The point in question the IBD editorial was making was that the Clinton Administration was penalizing companies that did not lend money to minority and low-income families under the Community Redevelopment Act. Basically, the government was considering it discrimination if the lenders did not lend. So fearful of facing financial penalties, the banks loosened up their lending standards so that they essentially lent to anyone who could "stand up straight" as Robert B. Reich put it.
Interesting. I didn't know that. Thanks for telling me.
However, it seems to me that there would be no way for the Clinton administration or any other administration to force lending institutions to offer loans at such low rates that the lending institutions themselves were sure to make a loss. That would be sheer economic madness, and if Clinton had proposed it, then Congress should have opposed it. Remember that Congress was dominated by Republicans during Clinton's second term. Sure, Clinton could have issued a veto to strike down the objections of Congress, but just think how bad it would have looked to posterity if Clinton had gone on record saying that lending institutions must give loans to low-income people at rates that are below inflation. He can't have done that, because if he had conservative media would remind us of it every chance they got.
So Clinton didn't force lending institutions to offer loans to poor people at rates that are below inflation. In other words, lending institutions were still allowed to make a profit when giving loans to low-income people. However, the way I understand the subprime loans, they generally mean that the person taking the loan has to pay a very low interest rate during the first few years, but then the interest rates shoot up sharply. That means that low-income people may be able to pay their interest rates during the first few years, but when the rate goes up they will be forced to default on their loans.
Surely lending institutions weren't forced to ask for a very low interest rate during the first few years and then a much higher rate after that? Surely they could have asked for a fixed rate from the beginning? That way low-income people would have seen right from the beginning that they wouldn't be able to afford that loan. And I don't see how the lending institutions could have been fined for making low-income people realize the true cost of taking a loan.
Anyway, remember that according to Scott Lilly, inflation-adjusted earnings for middle-income people rose by 14% between 1994 and 2000. During that time, people might reasonably expect their incomes to rise, so that they would be better able to afford a loan. But during the Bush years, middle-income earnings have fallen by 2%, according to Scott Lilly. Lilly also claims that the less you earned when Bush was inaugurated, the more your economic situation has probably deteriorated during the Bush years. And since it was Bush who was primarily responsible for shifting the flow of money away from low- and middle-income people into the pockets of the rich - mainly by way of his huge tax cuts for the rich - you might argue that Bush, more than Clinton, should have realized that subprime loans were becoming a real problem for poor people.
So I still very much question the claim that lending institutions were "forced" by the Clinton administration to offer hugely risky credit to poor people.
Ann
