Racial socialism and the subprime mortgage crisis

A reader suggested to me a few weeks ago that the real reason for the subprime mortgage crisis was leftism-driven loans to racial minorities. I discussed the issue with someone who is knowledgeable about economics, and he thought that racial liberalism was a contributing factor in the subprime crisis but not the driving factor. However, an article by Thomas DiLorenzo at lewrockwell.com reveals racial egalitarianism as the major underlying condition for the subprime crisis. It dates back to the Community Re-investment Act of 1977 which over the decades has forced banks on pain of penalties to make loans to low-income people with poor credit histories, particularly nonwhites, and to absorb the losses. That set the stage. Then, DiLorenzo continues, Fed monetary policies in recent years drove

spectacular escalation of real estate values in every American city over the past decade or so. This created a further problem for the financial institutions that are victimized by the CRA. They are forced to make a certain amount of bad loans, but because of the Fed-created explosion in housing prices, many thousands of subprime borrowers no longer qualified, by a long stretch, for conventional mortgages based on their incomes.

The only way these borrowers could qualify for their mortgage loans (even ignoring their bad credit ratings) was to take out adjustable rate mortgages, some of which had astonishingly low first-year rates in the 3 percent range, and sometimes lower. This is what has largely fueled the subprime mortgage meltdown—the inability of thousands of subprime borrowers to afford their mortgages now that their rates have adjusted upward. Thus, the combination of the Fed’s enforcement of the CRA (with the help of political pressure groups like ACORN) and its post 9/11 monetary policy in general are the reasons for the bursting real estate bubble and the “subprime” mortgage meltdown.

Posted by Lawrence Auster at September 08, 2007 05:19 PM | Send