FRONT PAGE CONTRIBUTOR
You Know What We Needed? More, Cheaper Subprime Loans! And Maybe Cheaper Hookers, Too.
Why Eliot Spitzer Should Not Come Back
So, Ezra Klein wants Eliot Spitzer back in public life, and argues that New Yorkers should take him back just like his wife did, and presumably for the same reasons. This is part of Spitzer’s rehab tour (more here and here). But Klein has picked the wrong man, and for the wrong reasons.
First of all, Spitzer should never be entrusted with any sort of executive authority ever again. The reasons for this are too numerous to recount here, but let’s start with the obvious: the man held the State’s top two law enforcement positions (Attorney General and Governor) while pursuing a lengthy and illegal prostitution habit, which he surrendered (so far as we know) only when exposed by a federal investigation. Yes, some politicians have survived hookers and other sex-and-crime scandals before: Barney Frank is still in Congress two decades after paying for an affair with a prostitute who operated a brothel out of Frank’s apartment; David Vitter is running for re-election in the Senate after being exposed as a former client of the DC Madam; Gerry Studds kept a commitee chairmanship in the House after an affair with an underage Congressional page; Ted Kennedy is still in the Senate four decades after leaving a woman to drown in his car, an event that in a just world would have resulted in a charge of second-degree murder. But bad as our tolerance for such scandals in legislators may be, they are another thing entirely when you are talking about a man who was charged not only with casting votes and writing laws but with taking care that the laws be faithfully, fairly and uniformly enforced while he was creeping around choking hookers.
It should also not be forgotten that fair and reasonable law enforcement was never Spitzer’s thing. Before the hooker scandal broke, he was already mired in investigations over improper use of state troopers to dig up dirt on political foes. He pursued a thuggish investigation designed to intimidate crisis pregnancy centers while giving a pass to abortion clinics. He forced out the successful management of AIG over charges that seem terribly penny-ante compared to what happened afterwards, and pursued a petty and ultimately unsuccessful vendetta against former NYSE chairman Dick Grasso. He tried to issue drivers’ licenses to illegal aliens, and while he was going after New York’s leading industries, his parole board dramatically increased the number of violent felons it let back on the streets; Spitzer never had much interest in violent crime. His signature move was applying vague laws to conduct they’d never been extended to; over and over again, he prosecuted things people had done that they’d never thought illegal. His targets, when they fought him in court, often won, a reflection of the weakness of his cases on the merits; Spitzer’s MO depended on suing businesses who couldn’t afford the consequences of an ongoing government campaign against them and had to settle rather than fight. Oh, and let’s also not forget, as we watch New York suffer under the bumbling regime of David Paterson (who even Klein admits is a “disaster”), that Spitzer was the guy who picked Paterson (already known for such lunacy as his ‘shoot to wound’ bill) to take over in case Spitzer had to resign, at the same time that Spitzer was engaging in the pattern of criminal activity that forced him to do just that.
All that aside, let’s look at the Spitzer article from 2004 that has Klein swooning about “pretty prescient stuff”:
Unfortunately, our belief in the importance of equal opportunity and nondiscrimination is too often forgotten when it comes to the debate over whether and how to police the market for home mortgages. In poor and working-class communities across the nation, predatory mortgage lending has become a new scourge. Predatory lending is the practice of imposing inflated interest rates, fees, charges, and other onerous terms on home mortgage loans — not because the imperatives of the market require them, but because the lender has found a way to get away with them. These loans (which are often sold as refinance or home improvement mechanisms) are foisted on borrowers who have no realistic ability to repay them and who face the loss of their hard-won home equity when the all-but-inevitable default and foreclosure occurs. When lenders systematically target certain low-income communities for loans of this sort, as they often do, the result is more insidious. Costs are imposed and burdens inflicted in a manner and to a degree that is discriminatory by race.
On the surface, predatory lenders are doing nothing more than seizing a “market opportunity” for refinancing or home-improvement loans in lower-income communities. To be sure, such communities desperately need credit. And it stands to reason that the prices and terms will be less favorable to borrowers whose financial circumstances are troubled or limited. In this sense, predatory loans are the natural outcome of a competitive market.[...]
[But] it is difficult to imagine a less rational, less efficient economic practice than lending of this sort. At the micro-level, it results in a gross misallocation of costs– imposing higher costs than the market requires on those least able to bear them. At the macro-level, it denies lower-cost capital to whole classes of persons who would otherwise qualify for it and to neighborhoods whose economic vitality depends on it.
In these circumstances, government must step in to curb predatory lending and encourage the flow of fairly priced capital to sectors where it is needed and will be well-used.
Leave aside Spitzer saying that the problem with the market is that it charges more than the market requires, which is nonsense by definition in the absence of a cartel (nobody claims that the chaotic mortgage market was a cartel at the retail level; the only place where the market narrowed to a few players was at the GSE level). The critical point here is that Spitzer never argued that the borrowers he discussed should not be given loans at all; to the contrary, his reference to “lower-cost capital” makes clear that he felt that the problem was that lenders were pricing loans too high. But if lenders had made the same loans at lower rates, they’d have been in even worse shape than they are now, with less return on their investments to cover the same default rates. Spitzer’s simplistic thinking seems to be that the only reason why subprime borrowers would end up defaulting was because they were paying too much in fees – it never occurred to him that the problem was underpriced credit for overpriced real estate investments by people with insufficient credit, whether they be people who should never have been given a mortgage to higher-end borrowers who were given one too big for their means. In short, Spitzer got the problem precisely backward – and worse yet, Ezra Klein, writing with the benefit of hindsight, still thinks this is profound.