Don’t blame bankers, it’s down to a man called Bill

Let us be clear: this is a crisis caused on Wall Street," insisted Speaker Nancy Pelosi on Monday, shortly before the House of Representatives voted to reject the President's $700 billion bail-out plan.

Pinning the blame for the crisis on greedy bankers and incompetent regulators may have seemed plausible enough during the turmoil of the past few days. Following Monday's rejection of the bail-out, stock markets threw a hissy fit which wiped billions off shares. Meanwhile, the sullen banks remained obdurate in their reluctance to lend, despite a massive injection of liquidity from central bankers. Not much there to inspire confidence in the system.

Consequently, this hardly seems the most appropriate moment to mount a defence of capitalism in general and American bankers in particular. But unless we take advantage of this hiatus between the crashing of financial institutions to take an honest look at the origins of our current predicament, then today's myth-making will quickly harden into tomorrow's firm conviction.

Let us be clear: this crisis was not caused on Wall Street — it was caused in the White House. The root problem was not financial — it was political, and those truly responsible for this fiasco were not bankers, nor even Bush Republicans; they were Clinton Democrats.

For generations, America's bankers have been firmly refusing credit to those they judged unworthy of it. Yet the mountain of toxic subprime debt is proof that bankers radically altered their behaviour and began to shower mortgages on borrowers who had no realistic prospect of keeping up repayments.

What could possibly have induced them to act so recklessly? The facile answer is greed. The correct answer is that banks were bullied into lowering their lending standards by politicians in pursuit of an ideological agenda.

Let's wind back to 1993 and Roberta Achtenberg's arrival in Washington. Achtenberg had made her name in San Francisco as a civil rights lawyer and activist. Bill Clinton offered her a job: she duly took up her post as Assistant Secretary for Fair Housing and Equal Opportunity at the Department of Housing and Urban Development (HUD).

The main thrust of the Clinton housing strategy was to increase home ownership among the poor, and particularly among blacks and Hispanics. High levels of home ownership correlated with less violent crime, better school performance, a heightened sense of community. But standing in the way were the conservative lending policies of the banks, which required such inconvenient things as cash deposits and regular repayments — things the poor and minorities often could not provide. Clinton told the banks to be more creative.

Meanwhile, Ms Achtenberg was busy setting up a network of enforcement offices, primed to spearhead an assault on the mortgage banks, bringing suits against any suspected of practising unlawful discrimination, whether on the basis of race, gender or disability. Achtenberg believed racism was a big factor in keeping minorities from enjoying the same level of home ownership as whites.

However, when little or no overt or deliberate racial discrimination was discovered among mortgage lenders, HUD's investigators turned to trying to prove "disparate treatment" of minority groups. If a bank refused loans to proportionally more black applicants than white ones, for instance, the onus would fall on it to prove it had good grounds for doing so or face settlement penalties running into millions of dollars. A series of highly publicised cases were brought on this basis, starting in 1994. Eventually the investigators would turn somewhat desperately to "disparate impact", a form of discrimination so abstract as to be only discernible at all through the application of multivariate regression analysis to information stored on regulators' databases.

These mortgage banks, which have been responsible for issuing about three-quarters of the dodgy subprime loans, quickly took the hint. From the mid-1990s they began to abandon their formerly rigorous lending criteria. Mortgages were offered with only three per cent deposit requirements, and eventually with no deposit requirement at all. The mortgage banks fell over one another to provide loans to low-income households and especially to minority customers. In the five years from 1994 to 1999, the number of African-American and Latino homeowners increased by two million.

The national banks, responsible for the remaining quarter of the current subprime loans, were put under a different kind of pressure by the Clinton team. Changes were made to the Community Reinvestment Act to establish a system by which banks were rated according to how much lending they did in low-income neighbourhoods. A good CRA rating was necessary to get regulators to sign off on mergers, expansions, even new branch openings. At the same time, the government pressed Freddie Mac and Fannie Mae, the two giants of the secondary mortgage market, to help expand mortgage loans among low and moderate earners, and introduced new rules allowing the organisations to get involved in the securitisation of subprime loans.

By the end of the 20th century most of the ingredients that would combine to cause today's subprime crisis were already in place. Only a small proportion of the subprime loans made since George W Bush became President have gone to new, first-time buyers. A huge number have been refinancing loans, replacing mortgages originally taken out perhaps eight, 10 or 12 years ago.
If you are one of those low-income householders, you will never pay off your loan. It's not your fault. It's not the bank's fault. And it certainly isn't George W Bush's fault — every attempt he has made to reform the mortgage market has been blocked by Congressional Democrats.
So that's how we get from there to here, from crude attempts at social engineering during the early, heady days of the first Clinton administration to the turmoil on Wall Street today.

There may be many technical lessons to be learned about selling and buying mortgages, about the best ways to price and manage risk, and about the regulation of financial markets, but I believe the most important lesson of all is an ethical one: it's about not behaving ruthlessly when trying to change the world for the better.
Bill Clinton's team, like so many progressives here in Britain, were not content to wait and see what fruits equal opportunities might bring.

They felt compelled to secure their equal outcomes by any means necessary, even if that meant debauching institutions, corrupting professions and trying to skew the operation of markets. That only ever leads to chaos.

* A longer version of this article appears in this week's Spectator magazine.