Sheila Blair, Chairman of the FDIC, gave a statement to the Financial Crisis Inquiry Commission on January 14, 2010, which includes in my estimation the single best outline of all the true causes of the mortgage/financial crisis. Ms Blair’s comment were cogent, unbiased, and unflinching in their analysis of “the failure of market discipline and regulation.”

I have heard a bunch of bogus arguments attempting to explain the mortgage crisis which spread to banking and Wall Street which in turn almost plunged us into another Great Depression. Rarely has anyone put up an argument, a chronology, and a path to make sure this never happens again.

That is until Sheila Blair did! But I’ll get to that in a minute.

Let’s go back to the stupid parade, so when we read her thoughts they have even more import.

The Dumbest Explanation For The Mortgage Crisis

The most ludicrous explanation for the crisis comes from the right lead by Larry Kudlow. They believe the mortgage crisis was primarily caused by increased lending of “subprime mortgages” (which is partly true…every good lie has a grain of truth) and the Community Reinvestment Act of 1977 opened the door by “forcing” banks to lend to poor borrowers.

I wrote a post entitled “Larry Kudlow Is Dead Wrong” to explain in greater detail the right wing’s attempt to blame government regulation for the cause of the mortgage crisis.

The Community Reinvestment Act of 1977 (CRA) is a law passed to end bank redlining. Redlining was a discriminatory practice where banks literally took a red pen and marked on a map all the poor sections in a town indicating where the would NOT lend. Sure, the banks had branches in those areas, they took people’s deposits in those areas, and made money from them, but those folks would never get a loan solely based on their address.

That’s not a fair practice, it’s not American, and the CRA ended it. The CRA requires federally insured banks who take deposits in low income areas to also offer loans in those areas. Those borrowers were not given “a pass” on all the other requirements to get a loan like Kudlow would have you believe. CRA did not suspend underwriting requirements of any kind.

And the real proof the CRA did not cause a mortgage meltdown which started in 2007 is the fact that the CRA passed in 1977. If Kudlow’s argument held water why did it take 30 years to show up?

See…pretty ridiculous, eh?

Kudlow and other Wall Street insiders will say any outlandish thing to blame government regulation for the crisis so right wingers will parrot their anthem not knowing just how stupid they look. But that doesn’t matter to them. The only thing that matters is staving off any real regulation in the future. Bankers, Wall Street insiders, mortgage folks, if asked will always say they don’t want any more regulation. I’m sure if you asked them back in 1977 if redlining should be outlawed, they would have said “No”.

Occasionally when an industry is so myopic to their own interests that they hurt a segment of our citizens, it is the duty of the government to step in.

Back to the current crisis.

The mortgage crisis and subsequent financial and housing meltdown didn’t just hurt a few people. Millions of American families were hoodwinked into both prime and subprime loans with exploding interest rates, vague terms, and improper underwriting requirements…all in the name of profit. These Americans are directly damaged by foreclosure. But the country as a whole is damaged when that disease spreads to the stock market and economy. The fallout of pension fund and real estate values plummeting even for those folks not caught in a mortgage trap actually hurts everyone. We are seeing this come to fruition as the economy slips and we get soaring unemployment.

It’s time for the government to step in and regulate these institutions so this never happens again. Which brings me back to Ms Blair. She has the best explanation and road map for doing just that. Give it a read here and let’s hope Congress is listening.

Good Luck!

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