.

Two bills in the House would be a good place to start. HR 7264, which has nine co-sponsors, would repeal the CRA. And HR 7094, with 17 co-sponsors, would dissolve Fannie Mae and Freddie Mac.

During the last severe slump, President Reagan deregulated the economy, saying: "Government is not the solution to the problem; government is the problem." He's as right today as he was then.

Brave Marine Speaks About Ron Paul, Taliban, Blackwater

Ron Paul got more donations from active military personnel than all other presidential candidates combined. This shows his foreign policy is the correct one.

There are dozens of videos like this from soldiers, who say Ron Paul is the only one who gets it.

Fed pledges another secret $7.4 Trillion

Bloomberg

Fed Pledges Top $7.4 Trillion to Ease Frozen Credit (Update1)

By Mark Pittman and Bob Ivry

Nov. 24 (Bloomberg) -- The U.S. government is prepared to lend more than $7.4 trillion on behalf of American taxpayers, or half the value of everything produced in the nation last year, to rescue the financial system since the credit markets seized up 15 months ago.

The unprecedented pledge of funds includes $2.8 trillion already tapped by financial institutions in the biggest response to an economic emergency since the New Deal of the 1930s, according to data compiled by Bloomberg. The commitment dwarfs the only plan approved by lawmakers, the Treasury Department’s $700 billion Troubled Asset Relief Program. Federal Reserve lending last week was 1,900 times the weekly average for the three years before the crisis.

When Congress approved the TARP on Oct. 3, Fed Chairman Ben S. Bernanke and Treasury Secretary Henry Paulson acknowledged the need for transparency and oversight. Now, as regulators commit far more money while refusing to disclose loan recipients or reveal the collateral they are taking in return, some Congress members are calling for the Fed to be reined in.

“Whether it’s lending or spending, it’s tax dollars that are going out the window and we end up holding collateral we don’t know anything about,” said Congressman Scott Garrett, a New Jersey Republican who serves on the House Financial Services Committee. “The time has come that we consider what sort of limitations we should be placing on the Fed so that authority returns to elected officials as opposed to appointed ones.”

Too Big to Fail

Bloomberg News tabulated data from the Fed, Treasury and Federal Deposit Insurance Corp. and interviewed regulatory officials, economists and academic researchers to gauge the full extent of the government’s rescue effort.

The bailout includes a Fed program to buy as much as $2.4 trillion in short-term notes, called commercial paper, that companies use to pay bills, begun Oct. 27, and $1.4 trillion from the FDIC to guarantee bank-to-bank loans, started Oct. 14.

William Poole, former president of the Federal Reserve Bank of St. Louis, said the two programs are unlikely to lose money. The bigger risk comes from rescuing companies perceived as “too big to fail,” he said.

The government committed $29 billion to help engineer the takeover in March of Bear Stearns Cos. by New York-based JPMorgan Chase & Co. and $122.8 billion in addition to TARP allocations to bail out New York-based American International Group Inc., once the world’s largest insurer. Yesterday, Citigroup Inc. received $306 billion of government guarantees for troubled mortgages and toxic assets. The Treasury Department also will inject $20 billion into the bank after its stock fell 60 percent last week.

“No question there is some credit risk there,” Poole said.

Exposure

Congressman Darrell Issa, a California Republican on the Financial Services Committee, said risk is lurking in the programs that Poole thinks are safe.

“The thing that people don’t understand is it’s not how likely that the exposure becomes a reality, but what if it does?” Issa said. “There’s no transparency to it so who’s to say they’re right?”

The worst financial crisis in two generations has erased $23 trillion, or 38 percent, of the value of the world’s companies and brought down three of the biggest Wall Street firms.

The Dow Jones Industrial Average through Friday is down 38 percent since the beginning of the year and 43 percent from its peak on Oct. 9, 2007. The S&P 500 fell 45 percent from the beginning of the year through Friday and 49 percent from its peak on Oct. 9, 2007. The Nikkei 225 Index has fallen 46 percent from the beginning of the year through Friday and 57 percent from its most recent peak of 18,261.98 on July 9, 2007. Goldman Sachs Group Inc. is down 78 percent, to $53.31, on Friday from its peak of $247.92 on Oct. 31, 2007, and 75 percent this year.

