Government Forces Financial Institutions to Go Woke

The recent crises tend to forget the ones that preceded them.

One, as you may recall, was the financial collapse of 2008—a collapse deemed by many as the worst since the Great Depression.

The collapse of the Soviet Union brought to power a government that was similar to the one we have today: the White House, both houses of Congress, and both houses controlled by Democrats.

Newly elected President Barack Obama appointed then-Rep. Rahm Emanuel as his chief of staff, who made popular the saying, “Never let a serious crisis go to waste.”

The new Democrat administration actually followed this advice and used financial crisis to expand government.

Democrats quickly attributed the financial collapse of 2008 to greedy businessmen and inadequate regulation of financial institutions.

In 2010, the 2,300-page Dodd-Frank Act was passed—with no Republican votes in the House and three in the Senate—adding 400 new regulations on financial institutions.

The creation of the Consumer Financial Protection Bureau, an independent agency, was part of this new tsunami of financial regulation. Sen. Elizabeth Warren was the original creator of the agency. She believed that disparities in financial results among different communities should be attributed to racism and discrimination. To level the playing field, they needed a Washington bureaucrat with all the power.

Now, our financial institutions—banks, securities firms, credit unions, payday lenders, etc.—fall under the purview of the Consumer Financial Protection Bureau and must submit to its scrutiny and oversight.

The CFPB has just announced sweeping new changes in its “supervisory operations to better protect families and communities from illegal discrimination.”

Firms must make available to CFPB “their processes for assessing risks and discriminatory outcomes, including documentation of customer demographics and the impact of products and fees on different demographic groups.”

This might be described as financial markets gone awake.

Can a government bureaucrat really tell a banker why they made a loan? And should the government have any say in this matter?

Can it be the exact same thing when government intervenes to change how financial institutions operate, or who sits at a lunch table?

The 2008 financial crisis can teach us a lot about this.

According to the work of American Enterprise Institute’s Peter Wallison, the crisis was not the result of insufficient regulation of business but of government excess.

Wallison claims that it all began in 1992 with the government-mandated Affordable Homes Goals. These mandated that the two giant government-backed mortgage companies—Fannie Mae and Freddie Mac—set a quota of 30% of all mortgages they acquired from mortgage originators to be targeted to low- and moderate-income borrowers.

This was 56% in 2008

Lending practices were drastically relaxed to meet these quotas. The down payment requirements were reduced from 10% to 3%, credit score requirements were relaxed and debt-to-income requirements were also lessened.

By 2008, just before everything collapsed, according to Wallison, “More than a majority of all mortgages in the U.S. financial system was sub-prime, required low or no down payment, or were otherwise risky.”

After the collapse in lending standards, housing demand and property prices soared and then the bubble burst.

Who was the worst hit by the recession? Per Pew Research, “Blacks and Hispanics have borne a disproportionate share of both job losses and housing foreclosures.”

The people who were most hurt by the government of America were the low-income Americans.

Today, Democrats are back at work.

Rohit Chopra, Director of CFPB, is preparing to use his almost unassisted power to show that he is more knowledgeable than the marketplace about what is best for consumers.

Our low-income citizens who are struggling will be the ones most affected, it is certain.


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