Regulation is the disease not the cure 8

 Neal Boortz confirms that the economic crisis was caused by socialist politicians, like Barack Obama, not by an ‘unregulated’ free market.

Political correctness won the day. Washington made it clear to banks and other lending institutions that if they did not do something .. and fast .. to bring more minorities and low-income Americans into the world of home ownership there would be a heavy price to pay. Congress set up processes (Research the Community Redevelopment Act) whereby community activist groups and organizers could effectively stop a bank’s efforts to grow if that bank didn’t make loans to unqualified borrowers. Enter, stage left, the “subprime” mortgage. These lenders knew that a very high percentage of these loans would turn to garbage – but it was a price that had to be paid if the bank was to expand and grow. We should note that among the community groups browbeating banks into making these bad loans was an outfit called ACORN. There is one certain presidential candidate that did a lot of community organizing for ACORN. I won’t mention his name so as to avoid politicizing this column.

These garbage loans to unqualified borrowers were then bundled up and sold. The expectation was that the loans would be eventually paid off when rising home values led some borrowers to access their equity through re-financing and others to sell and move on up the ladder. Oops.

Right now this crisis is being sold to the American public by the left as evidence the failure of the free market and capitalism. Not so. What we’re seeing is the inevitable result of political interference in free market economics. Acme bank didn’t want to loan money to Joe Homebuyer because Joe had a spotty job history, owed too much money on his credit cards, and wasn’t all that good at making payments on time. The politicians told Acme Bank to figure out a way to make that loan, because, after all, Joe is a bona-fide minority-American, or forget about opening that new branch office on the Southside. The loan was made under politicial pressure; the loan, with millions like it, failed – and now we are left to enjoy today’s headlines.

So … why aren’t you reading the whole story in the mainstream media? Come on, are you kidding me? Do you really expect the media to blame this mess on deadbeat borrowers and political interference in the free market when it is so easy to put the blame on greedy lenders and evil capitalists? Remember … there’s an election going on. One candidate is decidedly anti-capitalist. Do the math.

Posted under Commentary by Jillian Becker on Friday, September 19, 2008

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This post has 8 comments.

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  • Jillian Becker

    Dan W. – Thank you for all your comments. Re the Washington Post article: Greenspan should be added to our list of guilty men. Even if all this writer says is accurate, the guilt of the ideologists on the left who wanted those who cannot afford a house to have one remains, I think. Best of all is the the cartoonist’s view. I’m going to post it on our front page today.

  • Dan W.

    I know…I read it, Jillian. I still can’t find anything empirical in the editorial to support the claim that the CRA caused this (and I’ve found plenty of empirical evidence to be suspect of such a claim). They don’t even manage to prove a correlation between the CRA and the crisis, let alone primary causation. And, given what I’ve posted about how the CRA did not even apply to the majority of the financial institutions (or borrowers) involved in this crisis, I can see why. The argument does not hold.

    Also, why haven’t my 2 most recent comments been posted? I thought they included some pertinent links regarding this crisis (plus one funny yet still educational cartoon). Thanks,

    Dan

  • Jillian Becker

    Dan W – by ‘today’s IBD Editorials’ I mean Wednesday September 24.

  • Dan W.

    Oh, and just for poops and giggles, here’s a little piece that someone mocked up on google docs. The sad thing is, this cartoonist has a better grasp of the crisis than most of the politicians trying to “fix” this thing:

    http://docs.google.com/TeamPresent?docid=ddp4zq7n_0cdjsr4fn&skipauth=true&pli=1

  • Dan W.

    Jillian – I keep reading these types of editorials but not one of them provides me with any good empirical evidence as to how CRA loans caused this crisis. Even if all the CRA loans defaulted, it would only make a drop in the proverbial bucket in terms of the amount of money lost in this crisis (go to http://www.ffiec.gov/cra/default.htm to do some detail hunting on CRA loans). And the idea that the government “forced” banks to make bad loans is simply laughable…especially given, as I stated above, that a) the majority of institutions involved in making these loans were not under the guidelines of the CRA (e.g. they were not traditional banks and thrifts) and b) the majority of people defaulting on their loans are middle and upper-middle class borrowers (google “Merced, CA” and look at the types of homes that are being foreclosed…these are $500,00 homes we’re talking about here!).

    The problem here is much larger and more complicated than one bill signed 30 years ago, and the majority of people really trying to understand this situation know it. Despite the complexities, the bottom line is that we have an economy that is built upon and running on fake assets – i.e. credit. Again, the defaulting of home loans isn’t even the biggest source of all the money lost in the market. It is actually from investors on Wall Street bundling these loans into other financial products and then selling them. Investors were taking credit risks based on other peoples’ credit risks, so when the bottom falls out of the initial source of credit, well, the whole pyramid comes crashing down. That is essentially what has happened here. The question of “why?”, of course, is complex. There are multiple, interacting causes for this crisis (again, placing the blame on one bill written 30 years ago grossly simplifies the complexity of the matter…even if it is convenient to do so). But, again, despite the complexities, this is what happens when contemporary capitalism runs on credit as opposed to actual, concrete assets. Indeed, when giant, historic, multi-billion dollar corporations like AIG and Bear Stearns go belly-up in a matter of hours, that’s a clue that their actual assets aren’t worth very much.

    Here’s a nice analysis of the situation I found from someone who actually works within the banking system. He watched this thing go down from the inside:

    http://www.washingtonpost.com/wp-dyn/content/article/2008/09/19/AR2008091902808.html

    Not a complete analysis, of course (there is still much to be determined in the coming months and years), but it is a much more detailed analysis of the situation that I have seen elsewhere. Best,

    Dan

  • Jillian Becker

    Dan W – You are right that Jimmy Carter began it – in 1977. He sure did, and he sure got it wrong. I urge you to read in today’s IBD Editorials the article titled Good Intentions Paved The Road To Subprime-Stoked Meltdown. It’s all about this.

  • Dan W.

    Neil Boortz didn’t “confirm” anything. The Community Reinvestment Act (CRA) that Boortz and these other conservative talking heads keep referring to was signed into law by Jimmy Carter in 1977…let me state that again – 1977. So they are basically making the argument that this economic crisis is the result of a single bill passed over 30 years ago. Wow, it must have been some kind of super cool “time-released” market failure bill.

    I’d like to see Boortz and others who keep making this argument (like Limbaugh) actually make an empirical case as to how, exactly, the CRA caused this mess. Especially since the CRA only applies to banks and thrifts and the huge majority of the subprime loans over the last 8 years DID NOT come from banks and thrifts. 75-80% of these ridiculous loans came from financial institutions beyond the scope of CRA. Furthermore, the bulk of the people to whom these loans were directed and who defaulted on these loans were MIDDLE CLASS and above.

    So…Boortz and you are arguing that this financial crisis is the result of 1) an anti-discrimination bill signed into law 30 years ago that 2) only applies to 20-25% of the financial institutions involved in this debacle and 3) even a smaller percentage of the actual borrowers involved. That’s some story you got there…

  • quantum_flux

    I sure hope this isn’t what McCain means by reaching across party lines 🙁