IN 1994, PRESIDENT CLINTON directed HUD Secretary Henry Cisneros to come up with a plan to increase home ownership. Cisneros convened what HUD called a “historic meeting” of private and public housing-industry organizations in August of 1994. The group eventually produced a plan that incorporated creative measures to promote home ownership. The underlying motivation to increase home ownership was rooted in classic progressive dogma. That dogma asserts that all people, regardless of financial wherewithal, are entitled to own a home. The fact that people may not be able to afford to buy a home is, according to the cognitive distortions created by the progressive virus, nothing but one more example of social injustice. Cisneros, the Clintons and their minion were simply asserting a tried-and-true principle of progressivism when they concocted their housing scheme: Emphasis upon equal outcomes, NOT equal opportunity. Don’t own a home? No problem, we’ll (the government) take care of that.
Another die-hard progressive by the name of Congressman Barney Frank pressured Fannie Mae to make loans to people who would otherwise not qualify to buy a home, people who were destined to default on their loans. Frank pressured then Federal Reserve Chairman, Alan Greenspan, to lower interest rates to make it easier for the have-nots to qualify for a loan. Banks, under pressure from both the Clinton and Bush Administrations, were coerced into weakening home loan qualification criteria. Unfortunately, all of this progressive social engineering took place as the housing market bubble was reaching its “pop” point.
The extent to which progressives distort reality is stunning. In the mid-2000s, the looming housing bubble was denied to exist. During a House Financial Services Committee Hearing held on September 10, 2003, Congressman Frank, along with his fellow progressives on the committee, arrogantly dismissed the idea of a housing bubble and insolvency at Fannie Mae and Freddie Mac.
Rep. Barney Frank (D., Mass.): “I worry, frankly, that there’s a tension here. The more people, in my judgment, exaggerate a threat of safety and soundness, the more people conjure up the possibility of serious financial losses to the Treasury, which I do not see. I think we see entities that are fundamentally sound financially and withstand some of the disaster scenarios. “ {94}
When the committee reconvened on September 25, 2003, Frank had this to say:
Rep. Frank: “I do think I do not want the same kind of focus on safety and soundness that we have in OCC [Office of the Comptroller of the Currency] and OTS [Office of Thrift Supervision]. I want to roll the dice a little bit more in this situation towards subsidized housing. “{95} (Emphasis added)
With reference to Congressman Frank’s gambling analogy, the only problem with “rolling the dice” is that Mr. Frank was betting the taxpayer’s money, not his.
One committee member not infected with the progressive virus predicted the disaster that was about to happen. It should go without saying that this committee member’s prescient concerns were catalogued by the progressives on the committee as nothing more than an expression of social injustice.
“Sen. Chuck Hagel (R., Neb.): Mr. Chairman, what we’re dealing with is an astounding failure of management and board responsibility, driven clearly by self interest and greed. And when we reference this issue in the context of – the best we can say is, “It’s no Enron.” Now, that’s a hell of a high standard.
The very worst idea in the plan, which fortunately never gained approval, was to let first-time homebuyers freely tap their IRA and 401(k) retirement-savings plans with no penalty to scrounge up a down payment. That, HUD estimated, would have “benefited” 600,000 families in the first five years.
Plenty of other ideas in the plan did become reality, though. Knowing what we know now about the housing bust, the earnest language in the document seems faintly ridiculous. Here’s an excerpt. Read it closely and you can see the seeds of disaster being planted:
For many potential homebuyers, the lack of cash available to accumulate the required down payment and closing costs is the major impediment to purchasing a home. Other households do not have sufficient available income to make the monthly payments on mortgages financed at market interest rates for standard loan terms. Financing strategies, fueled by the creativity and resources of the private and public sectors, should address both of these financial barriers to homeownership.
Note the praise for “creativity.” That kind of creativity in stretching boundaries we could use less of. Mason puts it well: “It strikes me as reckless to promote home sales to individuals in such constrained financial predicaments.” {96}
Wall Street bankers who are never at a loss to exploit a bad situation and feather their own nest, took these subsidized and fragile loans and packaged them into what investment bankers called “Collateralized Debt Obligations.” (CDOs) Not only did the bankers package loans into a portfolio whose contents were a mystery to everyone, including the bankers who created them, they insured them through the likes of A.I.G. And just to make sure that unsuspecting “investors” had no fear about buying these CDOs, the bankers, their friends at the rating agencies, e.g., Standard and Poors and Moody’s, gave these house of cards investments their highest rating.
The general population who had been thoroughly infected with the progressive virus lapped up the little or no money down loans with a sense of entitlement. Some mortgage companies were giving loans equal to 125% or even more of the home’s inflated appraisal price. Americans infected with the progressive virus asked: Why should I not be able to buy a home just because I can’t afford to buy it? It is said that a fool and his money soon part.
These nouveau pseudo rich who took advantage of the push toward equal outcomes included house “flippers” who would buy homes on credit with no down payment, slap a coat of cheap paint on and in it, then “flip” it within a couple of weeks for a net profit, sometimes as much as tens of thousands of dollars or more. Real Estate Agents were rolling in the dough. House salesmen leased Mercedes, BMWs and Lexus automobiles to drive their greed-frenzied-entitlement minded clients to the next open house. Dilapidated shacks near the California coast with less than 900 square feet on average size lots were going for over a million dollars, sometimes more.
An entire generation of entitled Americans thought of their home as their personal piggy bank. They sucked the money out of their over-inflated homes and used it to buy fancy cars, take grand vacations, buy luxury goods and live the lifestyle the progressive virus had convinced them they were entitled to have. This was all done on credit and none of the progressives in the government seemed concerned, that is, until the bubble burst in 2008.
Those who took out their easy loans defaulted on them with an equivalent easiness. Banks had so much red on their books that even they got scared. Their insurers were asked to underwrite so many bad loans that they, too, went bust. The collapse scared everyone and when all was said and done, it was the taxpayer who was coerced into bailing out those who, because of their progressive infection, raped and pillaged the American economy.
When those infected with the progressive virus emphasize equal outcomes over equal opportunity, they discount, if not completely destroy, the predicate behaviors that result in genuine success, like hard word, frugality, industry and patience. When banks mandated that those applying for a home mortgage had saved 20% of the down payment, while demonstrating a debt to income ratio that reflected an applicant who was responsible, they were protecting the money supply of the United States and rewarding hard work, industry and responsibility. Those infected with the progressive virus turned that working system on its head with an ill-conceived, ideologically driven, social engineering scheme that resulted in a financial debacle rivaling the great depression of the 1930s.