"Renaissance Thinking About the Issues of Our Day"
Thom Hartmann: So what are the biggest lies, is lies the right word? What are the biggest lies about the economy? Joshua Holland, the editor and senior writer for Alternet, author of a new book, ‘The 15 Biggest Lies About the Economy and Everything Else the Right Doesn’t Want You To Know About Taxes, Jobs, and Corporate America” is with us on the line. Hey Joshua, welcome to the program.
Joshua Holland: Hey Thom, how are you, thanks for having me.
Thom Hartmann: You know I appreciate your showing up. This is, the, let’s begin with what I think is the most mind boggling of all these things. You talked to pretty much any Republican or conservative who is on any listserve or email list and asked them what caused the bank crisis and they’ll say because Jimmy Carter or Bill Clinton, take your choice, forced the banks to start loaning money to poor people who couldn’t afford loans, that brought the system down. Any truth to that?
Joshua Holland: Well there’s absolutely no truth to that. That is a common fallacy on the right as you say. And the story is that legislation that requires that banks lend to all of the areas where they have branches, and the Freddy Mac and Fannie Mae forced banks to lend to, to lower their lending standards to the point where they’re basically giving out money to just anybody. And it was that government intervention which caused so much harm to the economy. Now the reality is that there is no mandate and never was a mandate to loan money to people who weren’t qualified.
Thom Hartmann: So the government didn’t require this.
Joshua Holland: There is no requirement, there has never been a requirement. Basically, they’re…
Thom Hartmann: Did the government encourage this?
Joshua Holland: There’s, no, no. Basically one of the great ways that this fallacy has come to be is that you know banks are regulated and insured by the FDIC. So you can basically say that you know all of these bad loans have some connection to the government, and that’s how this meme is created. It’s like saying that because the government has, regulates pollution they’re responsible for pollution. It’s a ludicrous claim and it’s totally unfounded in the facts but it’s persistent and of course it appeals to those who are predisposed to believe that it must be poor people that are causing all the problems. Ideologically predisposed to buy it.
Thom Hartmann: Right. And, this is, this is pretty amazing. How do you, you know, I have gotten so many of these emails from, you know because I’m on all these different lists and I get the same emails all the right wingers get. And I’ve gotten so many emails laying this at the feet of Chris Dodd and Bill Clinton and even Jimmy Carter. And with great specificity. I mean a lot of detail. “Oh it’s the Community Reinvestment Act", that was the piece of legislation and that piece of legislation required this this this and this” and they go through it like in enormous detail. Now I know that a lot of these have been debunked over at Snopes and some of these other, you know factcheck.org and what not. But they have such tenacity.
Did the Community Reinvestment Act, in any way, have anything to do with the banking disaster and if not what did?
Joshua Holland: Well I mean what did is a very long story. But the essence of it is that deregulation allowed commercial banking and investment banking to be merged.
Thom Hartmann: So you’re talking about 1999, Phil Gramm, the…
Joshua Holland: Phil Gramm! I mean you lay it all at Phil Gramm…
Thom Hartmann: The Gramm-Leach-Bliley bill. And this was cooked up and promoted by the Republicans but it was enthusiastically signed into law by a Democratic president.
Joshua Holland: By all means, by all means. And you know they basically figured out a way to, what we now know is securitization. And they would take these loans, they’re getting fees up front…
Thom Hartmann: Okay now this was, now if I may interrupt you. What you’re describing now is the consequence of what came one year later in 2000 which was also promoted by Phil Gramm whose wife Wendy was on the board of directors of Enron, and this was in fact it was called the Enron loophole. The Commodity Futures Modernization Act, which said that banks, now that banks can be gambling houses as well they don’t just have to gamble on pork bellies and silver and gold like the old fashioned gamblers, they can gamble on a whole brand new commodity, made out of nothing, which is bets on bets on bets on bets against a mortgage, or in favor of a mortgage. Right?
Joshua Holland: Well that’s right, there’s two different pieces to this. So there’s the bets on bets and bets and bets, but there’s also the basic security that they were creating.
Thom Hartmann: Right.
Joshua Holland: So this is where that whole toxic stew, when you hear CDOs and everybody’s eyes glaze over. But the basic gist of it was that these were the smartest guys in the room and they decided well we can basically launder the risk out of high risk loans and they did this by slicing them up into slices, little pieces that they called tranches, and they would basically say okay here’s the senior tranche and they get paid out first when people repay these loans, those are now safe. And they got them triple a rated which allowed pension funds and other institutions that aren’t allowed to take risky bets to buy into them. And they created such a market for this. And of course there’s again a fat stream of fees. They’ve broken the link between the lender and the borrower and they’re just taking in the fees and creating all this junk securities.
And that was all, that was all fine as long as the housing market was going really strong. We had this housing bubble unfortunately where the underlying asset value had no relation to the price, right? And so when it came down, the senior slices that were supposed to be very, very safe were, as we now know, as much at risk as the junior slices.
Thom Hartmann: Yeah, it’s the old GIGO thing in business. Garbage in, garbage out. Or in computer programming rather.
Joshua Holland: That’s right because the basic, the basic building blocks for these securities were shaky loans. And they created so much demand that the you know mortgage agencies and lenders were just excited to make loans to just about anybody.
Thom Hartmann: So what allowed the crummy loans? I mean why was it that you know back in the, I guess it was the late ‘70s, Louise and I bought our first house. And we had to jump through so many hoops to prove to that bank that we had an income, that we could afford that house, we had to put a down payment of as I recall 20% down. I mean you know we saved for years to be able to buy our first house. And you know how did we get from there to ninja loans?
Joshua Holland: Well I think that that is you know the key piece of all of that is as I mentioned, they broke the relationship between the lender and the borrower.
Thom Hartmann: So that’s Gramm-Leach-Bliley, 1999.
Joshua Holland: So instead of the banks… that’s right. Yes exactly. And the bank that you took your loan out from, they wanted their money back, right. So they made sure that you were a qualified borrower.
Thom Hartmann: Right, in fact I remember when I sold that first house two and a half years later I went back to the same bank, to the same guy in the same bank, to execute the sale of the house. So that bank was still holding that note.
Joshua Holland: That’s right, that’s exactly right. So now what we’re seeing is you know your mortgage is divided between different securities, bundled with other securities, and now it’s owned by investors. So the bank doesn’t really have to worry about getting it’s money back because they’re no longer on the hook, basically. They figured out how to securitize your mortgage and sell it off to investors. And what they’re basically selling is theoretically your future payments. And when your house is now under water and you’re being foreclosed on, that is, that’s a house of cards that they’ve built and it came crashing down.
Thom Hartmann: Right.
Joshua Holland: And when you look at the Community Reinvestment Act, I mean it is, it gives guidelines. I mean this is the thing that, you know, those viral right wing emails are based on the fact that it says, you know, it encourages banks to lend just in the areas where they do business, but I’ll quote this. It has to be, and this is what it says in the law, in section 802. It must be “consistent with safe and sound operation.” So it’s not like there was ever any pressure from the government to …
Thom Hartmann: Basically what they were just saying is you can’t red line poor neighborhoods anymore. They didn’t even say you cant, they said please don’t. And but by the way if you’re going to give a loan to somebody, make sure that it’s consistent with safe banking practices. I got it.
Joshua Holland: Exactly.
Thom Hartmann: Joshua Holland, you can read it over at Alternet.org, and check out his new book. Thank you Joshua.
Joshua Holland: Thanks so much for having me Thom.
Transcribed by Suzanne Roberts, Portland Psychology Clinic.