Wall Street

Some of OpenMarket.org’s readers may know that I’m in the middle of earning a Master’s of Journalism here in D.C. I’m concentrating in Broadcast and Online Production, and for those concerned that journalism is dying a slow death, I’m living proof that a new generation of journalists are being bred with the Internet in mind–but that’s another story for another day.

As one of the requirements of a Public Affairs Reporting class, I’ve written a piece on last year’s financial crisis specifically exploring the role of the Federal Reserve and the Community Reinvestment Act and attempting to give, in layman’s terms, a reasonable account of what happened that the average person would be able to understand.

I’m a firm believer that one should not have to be a banker to make sense of the financial crisis, and as a journalist I have to concede that news organizations could and should have done a much better job explaining what happened. Unfortunately, it seems that when it comes to explaining things like collateralized debt obligations, credit default swaps and market derivatives it’s far easier to revert to intellectual sloth, blaming greedy investors and “capitalism gone wild.”

I’ve reproduced the piece’s script, which was designed for a radio broadcast, here in its entirety, complete with its anchor introduction and cueing (and yes, all good broadcast reporters write their own introductions). You’ll have to forgive some of the elements of the broadcast style (such as putting a source’s title before their name), but one of the advantages of the format is its clear, concise points and fast pacing. This story would be about five minutes long if it were played on the air. And as a side note, even though I work at a think-tank, I’ve tried to make the piece as politically neutral as possible.

The Financial Crisis Made Easy

Anchor1: The Federal Reserve is coming under closer scrutiny for its actions during last year’s credit crisis.

Anchor2: Experts are also taking a closer look at a law that makes it easier for low-income families to get home loans.

Anchor1: As Evan Banks reports, some are saying that the Fed and the Civil-Rights era law played a major role in last year’s financial crisis, while others blame greedy investors and bankers for the housing bubble.

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Federal Reserve Chairman Ben Bernanke may be saying that the recession is over, but there is still much debate over what caused last year’s crisis in the first place.

Some are saying the central bank itself was at the root of the crisis.

Established in 1913 by Woodrow Wilson, the Fed’s duties include monitoring and managing the nation’s money supply and setting interest rates by buying and selling government-backed bonds.

Its end goal is to create and maintain a stable economic setting for private commerce to flourish.

However, economist Steven Horwitz believes that by artificially lowering interest rates after nine-eleven, the Fed overstimulated the housing market.

SOT (stands for sound on tape) (:10) “Look at the banking industry like a traffic light at an intersection. When the lights turns red, banks don’t lend. The Fed, through monetary and fiscal policy, makes all the lights turn green.”

Horwitz says that the only problem with green lights all the time is that eventually it causes a traffic accident.

As more and more people bought homes at low interest rates, home values skyrocketed, creating a housing bubble that burst last year.

The resulting sharp decline in home values was the trigger that brought the nation’s banking system to its knees last fall.

Some say that the Community Reinvestment Act, a law passed in 1977, also contributed to the crisis.

The law is the culmination of an effort to stop discrimination in loans made to low-income individuals and businesses, a practice known as redlining.

However, the Competitive Enterprise Institute’s Michelle Minton says that as the Community Reinvestment Act matured in the mid-nineties, it’s scope and regulatory powers broadened.

SOT (:17) “The Community Reinvestment Act was an attempt to strong arm banks into going against their better judgment and writing loans without thinking about the profit consequence. The game really changed as the feds made CRA compliance a requirement for bank mergers.”

Minton says that the law encouraged banks to make risky loans to individuals that couldn’t pay the money back—individuals the banks would not otherwise have loaned to.

When these high-risk individuals couldn’t pay back their mortgages and the banks repossessed their homes, the entire system came crashing down like a set of dominoes.

With fewer people paying their mortgages and banks unable to re-sell more and more foreclosed houses, property values across the board dropped.

For many homeowners it made increasingly less sense to continue paying off a loan that was higher than their house was worth.

Combine falling home values with so-called ninja loans- loans requiring no proof of income, no job, and little or no down payment on the home, and the recipe was perfect for walk-outs and abandoned homes.

Finally, as a direct result of mortgage revenues drying up, investors and banks across Wall Street that had heavily invested in real estate started going belly-up.

With investments, retirement plans and stocks dropping across the board, the crisis hit home and came full-circle.

Former Chair of the Federal Housing Board Bruce Morrison points a finger directly as these risky lending practices, saying they inevitably lead to defaulting mortgages.

He warns against policy-driven lending:

SOT (:15) “Deciding that risk doesn’t exist because you have an objective is a really bad thing to do, and so we need to learn about risk and how to measure it better than we have and have more honest discussions about which risks we ought to take and who are to take them and who will underwrite them.”

On the other hand, the National Community Reinvestment Coalition’s John Taylor says that it’s silly to blame poor people for bursting the nation’s housing bubble.

Taylor points out that the housing crisis affected everyone, not just the poor and minorities:

SOT (:07) “You’d be surprised at the whiteness of these people. This was not just about minority communities.”

The Federal Reserve’s response to the crisis involved authorizing the Treasury to print large amounts of new money and lowering the interest rate even further.

The Fed also stood behind former President Bush’s Troubled Asset Relief Program, the national plan to bail out banks deemed by the Fed to be “too important to fail.”

Last week Citigroup returned the remainder of unused TARP funding along with its loaned federal monies, making it the last Wall Street bank to exit the program.

Some, though, are still wary of a society that makes liberal use of credit and bailout money.

Stamm Mortgage Management founder Mark Stamm says that he fears a future where contracts and loan obligations are meaningless.

He says that a bailout mentality will cripple the American economic apparatus in the end, perhaps irrecoverably:

SOT (:12) “That’s going to be the biggest bad thing that happens as a result of this. credit cards? You don’t really need to pay ‘em. Mortgages? You don’t really need to pay ‘em.”

Regardless of whether the Community Reinvestment Act, the Federal Reserve, both, or neither was at fault in last year’s financial fiasco, both sides agree that public regulators and private banking firms must be more transparent in their mortgage dealings.

A bill introduced by Texas representative Ron Paul that would audit the Federal Reserve is currently going through a committee and has 317 cosponsors.

Paul’s Federal Reserve Transparency Act of 2009 would allow Congress and the American public to see, for the first time in history, the day-to-day decisions on the Fed’s books.

At this time no efforts are being made to repeal or change the Community Reinvestment Act.

Evan Banks, [news organization here].