The U.S. financial markets meltdown should be instructive to Gloria Macapagal Arroyo and others aspiring to the Philippine presidency. Adherence to democratic and free market principles are negated by corruption.
The best example of a pro-poor program is the Community Reinvestment Act (CRA) requiring banks and S&L associations to offer credit throughout their entire market area and prohibits them from targeting only wealthier neighborhoods with their services, a practice known as “redlining.” The purpose of the CRA is to provide credit, including home ownership opportunities to under-served populations and commercial loans to small businesses.
The CRA has been run aground by corrupt practices of top management of the two government sponsored institutions (GSEs) created to implement the law. They are the Federal National Mortgage Association, commonly known as Fannie Mae, enables mortgage companies, savings and loans, commercial banks, credit unions, and state and local housing finance agencies to lend to home buyers; and Federal Home Loan Mortgage Corporation, commonly known as Freddie Mac, buys mortgages on the secondary market and sells them as mortgage-backed securities on the open market.
According to Wikipedia, the CRA was passed into law in 1977 during the Carter administration as a result of national grassroots pressure for affordable housing, and despite considerable opposition from the mainstream banking community. The CRA mandates that each banking institution be evaluated to determine if it has met the credit needs of its entire community. That record is taken into account when the federal government considers an institution’s application for deposit facilities, including mergers and acquisitions. The CRA is enforced by the financial regulators. However, until 1995 the Act was laxly enforced and banks only were required to advertise in local minority newspapers or sit on the boards of local community groups.
In 1993 President Clinton ordered new regulations for the CRA which would increase access to mortgage credit for inner city and distressed rural communities. The new rules went into effect on Jan. 31, 1995 that opened the floodgates to people to acquire homes they couldn’t afford. This came about during a time when many banks were merging and needed to pass the CRA review process to do so, substantially increased the number and aggregate amount of loans to low- and moderate-income borrowers for home loans, some of which were “risky mortgages.” The number of CRA mortgage loans increased by 39 percent between 1993 and 1998, while other loans increased by only 17 percent.
Related rule changes gave Fannie and Freddie extraordinary leverage, allowing them to hold just 2.5% of capital to back their investments, vs. 10% for banks. By 2007, Fannie and Freddie owned or guaranteed nearly half of the $12 trillion U.S. mortgage market. Due to massive financial losses, on September 7, 2008 the Federal Housing Finance Agency (FHFA) put Fannie Mae and Freddie Mac under FHFA conservatorship.
In 2003, the Bush administration recommended what the New York Times called “the most significant regulatory overhaul in the housing finance industry since the S&L crisis a decade ago.” The proposal was to move governmental supervision of Fannie Mae and Freddie Mac guaranteeing subprime loans under a new agency created within the Department of the Treasury.
However, the regulatory framework didn’t materialize because Democratic members of Congress opposed it. Sen. Chris Dodd and Rep. Barney Frank put up the principal opposition and the latter said, “Fannie Mae and Freddie Mac are not facing any kind of financial crisis, the more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing.”
As usually happens an economic problem like the meltdown is long in coming and not felt until it suddenly manifests itself like an earthquake. This is instructive to Arroyo.
Previously, I wrote she was lying by pretending she cancelled her U.S. trip this month because of the worsening Mindanao security situation for the botched Memorandum of Agreement on Ancestral Domain (MOA-AD) with the MILF. The truth is Arroyo couldn’t obtain a normal visa and decided to proceed with the trip anyway despite being treated like Iran President Mahmoud Ahmadinejad who could stay only within a 25-mile radius from the United Nations headquarters. She couldn’t even honor the invitation to be keynote speaker of NaFFAA’s annual conference in Seattle during the trip.
Arroyo isn’t only a big liar but also a great pretender. Recall she didn’t cancel her U.S. trip in June despite typhoon “Frank” and didn’t come home after the M/V Princess of the Stars sank when over 800 crewmembers and passengers perished.
Arroyo knows her administration is now like a plane whose engines have conked out. She, her family and close associates are boxed in that there’s no way to prevent the end like extending her illegitimate presidency. She suffers agonizing thoughts of what would be their fate with the fast approaching end of her term in just over a year.
The Philippine economy has been going through a meltdown caused by an endless series of politically motivated policy decisions which have debilitated it that Arroyo and her drumbeaters cover up with lies and band-aid solutions that turn out to be medicines worse than the disease.
The longer Arroyo stays in office exacerbates the problems until the U.S. financial meltdown is replicated. Surely, Arroyo and her team have neither the mental capability beyond covering up mistakes nor resources such as the billions of dollars available to the U.S. even if less than that is needed to address Philippine problems.
A practical solution is for Arroyo to step down sooner rather than later for fresh approaches to be found to address the fast developing crisis. It’d be an option for Arroyo to also make a deal with Vice President Noli de Castro and be pardoned of the charges she’d surely face once her presidential immunity ends.
(fcwenceslao@hotmail.com)
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