The financial crisis, in a nutshell

posted at 11:38 am on March 17, 2009 by Ed Morrissey

James Pethokoukis provides us a crystal-clear example of the reason for the economic crisis — and how our political leaders still haven’t learned from it.  He notes one small bank that has managed to weather the storm by lending carefully and within its means.  Boston Bizjournal reports that East Bridgewater Savings has gotten federal attention for its fiscal responsibility, but not in the way you’d think:

Bad or delinquent loans? Zero. Foreclosures? None. Money set aside in 2008 for anticipated loan losses? Nothing. …  The bank even squeaked out a profit of $87,000. And its Tier 1 risk-based capital ratio was 31.6 percent, or more than three times higher than many community banks in Massachusetts. “We’re paranoid about credit quality,” [Joseph] Petrucelli said. The 62-year-old chief executive has run the bank since 1992.

That makes Petrucelli a man to emulate, right?  After all, with all the outrage over AIG’s performance, shouldn’t we cheer someone who knows how to correctly assess risk and keep his lending institution in the black?  Only if you don’t work for the federal government (emphasis mine):

The FDIC’s negative review of East Bridgewater Savings Bank’s loan volume is an anomaly in today’s current banking scene as lenders reel from their role in offering too many cruddy mortgage products to borrowers with weak credit.

Still, the FDIC slapped East Bridgewater Savings with a rare “needs to improve” rating after evaluating the bank under the Community Reinvestment Act.

Let’s get this straight.  We bail out the people who made all sorts of bad loans, and we punish the people who didn’t?  How’s that for accountability?

In all seriousness, the FDIC gave EBS a poor rating because it didn’t advertise its rates well enough.  It doesn’t have a website, which is apparently a sin for FDIC-insured lenders.  The FDIC said that EBS didn’t have any “financial or legal impediments” to widening its lending, a remarkable statement considering the taxpayer monies getting thrown at companies that did widen their lending practices and wound up broke as a result.

Pethokoukis uses this example to remind us how the CRA distorted lending markets and led to the housing bubble that devastated the economy:

How many East Bridgewaters are out there that knuckled under to the pressure and started handing out mortgages to whomever? I am not saying that CRA is the only factor here. There is plenty of blame to go around, regulators, Alan Greenspan, derivatives desks on Wall Street.  But to let CRA and its enablers off the hook is ridiculous.

How many, indeed?  We are going through all of this bailout nonsense and economic upheaval, and the federal government is busily setting us up for the next crash.

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There is simply no end to Democratic stupidity.

drjohn on March 17, 2009 at 2:01 PM

Interesting story. Thanks. I usually discount the “CRA started all of the trouble” stories. That’s an exaggeration.

Derivative formulas about spreading the risk that nobody can understand is at the root of the problem. It was math whizzes, sort of like the boomers.

So bright that their brains fell out of their head.

But this is another story about the excessive pressure of race fairness stuff on us.

I am waiting for a follow-up to the notion that mortgage bankers really did slot AA borrowers into more sub-prime loans, even though the credit portfolio was the same.

When I read that, the only thing I could think of was that they sought out those fly-by-night mortgage brokers. My neighbor was one. Good gravy, the woman couldn’t balance her checkbook….but she was a mortgage broker for Countrywide, trying to talk everyone into a “deal.”

She should know. She got her own kid into a house well beyond her means.

They are all living together now in a cheap apartment.

AnninCA on March 17, 2009 at 2:07 PM

And to make matters 10 times worse, FHA fell right in line and loosened up their lending guidelines to point where making loans on commercial properties started like wildfire.
Knucklehead on March 17, 2009 at 1:49 PM

I was on the flip-side of the real estate lending fiasco. My business used to own our own building, and the banks threw money at us. But when we moved into rental property, banks treated us like lepers. We owned a million dollars worth of equipment and had a two-million-dollar cash flow, but the next time we tried to expand, we literally couldn’t get a one-penny line of credit!

