Financing Housing

As for the global financial crisis, that wasn’t Bush, it was Clinton who really started that mess, by forcing the banks to give mortgages to low-income, unqualified buyers, with the Community Reinvestment Act.

Simply put, the financial crisis of 2008 was caused by a lot of banks making a lot of loans to a lot of people who either could not or would not pay the money back. But this explanation raises two key questions. Why did private lenders, whose job it was to assess credit risk, make those loans? And why did the army of financial regulators, with massive enforcement powers, allow 28 million high-risk loans to be made?

There’s a strong case that the answers can be traced to Sept. 12, 1992. On that day presidential candidate Bill Clinton proposed, in his campaign book “Putting People First,” using private pension funds to “invest” in government priorities, such as affordable housing, to “generate long-term, broad based economic benefits.” Seldom has such a radical proposal been so ignored during a campaign only to later lead to such devastating consequences.

After his election, President Clinton tapped Labor Secretary Robert Reich to lead the effort to extract, as Mr. Reich put it in 1994 congressional testimony, “social, ancillary, economic benefits” from private pension investments. Mr. Reich called on pension funds to join the administration’s “Economically Targeted Investment” effort. Housing and Urban Development Secretary Henry Cisneros assured participants that “pension investments in affordable housing are as safe as pension investments in stocks and bonds.”
Six pension funds ultimately agreed to invest in public housing that was backed by $100 million in federal grants and guarantees, but the program never took off. In the end, even unions and their pension funds rejected the effort to direct any part of their retirement savings toward someone else’s welfare.

The Clinton administration lost the battle to use pensions to fund low-income housing, but it succeeded in winning the war by drafting Fannie Mae, Freddie Mac and the commercial banking system into the affordable-housing effort. It did so by exploiting a minor provision in a 1977 housing bill, the Community Reinvestment Act, that simply required banks to meet local credit needs.

http://www.aei.org/article/economics/the-clinton-era-roots-of-the-financial-crisis/
(Originally from Wall Street Journal –http://online.wsj.com/article/SB10001424127887323477604579000571334113350.html)