Dodd Preserves Deniability

Sen. Dodd's financial reform bill, like Rep. Frank's before it promises to be a magnificent example of the politicians' craft. The near perfect failure of either bill to address the actual cause of the crisis is outshined only by the shamelessness with which its authors evade their own responsibility for the disaster. Naturally they propose to expand their own power to do it all over again.

The most hypocritical and dangerous part of the bill is the creation of a new agency (or in the Senate bill a new department inside the Federal Reserve) supposed to protect consumers from predatory lending. Predatory here is being used in a slightly unusual sense. It apparently means the practice of identifying would-be homeowners who have no money for a down payment, spotty credit, and insufficient income, and giving them zero-down mortgages on luxurious homes in which they may live for a couple years before losing them.

Well we should definitely put a stop to that. Our only hesitation is that Congress seems a little confused about which were the predators and which the prey. It seems to us that the parties who did most of the bleeding were investors in worthless mortgage bonds like those promoted by Congress's pet banks Fannie and Freddie, and when they were bled out, the taxpayers.

Messrs., Frank, Dodd and colleagues take hundreds of pages to say never again to such horrible abuses, without ever once mentioning that (a) junk mortgages were Congress's idea, largely led by those esteemed gentlemen, (b) Fannie Mae and Freddie Mac, directly answerable to Mr. Frank and Mr. Dodd and their committees, were the largest suppliers of capital by far for such mortgages, or (c) that Messrs Frank, Dodd and co. were repeatedly warned of the danger posed by junk mortgages. They not only refused to do anything about it but repeatedly and angrily denounced those who tried, including implicating racist motives to Fannie's and Freddie's critics. Their support for these largest of all predatory mortgage financiers continued right up through Sen. Dodd's remarkable declaration only weeks before their collapse that Fannie and Freddie were perfectly sound and adequately capitalized.

The battle cry of the consumer protection types is that consumers need separate regulatory advocates because traditional bank regulators are focused on the safety and soundness of the banks not on protecting consumer interests. Unfortunately for this argument the principal driver of the mortgage crisis was a nearly 20-year campaign to do exactly what the consumer advocates advocate: sever the link between bank safety and consumer interests.

That was exactly what Congress as well as the Clinton and Bush administrations did by relentlessly increasing pressure on the banks and especially on Fannie and Freddie to capitalize junk mortgages, especially mortgages with low down payments. Liberals in those days equated bank safety and soundness with racism; accusing banks that were reluctant to write predatory loans, as they are now called, of "redlining."

As federal authorities repeatedly told the banks in those days, the traditional 20 percent down-payment was the single biggest obstacle to low-income, weak-credit borrowers seeking a mortgage. Only by getting rid of the 20 percent down payment could more loans be made to weak borrowers. The banks caved, disastrously.

As Stanley Liebowitz of the University of Texas at Dallas has shown, it was not sub-prime mortgages per se that drove catastrophic default rates, but "innovative" sub-prime mortgages with low or no down payments. Low or no down payments were also the leading cause of defaults on prime mortgages taken by upper-income folk. Low down payments more than anything other factor drove the catastrophic increase in defaults, collapsing the mortgage market, crashing the banks, bankrupting Fannie and Freddie, and putting hundreds of thousands of Americans into foreclosure.

Congress and conspicuously Messrs. Frank and Dodd repeatedly ratcheted up the pressure on banks to make these junk loans they now decry. In those days giving mortgages to people who could not afford them was the "pro-consumer" position.

Mr. Dodd now likes to claim he advocated action against predatory loans; that Congress even passed a bill. This is typical Senatorial double speak. Pass a highly visible bill claiming to solve a problem while quietly arm-twisting a regulated industry to make it worse, and of course sticking the industry with the blame when it all goes bad.

Next Sen. Dodd will be telling us he supported the war before he opposed it.

This staunch opponent of predatory lending is the man who along with Mr. Frank and the execs of Fannie and Freddie made Angelo Mozilo, the number one mortgage hustler in the USA, into a folk hero. Dodd even borrowed money from him at the special "friends of Angelo" rate.

Naturally the Republican response has been lame. Do you want to know why the Republicans look like toadies to the banks? Simple. They are toadies to the banks. That's why their toady brains are incapable of coming up with a decent argument against this "consumer protection" disaster.

All Republicans can do is talk about the regulatory burden on the poor pitiful banks, and the inefficiency of multiplying regulatory agencies. Sen. Corker's idea of a creative response is just stupid Congressmen tricks, like embedding the consumer agency into the Fed in hopes it will never be found again. That's not even smart politically. Does he have any clue how unpopular the Fed is today, or how ridiculous it will look for the GOP to filibuster a financial reform it otherwise favors on the ground that some agency is located at the wrong address.

If the Republicans were real capitalists instead of bank-toadying, campaign-slush-fund-collecting crony capitalists, they might even say out loud that the best protection against predatory lending is sound banking. Safe and sound loans that borrowers can actually repay, are good for consumers for the same reason they are good for banks, not to mention taxpayers. Nobody goes broke; nobody gets bailed out.

Congress could dramatically improve bank safety and eliminate predatory lending with a few simple statutory rules written on one sheet of paper. Boosting capital requirements and require banks to fully disclose the details of their investments, so bank creditors could easily determine which banks were making too many imprudent loans and cut off their credit.

Congress will not do this, for two reasons.

First, governments do not like conservative banks. Governments prefer loose credit to tight credit, and best of all they like loose credit extended to government's friends and pet projects.

Also Congress hates writing actual laws. Real laws empower citizens, not politicians. Politicians like "discretionary regulation" because Washington types can manipulate it while citizens can't even understand it. Discretionary regulation preserves deniability, which is how Congress could strong arm banks into making junk loans and then later indict them for it.

And that's what both the Frank and Dodd bills are all about: deniability and power.