‘Snookered’


Regulators hope the rescue will contain the damage and keep banks providing the credit that is the lifeblood of the U.S. economy.

Most of the spending programs are run out of the New York Fed, whose president, Timothy Geithner, is said to be President- elect Barack Obama’s choice to be Treasury Secretary.

The money that’s been pledged is equivalent to $24,000 for every man, woman and child in the country. It’s nine times what the U.S. has spent so far on wars in Iraq and Afghanistan, according to Congressional Budget Office figures. It could pay off more than half the country’s mortgages.

“It’s unprecedented,” said Bob Eisenbeis, chief monetary economist at Vineland, New Jersey-based Cumberland Advisors Inc. and an economist for the Atlanta Fed for 10 years until January. “The backlash has begun already. Congress is taking a lot of hits from their constituents because they got snookered on the TARP big time. There’s a lot of supposedly smart people who look to be totally incompetent and it’s all going to fall on the taxpayer.”

New Deal

President Franklin D. Roosevelt’s New Deal of the 1930s, when almost 10,000 banks failed and there was no mechanism to bolster them with cash, is the only rival to the government’s current response. The savings and loan bailout of the 1990s cost $209.5 billion in inflation-adjusted numbers, of which $173 billion came from taxpayers, according to a July 1996 report by the U.S. General Accounting Office.

The 1979 U.S. government bailout of Chrysler consisted of bond guarantees, adjusted for inflation, of $4.2 billion, according to a Heritage Foundation report.

The commitment of public money is appropriate to the peril, said Ethan Harris, co-head of U.S. economic research at Barclays Capital Inc. and a former economist at the New York Fed. U.S. financial firms have taken writedowns and losses of $666.1 billion since the beginning of 2007, according to Bloomberg data.

“This is the worst capital markets crisis in modern history,” Harris said. “So you have the biggest intervention in modern history.”

Federal Lawsuit

Bloomberg has requested details of Fed lending under the U.S. Freedom of Information Act and filed a federal lawsuit against the central bank Nov. 7 seeking to force disclosure of borrower banks and their collateral.

Collateral is an asset pledged to a lender in the event a loan payment isn’t made.

“Some have asked us to reveal the names of the banks that are borrowing, how much they are borrowing, what collateral they are posting,” Bernanke said Nov. 18 to the House Financial Services Committee. “We think that’s counterproductive.”

The Fed should account for the collateral it takes in exchange for loans to banks, said Paul Kasriel, chief economist at Chicago-based Northern Trust Co. and a former research economist at the Federal Reserve Bank of Chicago.

“There is a lack of transparency here and, given that the Fed is taking on a huge amount of credit risk now, it would seem to me as a taxpayer there should be more transparency,” Kasriel said.

$4.4 Trillion

Bernanke’s Fed is responsible for $4.4 trillion of pledges, or 60 percent of the total commitment of $7.4 trillion, based on data compiled by Bloomberg concerning U.S. bailout steps started a year ago.

“Too often the public is focused on the wrong piece of that number, the $700 billion that Congress approved,” said J.D. Foster, a former staff member of the Council of Economic Advisers who is now a senior fellow at the Heritage Foundation in Washington. “The other areas are quite a bit larger.”

The Fed’s rescue attempts began last December with the creation of the Term Auction Facility to allow lending to dealers for collateral. After Bear Stearns’s collapse in March, the central bank started making direct loans to securities firms at the same discount rate it charges commercial banks, which take customer deposits.

In the three years before the crisis, such average weekly borrowing by banks was $48 million, according to the central bank. Last week it was $91.5 billion.

Lehman Failure

The failure of a second securities firm, Lehman Brothers Holdings Inc., in September, led to the creation of the Commercial Paper Funding Facility and the Money Market Investor Funding Facility, or MMIFF. The two programs, which have pledged $2.3 trillion, are designed to restore calm in the money markets, which deal in certificates of deposit, commercial paper and Treasury bills.

“Money markets seized up after Lehman failed,” said Neal Soss, chief economist at Credit Suisse Group in New York and a former aide to Fed chief Paul Volcker. “Lehman failing made a lot of subsequent actions necessary.”

The FDIC, chaired by Sheila Bair, is contributing 20 percent of total rescue commitments. The FDIC’s $1.4 trillion in guarantees will amount to a bank subsidy of as much as $54 billion over three years, or $18 billion a year, because borrowers will pay a lower interest rate than they would on the open market, according to Raghu Sundurum and Viral Acharya of New York University and the London Business School.

