The crises of recent years tend to erase the memory of those that have gone before.
One, as you may recall, was the 2008 financial collapse – a collapse considered by many to be the worst since the Great Depression.
That collapse brought into power a government like the one we have now—the White House and both houses of Congress controlled by Democrats.
Newly elected President Barack Obama appointed then-Rep. Rahm Emanuel as chief of staff, popularizing the adage, “Never let a serious crisis go to waste.”
Indeed, the new Democratic administration followed this advice, using the financial crisis as an opportunity for a major expansion of government.
Democrats wasted no time in blaming the financial meltdown on corporate greed and inadequate regulation of banks and other financial institutions. In 2010, the 2,300-page Dodd-Frank Act passed — with no Republican votes in the House and three in the Senate — adding 400 new regulations for financial institutions.
Included in this tsunami of new financial regulation was the creation of a new independent agency – the Consumer Financial Protection Bureau. The agency, originally the brainchild of Senator Elizabeth Warren, was conceived with her view, shared by Democrats on the far left, that differences in financial outcomes between different communities must be due to racism and discrimination. So, in their view, an all-powerful bureaucrat in Washington was needed to level the playing field.
Now our financial institutions – banks, securities firms, credit unions, payday lenders, etc. – fall under the purview of the Consumer Financial Protection Bureau and must submit to its audit and oversight.
The CFPB has just announced sweeping new changes in its “Oversight Operations to Better Protect Families and Communities from Illegal Discrimination.”
Firms must provide CFPB with “their processes for assessing risks and discriminatory outcomes, including documenting customer demographics and the impact of products and fees on different demographics.”
We could sum this up as financial markets woke up.
Can a government bureaucrat really determine why a banker has or has not granted a loan, and should the government’s heavy hand be involved?
Can government interference in the way financial institutions do business be the same as government interference in who sits at a lunch counter?
We can learn a lot about this from the 2008 financial crisis.
According to the work of Peter Wallison of the American Enterprise Institute, the crisis was not the result of inadequate economic regulation, but of government excesses.
According to Wallison, it all started with the government-mandated Affordable Housing Targets in 1992. These ordered the two giant government-backed mortgage companies – Fannie Mae and Freddie Mac – to set a quota of 30% of all mortgages they issued from mortgage lenders should be targeted at low- and middle-income borrowers.
By 2008 it was up to 56%.
In order to meet these quotas, credit practices have been drastically relaxed. Down payment requirements decreased from 10% to 3%; Credit requirements have been relaxed, as have debt ratio requirements for borrowers.
By 2008, Wallison says, just before it all collapsed, “more than the majority of all mortgages in the US financial system were substandard, required little or no down payment, or were otherwise risky.”
As lending standards collapsed, housing demand and prices soared, and then the bubble burst.
Who suffered most in the ensuing recession? Per Pew Research, “Blacks and Hispanics have borne a disproportionate share of job losses and home foreclosures.” The low-income Americans most wanting to help were the ones hurting the most.
The Democrats are back today.
CFPB Director Rohit Chopra is preparing to use his near-unilateral power to show he knows what’s good for consumers better than the economy and the market.
Certainly, once again, those who will suffer most will be our struggling, low-income citizens.
Star Parker is President of the Center for Urban Regeneration and Education and host of the weekly television show Cure America with Star Parker.
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