All the non-real estate credit has been dried up for years. Not just private homeowners, but many businesses that had no business investing in real estate have been pushed into it. Maybe it will turn out we were the smart ones, but with monkeys running the Fed, who knows?

This train wreck wasn’t just slow-moving; it was downright glacial. Anybody with so much as one college economics course could see this coming fifteen years ago.

logis on March 17, 2009 at 2:13 PM

The ultimate result of shielding men from the effects of folly is to fill the world with fools.
— Herbert Spencer, English Philosopher (1820-1903)

Christian Conservative on March 17, 2009 at 2:23 PM

Yes i found out my local bank also was very tight
not this tight but pretty close..
and they didnt go under like
Washington mutual which LOST 7 BILLION dollars
on loans in california to ohhh
\UNdocumented PEOPLE
FAKE SSN (i know i saw one 000-00-0000) personally
the guy cut it out of the magazine and actually presented it
and guess what?

the lady HAD to take it due to LAW..

SO i dont care now what the feds say..
I dont care about communist err community re-investment
read you will loan money to poor blacks and hispanics even

This again was pushed by the DEMOCRATS and litteraly soaked
the entire financial system in gasoline
and then Barney frank and Dodd threw a match on it..

and what did you expect (ICE CREAM)?
Talk about global warming the FIRE these BUFFONS CAUSED was so bad it RAISED the temperature of Venus..
by 100 degrees..


so disreguard everything the feds say and do what is right
and you will be just fine..
and if they sue you?
move to mexico..

hell obama and pelozi would probably send you a check.

jcila on March 17, 2009 at 5:21 PM

Good news today, Americans are now eligible for asylum in other countries.

workingforpigs on March 17, 2009 at 5:22 PM

There is no next crash, Ed. It’s the next leg down of the current conflagration. Enjoy the bear rally, just don’t get eaten.

rhodeymark on March 17, 2009 at 6:25 PM



so disreguard everything the feds say…


jcila on March 17, 2009 at 5:21 PM

Irony this severe should be physically painful.

VekTor on March 17, 2009 at 7:02 PM

. Thanks. I usually discount the “CRA started all of the trouble” stories. That’s an exaggeration.

AnninCA on March 17, 2009 at 2:07 PM

You’re a fool

VinceP1974 on March 17, 2009 at 7:45 PM

Back on topic:
From Drudge Report Yesterday: Alaska banks are in much better shape than most other states.
Go Sarah!!!

mad scientist on March 17, 2009 at 10:58 PM

Anybody with so much as one college economics course could see this coming fifteen years ago.
logis on March 17, 2009 at 2:13 PM

That is the problem. The , Keynesian or Marxist professors destroyed the common sense of the students, and taught them that this nonsense works.

darktood on March 18, 2009 at 7:32 AM

The , Keynesian or Marxist professors destroyed the common sense of the students, and taught them that this nonsense works.

I disagree about Keynesian professors. If they were true to Keynesian theories then they would not be teaching what has happened post 1970s.

When we hit stagflation Keynesian economics was not able to fix the problem. Keynes did not advocate the massive spending spree that we have seen in the USA, Europe, GB and Australia.

His theory was a lot more limited than the excesses that we are seeing now.

Keynes was not a Marxist, but he did state that his theory would work best in a communist society. However, I have not seen evidence that his theory was ever put into practice.

It would be a good idea to study how GB came out of the Great Depression to see Keynsian economics at work.

What we see now though is not from Keynes, not sure about Milton Friedman, since he had other ideas.

If we had an economics guru of the stature of Keynes and Friedman alive today, maybe somebody might be able to analyze the mess and come up with some ideas on how to fix it.

Marxism is not the answer to the problem, because Marxism as practiced by ACORN and Obama is at the root of the present problems.

Once you start talking CRA and talk about the amendments and the loosening of regulations then you have to start looking at the involvement of Barack Obama at that time – he lobbied Washington to allow those loans to be packaged on behalf of ACORN…

The buck stops at Barack Obama the worst President in our lifetime.

maggieo on March 19, 2009 at 3:47 AM