In the past week, the Australian media have given copious quantities of space and time to commentators seeking to blame the American sub-prime loans crisis on the market economy. These commentators, most of them from state-funded universities and media, think their own commitment to state ownership, government intervention, and a heavily regulated economy has been vindicated as market forces and corporate greed apparently spin out of control.
It is revealing, therefore, to re-read an article from the conservative City Journal in 2000 predicting problems for the banking sector from the Clinton administration’s resurrection of Jimmy Carter’s 1977 Community Reinvestment Act, which appears to have been the major single factor in the origins of American high-risk sub-prime loans. Under Bill Clinton:
• banks were required to provide loans on an affirmative action basis to poor inner-urban ghettoes;
• the scheme’s intentions were to help low-income earners buy homes and revive decaying neighbourhoods;
• much of the money was funnelled through a nationwide network of leftwing community activist groups;
• government regulators were appointed to measure banks’ performance and ensure they reversed their previous “racially discriminatory” policies of declining to lend money to high-risk clients;
• by 2000 banks had committed nearly $1 trillion for loans to low-income ethnic and inner-urban groups;
• at the time, the chairman of the US Senate Banking Committee, Republican Senator Phil Gramm, denounced the program as “a vast extortion scheme against the nation’s banks”.
The full story is at: http://www.city-journal.org/html/10_1_the_trillion_dollar.html.