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Review of Infiltrated by Jay W. Richards (McGraw Hill Education, 2013) 299 pages; $25.00.

Six years have passed since the meltdown of markets in 2008. Like many things "we all know," the putative reasons for this meltdown have now passed into the national consciousness: greedy bankers, deregulation, and an unregulated market for derivatives, credit default swaps, and other complex financial instruments. Jay Richards' Infiltrated, released in the summer of 2013, is a very handy volume to give to people who are open to hearing an alternative explanation of the crisis.

That it needs to be put in the hands of those open to its message must be said. The dramatic dust jacket and the title are both a little too Ann-Coulter-like for giving to people not already inclined to its message. But Richards, a former Acton staffer and current senior fellow at the Discovery Institute, has penned a book that will help those who read it explain how the accepted narrative is mistaken.

Richards assigns blame for the meltdown and, by extension, for the years of economic sluggishness that have followed to, as the subtitle has it, "the insiders and activists who are exploiting the financial crisis to control our lives and fortunes." They have "infiltrated" the halls of government and even helped expand its unaccountable bureaucracy not in order to eliminate competition from the various markets in which they work (though this seems to happen anyway), but in order to "hand over the consumer finance system in America to noble overseers like themselves." This happened in the case of the mortgage loan industry and continues to happen in other sectors now, especially the one dealing with small-dollar loans ("payday loans" in the common, though imprecise, jargon). The root cause of this crisis was not simple greed but instead an unfortunate mix of high ideals and bad economics that led to faulty policy.

But what about deregulation and the exotic financial stuff? Retailers of the conventional wisdom who are challenged to identify which deregulation it was that caused all this mess will inevitably bring up the repeal of the depression-era Glass- Steagall Act. Richards observes that the Gramm-Leach-Bliley Act of 1999, signed into law by President Clinton, only repealed parts of the former law, allowing, for instance, financial firms to diversify and commercial banks to affiliate with investment banks. But this deregulation, if it had any effect on the crisis, says Richards, "almost surely made the crisis less severe. If all of Glass-Steagall had been in place in 2008, JPMorgan Chase (a commercial bank) could not have bought Bear Stearns (an investment bank), and Bank of America could not have bought Merrill Lynch—purchases that helped to slow the snowball of panic."

The same goes with the exotic financial instruments like the demonized credit default swaps (CDSs), which are really insurance against the risk of investments. One of the benefits of this book is that, unlike many more technical accounts of the crisis, Richards provides ordinary-language explanations of how these instruments work along with an account of their place in the crisis. There is little evidence that institutions failed because of CDSs. The institutions collapsed because they made a lot of bad investment bets.

Moreover, these bad bets were all centered around the mortgage industry, which brings us to the infiltration. Richards' account of the home mortgage meltdown goes back to the Community Reinvestment Act of 1977, designed to encourage more lending to the poor and minorities. The practical effect was to encourage lenders to weaken their standards. This trend was exacerbated by the 1992 Federal Housing Enterprises Financial Safety and Soundness Act, originally proposed as a way to provide sensible rules for mortgage loans, but turned into a quota system mandating a certain percentage of loans to low- and moderate-income families for Fannie Mae and Freddie Mac, the two governmentsponsored entities in the mortgage industry. Other government initiatives from players like HUD (Department of Housing and Urban Development) as well as activism from groups like ACORN were able to pressure lenders into making more subprime loans—"subprime" designating the low credit rating of the borrowers as well as the type of loans given. Since Fannie and Freddie were required to have a certain number of these loans on the books, other lenders were able to off-load them on Fannie and Freddie as well as other secondary market actors. At the time of the crash, there were 27 million of these subprime loans, almost half of all mortgage loans, in the system. The sine qua non for the crash, as Richards alleges, following Peter Wallison of the American Enterprise Institute, was all of this government policy pushing weaker lending standards on the industry. Playing an additional role in the mess was the moral hazard created by promises to Fannie, Freddie, and others that the U. S. Government would serve as a backstop to institutions "too big to fail." In other words, it wasn't free markets that caused this crash; it was markets jammed up by bad incentives, government pressure, and scrambled economic indicators.

The actual accounting for the meltdown itself begins with chapter seven. The first six chapters are an exciting narrative of the many players who were attempting to drive policy before the crash and still attempting to drive it afterward. Richards focuses on Herb and Marion Sandler of Golden West Financial/World Savings in California and Martin Eakes of Self-Help Loans in North Carolina. Both did business and influenced policy under the aegis of helping the poor. (I would have preferred the account of the crash come first, then an account of how these background players were involved, but the ordering does provide something of the flavor of a whodunit.)

Both the Sandlers and Eakes were players in the field of home-loans. The Sandlers were pioneers of adjustable-rate-mortgages (ARMs) issued with little verification of the lender's credit-worthiness, meanwhile demonizing others with similar practices. They sold World Savings at the housing bubble's peak for over $24 billion to Wachovia, which then suffered immediate buyer's remorse. Wachovia was eventually sold to Wells Fargo for pennies on the dollar. North Carolinian Eakes made his name with Self-Help Loans, a credit union that targeted the poor, and with his advocacy work to change the way lenders operated. Eakes pushed laws to limit fees and prepayment penalties in North Carolina, as well as goading the Federal Trade Commission into suing CitiGroup for some of its practices in this regard.

Because of his activism Eakes was noticed by Herb Sandler, who bankrolled Eakes' Center for Responsible Lending (CRL), an advocacy group that, along with many others, helped push large lenders into making more subprime loans with the subtle threat of disrupting merger plans. They were thus a force causing the meltdown. But the CRL lost no esteem since the conventional narrative blamed greedy bankers. They provided advocacy in the wake of the meltdown in favor of the new Consumer Financial Protection Bureau (CFPB) and the Dodd–Frank law.

Government Bail Out

Richards summarizes why Dodd-Frank exacerbates "too big to fail" by designating an entire category of such institutions, making likely the disappearance of small banks and a repeat of bad investments by big ones. The result is a financial system in which survival is predicated on government connections. The CFPB's authority is outside of Congressional funding or oversight, and it exercises a power to issue cease-and-desist orders to businesses because of anything it designates as "abusive" behavior.

In the end, Richards argues that real ideological fervor is to blame for our current situation, not greedy economic masterminds. People who want to make things better will make them worse without sound economic understanding. The current drive by Eakes and those like-minded is to label all payday lenders as usurious and force them out of most states, despite abundant evidence that such lending is a boon to the poor. Like the high-minded attempts to help the poor get houses, this new drive to save them from "abusive" practices has consequences that will only be seen in the long-run. And those consequences, like those of the push to help the poor get home loans even when not feasible, will probably not be pretty.

David Paul Deavel is associate editor of Logos: A Journal of Catholic Thought and Culture and contributing editor for Gilbert Magazine.


David P. Deavel is editor of Logos: A Journal of Catholic Thought and Culture and a visiting professor at the University of St. Thomas. He is the 2013 winner of the Novak Prize.