Bank Subsidy

Congress and the Treasury have ponied up $892 billion in TARP and other funding, or 12 percent.

The Federal Housing Administration, overseen by Department of Housing and Urban Development Secretary Steven Preston, was given the authority to guarantee $300 billion of mortgages, or about 4 percent of the total commitment, with its Hope for Homeowners program, designed to keep distressed borrowers from foreclosure.

Most of the federal guarantees reduce interest rates on loans to banks and securities firms, which would create a subsidy of at least $6.6 billion annually for the financial industry, according to data compiled by Bloomberg comparing rates charged by the Fed against market interest currently paid by banks.

Not included in the calculation of pledged funds is an FDIC proposal to prevent foreclosures by guaranteeing modifications on $444 billion in mortgages at an expected cost of $24.4 billion to be paid from the TARP, according to FDIC spokesman David Barr. The Treasury Department hasn’t approved the program.

Automakers

Bernanke and Paulson, former chief executive officer of Goldman Sachs, have also promised as much as $200 billion to shore up nationalized mortgage finance companies Fannie Mae and Freddie Mac. The FDIC arranged for $139 billion in loan guarantees for General Electric Co.’s finance unit.

The tally doesn’t include money to General Motors Corp., Ford Motor Co. and Chrysler LLC. Obama has said he favors financial assistance to keep them from collapse.

Paulson told the House Financial Services Committee Nov. 18 that the $250 billion already allocated to banks through the TARP is an investment, not an expenditure.

“I think it would be extraordinarily unusual if the government did not get that money back and more,” Paulson said.

‘We Haircut It’

In his Nov. 18 testimony, Bernanke told the House Financial Services Committee that the central bank wouldn’t lose money.

“We take collateral, we haircut it, it is a short-term loan, it is very safe, we have never lost a penny in these various lending programs,” he said.

A haircut refers to the practice of lending less money than the collateral’s current market value.

Requiring the Fed to disclose loan recipients might set off panic, said David Tobin, principal of New York-based loan-sale consultants and investment bank Mission Capital Advisors LLC.

“If you mark to market today, the banking system is bankrupt,” Tobin said. “So what do you do? You try to keep it going as best you can.”

“Mark to market” means adjusting the value of an asset, such as a mortgage-backed security, to reflect current prices.

Some of the bailout assistance could come from tax breaks in the future. The Treasury Department changed the tax code on Sept. 30 to allow banks to expand the deductions on the losses banks they were buying, according to Robert Willens, a former Lehman Brothers tax and accounting analyst who teaches at Columbia University Business School in New York.

‘Wells Fargo Notice’

Wells Fargo & Co., which is buying Charlotte, North Carolina-based Wachovia Corp., will be able to deduct $22 billion, Willens said. Adding in other banks, the code change will cost $29 billion, he said.

“The rule is now popularly known among tax lawyers as the ‘Wells Fargo Notice,’” Willens said.

The regulation was changed to make it easier for healthy banks to buy troubled ones, said Treasury Department spokesman Andrew DeSouza.

House Financial Services Committee Chairman Barney Frank said he was angry that banks used the money for acquisitions.

“The only purpose for this money is to lend,” said Frank, a Massachusetts Democrat. “It’s not for dividends, it’s not for purchases of new banks, it’s not for bonuses. There better be a showing of increased lending roughly in the amount of the capital infusions” or Congress may not approve the second half of the TARP money.

A Tremendous Speech by Ron Paul

Yesterday, on November 20, 2008, Ron Paul made a tremendous speech before the U.S. House of Representatives:

Statement of Congressman Ron Paul

United States House of Representatives

The Austrians Were Right

Madame Speaker, many Americans are hoping the new administration will solve the economic problems we face. That’s not likely to happen, because the economic advisors to the new President have no more understanding of how to get us out of this mess than previous administrations and Congresses understood how the crisis was brought about in the first place.

Except for a rare few, Members of Congress are unaware of Austrian Free Market economics. For the last 80 years, the legislative, judiciary and executive branches of our government have been totally influenced by Keynesian economics. If they had had any understanding of the Austrian economic explanation of the business cycle, they would have never permitted the dangerous bubbles that always lead to painful corrections.

