How Did We Get Here?

Ed Morrissey @ Hot Air asks “Whose policies led to the credit crisis?”

The answer depends on who you ask… Democrats of course blame Republicans and Republicans of course blame Democrats. Personally, I think it’s safe to point fingers at both parties and the Federal Reserve Board.

The roots of the current credit crisis can, as John Lott noted in March, be traced to a 1992 Boston Federal Reserve study that reportedly found evidence of racial discrimination in mortgage lending. As Lott notes:

The Fed later used the study to produce a manual for mortgage lenders that: “discrimination may be observed when a lender’s underwriting policies contain arbitrary or outdated criteria that effectively disqualify many urban or lower-income minority applicants.”

So what is on the list of Fed’s “outdated criteria”? Such “discriminatory” factors as the borrower’s credit history, income verification, and the size of the mortgage payment relative to income.

But it turns out that the original study was mistaken.

Economists discovered that there were errors in the data the study used. Some minorities were listed as having wealth up to hundreds of times greater than they actually had, making it look like wealthy minorities were being turned down for loans. When the data errors were corrected minorities with the same financial background as whites had been at no disadvantage in getting mortgages.

It was Clinton era changes to the Community Redevelopment Act that helped create the market for risky subprime loans… The very things that Democrats now point to as evidence of predatory lending practices.

Yes, it was Democrats who wanted to preserve Clinton era policies and resisted the Bush Administrations attempts to rein in the credit markets. But it was Republicans who don’t appear to have put much effort into exposing corruption at Fannie Mae and Freddie Mac and/or fighting for reforms.

Bottom line this isn’t the time for finger pointing but since we’re going to do it any anyway we might as well blame the entrenched Washington political culture. Our current credit crisis isn’t Democrat or Republican problem… It’s a culture problem; Washington shuns accountability, tolerates corruption and places political correctness ahead of good governance.