“Pigs get fat, hogs get slaughtered.” The adage is a warning to the greedy, but when I look back on the financial debacle of 2008, I have to say somehow the adage got it wrong. Hogs of the financial system survived while the rest of the litter got killed, meaning you, me and all the little guys. But a recent essay co-authored by Charles Colomiris and Stephen Haber, argues that greed wasn’t the only cause for the financial meltdown. Good intentions were at fault, too. (“Why Banking Systems Succeed—and Fail,” Foreign Affairs, Nov/Dec 2013 pgs. 97-110)
True, scandalous lending practices deserve most of the blame but, according to the authors, so, too, was the dubious relationship that sprang up between banks and activist organizations. That relationship began in 1977 when Congress passed the Community Reinvestment Act (CRA). It required banks to show they were meeting the needs of the communities they served. To reach that goal, lending institutions sought the support of organizations like the Association of Community Organizations for Reform Now (ACORN), non-profit groups whose charters were to help low income people obtain home mortgages and business loans. What developed was a symbiotic connection. The banks got support from activist organizations in exchange for easier loans for those struggling to climb the economic ladder. For a time the money flowed freely until banks began to worry about the amount of debt on their books. So, with the help of the non-profits, they successfully lobbied Congress to pass a bill that required Fannie Mae and Freddie Mac to repurchase those mortgages. (Ibid pg. 106)
With their liabilities shifted off their books, banks grew generous again. A house could be purchased with 3% down instead of the standard 20%. (Ibid 106) Generosity had its price, however. Before long, the two Federal agencies found themselves awash in bad loans. Eventually, the government had to bail out Fannie Mae and Freddie Mac — which brings to mind another adage… something about roads that lead to hell.
(Courtesy of www.3geez.com)