Today, a major economic crisis is unfolding. New government programs are started daily, and future plans are being made for even more. All are based on the belief that we’re in this mess because free-market capitalism and sound money failed. The obsession is with more spending, bailouts of bad investments, more debt, and further dollar debasement. Many are saying we need an international answer to our problems with the establishment of a world central bank and a single fiat reserve currency. These suggestions are merely more of the same policies that created our mess and are doomed to fail.

At least 90% of the cause for the financial crisis can be laid at the doorstep of the Federal Reserve. It is the manipulation of credit, the money supply, and interest rates that caused the various bubbles to form. Congress added fuel to the fire by various programs and institutions like the Community Reinvestment Act, Fannie Mae and Freddie Mac, FDIC, and HUD mandates, which were all backed up by aggressive court rulings.

The Fed has now doled out close to $2 trillion in subsidized loans to troubled banks and other financial institutions. The Federal Reserve and Treasury constantly brag about the need for “transparency” and “oversight,” but it’s all just talk – they want none of it. They want secrecy while the privileged are rescued at the expense of the middle class.

It is unimaginable that Congress could be so derelict in its duty. It does nothing but condone the arrogance of the Fed in its refusal to tell us where the $2 trillion has gone. All Members of Congress and all Americans should be outraged that conditions could deteriorate to this degree. It’s no wonder that a large and growing number of Americans are now demanding an end to the Fed.

The Federal Reserve created our problem, yet it manages to gain even more power in the socialization of the entire financial system. The whole bailout process this past year was characterized by no oversight, no limits, no concerns, no understanding, and no common sense.

Similar mistakes were made in the 1930s and ushered in the age of the New Deal, the Fair Deal, the Great Society and the supply-siders who convinced conservatives that deficits didn’t really matter after all, since they were anxious to finance a very expensive deficit-financed American empire.

All the programs since the Depression were meant to prevent recessions and depressions. Yet all that was done was to plant the seeds of the greatest financial bubble in all history. Because of this lack of understanding, the stage is now set for massive nationalization of the financial system and quite likely the means of production.

Although it is obvious that the Keynesians were all wrong and interventionism and central economic planning don’t work, whom are we listening to for advice on getting us out of this mess? Unfortunately, it’s the Keynesians, the socialists, and big-government proponents.

Who’s being ignored? The Austrian free-market economists – the very ones who predicted not only the Great Depression, but the calamity we’re dealing with today. If the crisis was predictable and is explainable, why did no one listen? It’s because too many politicians believed that a free lunch was possible and a new economic paradigm had arrived. But we’ve heard that one before – like the philosopher’s stone that could turn lead into gold. Prosperity without work is a dream of the ages.

Over and above this are those who understand that political power is controlled by those who control the money supply. Liberals and conservatives, Republicans and Democrats came to believe, as they were taught in our universities, that deficits don’t matter and that Federal Reserve accommodation by monetizing debt is legitimate and never harmful. The truth is otherwise. Central economic planning is always harmful. Inflating the money supply and purposely devaluing the dollar is always painful and dangerous.

The policies of big-government proponents are running out of steam. Their policies have failed and will continue to fail. Merely doing more of what caused the crisis can hardly provide a solution.

The good news is that Austrian economists are gaining more acceptance every day and have a greater chance of influencing our future than they’ve had for a long time.

The basic problem is that proponents of big government require a central bank in order to surreptitiously pay bills without direct taxation. Printing needed money delays the payment. Raising taxes would reveal the true cost of big government, and the people would revolt. But the piper will be paid, and that’s what this crisis is all about.

There are limits. A country cannot forever depend on a central bank to keep the economy afloat and the currency functionable through constant acceleration of money supply growth. Eventually the laws of economics will overrule the politicians, the bureaucrats and the central bankers. The system will fail to respond unless the excess debt and mal-investment is liquidated. If it goes too far and the wild extravagance is not arrested, runaway inflation will result, and an entirely new currency will be required to restore growth and reasonable political stability.

The choice we face is ominous: We either accept world-wide authoritarian government holding together a flawed system, OR we restore the principles of the Constitution, limit government power, restore commodity money without a Federal Reserve system, reject world government, and promote the cause of peace by protecting liberty equally for all persons. Freedom is the answer.

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