The Campaign Spot

Obama: Home-Loan Fine Print Led Us Into Recession

President Obama, yesterday, when introducing his nomination of Richard Cordray as director of the Consumer Financial Protection Bureau:

That’s why it’s so important that we tackle the problems that led us into this recession in the first place. One of the biggest problems was that the tables were tilted against ordinary people in the financial system. When you get a home loan, it came with pages of fine print. When you got a credit card, it was as if the contract was written in another language. These kinds of things opened the door to unscrupulous practices — loans with hidden fees and terms that meant your rate could double overnight. It led to people getting mortgages they couldn’t afford, and it put honest businesses at a disadvantage. And it encouraged dangerously risky behavior on Wall Street, which dragged the economy into the mess that we’re still trying to clean up.

First, I have a hard time envisioning a world where a purchase as large as as a home doesn’t involve pages of fine print. When we see pages and pages of legal-ese, we know the sue-first-and-ask-questions-later trial lawyers have trod here before us. Perhaps the president could discuss that with his political allies.

As for the notion that “one of the biggest problems was that the tables were tilted against ordinary people in the financial system,” that’s a curious way to describe a time when loans were easier than ever to get. As Ben Bernanke laid out, the problem was not that “ordinary people” had the tables tilted against them but that credit was too cheap and loans were way too easy to obtain:

In the past 10 to 15 years, the United States and some other industrial countries have been the recipients of a great deal of foreign saving . . . Saving inflows from abroad can be beneficial if the country that receives those inflows invests them well. Unfortunately, that was not always the case in the United States and some other countries. Financial institutions reacted to the surplus of available funds by competing aggressively for borrowers, and, in the years leading up to the crisis, credit to both households and businesses became relatively cheap and easy to obtain. One important consequence was a housing boom in the United States, a boom that was fueled in large part by a rapid expansion of mortgage lending. Unfortunately, much of this lending was poorly done, involving, for example, little or no down payment by the borrower or insufficient consideration by the lender of the borrower’s ability to make the monthly payments. Lenders may have become careless because they, like many people at the time, expected that house prices would continue to rise — thereby allowing borrowers to build up equity in their homes — and that credit would remain easily available, so that borrowers would be able to refinance if necessary. Regulators did not do enough to prevent poor lending, in part because many of the worst loans were made by firms subject to little or no federal regulation.

In Obama’s mind, all economic problems stem from powerful forces conspiring against “the people,” never from poor decision-making on the part of “the people” themselves. Notice how the loans “led to people getting mortgages they couldn’t afford,” not “people took out loans they couldn’t afford.”

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