Data prove untrue charges that push for affordable housing caused crisis

[VietCowboy]

another article on the economic stuff

http://www.miamiherald.com/news/politics/AP/story/722379.html

Data prove untrue charges that push for affordable housing caused crisis


By DAVID GOLDSTEIN AND KEVIN G. HALL

McClatchy Newspapers

WASHINGTON -- As the economy worsens and Election Day approaches, a conservative campaign that blames the global financial crisis on a government push to make housing more affordable to lower-class Americans has taken off on talk radio and e-mail.
Commentators say that's what triggered the stock market meltdown and the freeze on credit. They've specifically targeted the mortgage finance giants Fannie Mae and Freddie Mac, which the federal government seized on Sept. 6, contending that lending to poor and minority Americans caused Fannie's and Freddie's financial problems.
Federal housing data reveal that the charges aren't true, and that the private sector, not the government or government-backed companies, was behind the soaring subprime lending at the core of the crisis.
Subprime lending offered high-cost loans to the weakest borrowers during the housing boom that lasted from 2001 to 2007. Subprime lending was at its height from 2004 to 2006.
Federal Reserve Board data show that:
-More than 84 percent of the subprime mortgages in 2006 were issued by private lending institutions.
-Private firms made nearly 83 percent of the subprime loans to low- and moderate-income borrowers that year.
-Only one of the top 25 subprime lenders in 2006 was directly subject to the housing law that's being lambasted by conservative critics.
The "turmoil in financial markets clearly was triggered by a dramatic weakening of underwriting standards for U.S. subprime mortgages, beginning in late 2004 and extending into 2007," the President's Working Group on Financial Markets reported Friday.
Conservative critics claim that the Clinton administration pushed Fannie Mae and Freddie Mac to make home ownership more available to riskier borrowers with little concern for their ability to pay the mortgages.
"I don't remember a clarion call that said Fannie and Freddie are a disaster. Loaning to minorities and risky folks is a disaster," said Neil Cavuto of Fox News.
Fannie, the Federal National Mortgage Association, and Freddie, the Federal Home Loan Mortgage Corp., don't lend money, to minorities or anyone else, however. They purchase loans from the private lenders who actually underwrite the loans.
It's a process called securitization, and by passing on the loans, banks have more capital on hand so they can lend even more.
This much is true. In an effort to promote affordable home ownership for minorities and rural whites, the Department of Housing and Urban Development set targets for Fannie and Freddie in 1992 to purchase low-income loans for sale into the secondary market that eventually reached this number: 52 percent of loans given to low-to moderate-income families.
To be sure, encouraging lower-income Americans to become homeowners gave unsophisticated borrowers and unscrupulous lenders and mortgage brokers more chances to turn dreams of homeownership in nightmares.
But these loans, and those to low- and moderate-income families represent a small portion of overall lending. And at the height of the housing boom in 2005 and 2006, Republicans and their party's standard bearer, President Bush, didn't criticize any sort of lending, frequently boasting that they were presiding over the highest-ever rates of U.S. homeownership.
Between 2004 and 2006, when subprime lending was exploding, Fannie and Freddie went from holding a high of 48 percent of the subprime loans that were sold into the secondary market to holding about 24 percent, according to data from Inside Mortgage Finance, a specialty publication. One reason is that Fannie and Freddie were subject to tougher standards than many of the unregulated players in the private sector who weakened lending standards, most of whom have gone bankrupt or are now in deep trouble.
During those same explosive three years, private investment banks - not Fannie and Freddie - dominated the mortgage loans that were packaged and sold into the secondary mortgage market. In 2005 and 2006, the private sector securitized almost two thirds of all U.S. mortgages, supplanting Fannie and Freddie, according to a number of specialty publications that track this data.
In 1999, the year many critics charge that the Clinton administration pressured Fannie and Freddie, the private sector sold into the secondary market just 18 percent of all mortgages.
Fueled by low interest rates and cheap credit, home prices between 2001 and 2007 galloped beyond anything ever seen, and that fueled demand for mortgage-backed securities, the technical term for mortgages that are sold to a company, usually an investment bank, which then pools and sells them into the secondary mortgage market.
About 70 percent of all U.S. mortgages are in this secondary mortgage market, according to the Federal Reserve.
Conservative critics also blame the subprime lending mess on the Community Reinvestment Act, a 31-year-old law aimed at freeing credit for underserved neighborhoods.
Congress created the CRA in 1977 to reverse years of redlining and other restrictive banking practices that locked the poor, and especially minorities, out of homeownership and the tax breaks and wealth creation it affords. The CRA requires federally regulated and insured financial institutions to show that they're lending and investing in their communities.
Conservative columnist Charles Krauthammer wrote recently that while the goal of the CRA was admirable, "it led to tremendous pressure on Fannie Mae and Freddie Mac - who in turn pressured banks and other lenders - to extend mortgages to people who were borrowing over their heads. That's called subprime lending. It lies at the root of our current calamity."
Fannie and Freddie, however, didn't pressure lenders to sell them more loans; they struggled to keep pace with their private sector competitors. In fact, their regulator, the Office of Federal Housing Enterprise Oversight, imposed new restrictions in 2006 that led to Fannie and Freddie losing even more market share in the booming subprime market.
What's more, only commercial banks and thrifts must follow CRA rules. The investment banks don't, nor did the now-bankrupt non-bank lenders such as New Century Financial Corp. and Ameriquest that underwrote most of the subprime loans.
These private non-bank lenders enjoyed a regulatory gap, allowing them to be regulated by 50 different state banking supervisors instead of the federal government. And mortgage brokers, who also weren't subject to federal regulation or the CRA, originated most of the subprime loans.
In a speech last March, Janet Yellen, the president of the Federal Reserve Bank of San Francisco, debunked the notion that the push for affordable housing created today's problems.
"Most of the loans made by depository institutions examined under the CRA have not been higher-priced loans," she said. "The CRA has increased the volume of responsible lending to low- and moderate-income households."
In a book on the sub-prime lending collapse published in June 2007, the late Federal Reserve Governor Ed Gramlich wrote that only one-third of all CRA loans had interest rates high enough to be considered sub-prime and that to the pleasant surprise of commercial banks there were low default rates. Banks that participated in CRA lending had found, he wrote, "that this new lending is good business."

[MetalHead]

It sure work didn't it?

[VietCowboy]

http://www.businessweek.com/investing/insights/blog/archives/2008/09/community_reinv.html

Posted by: Aaron Pressman on September 29

Fresh off the false and politicized attack on Fannie Mae and Freddie Mac, today we’re hearing the know-nothings blame the subprime crisis on the Community Reinvestment Act — a 30-year-old law that was actually weakened by the Bush administration just as the worst lending wave began. This is even more ridiculous than blaming Freddie and Fannie.
The Community Reinvestment Act, passed in 1977, requires banks to lend in the low-income neighborhoods where they take deposits. Just the idea that a lending crisis created from 2004 to 2007 was caused by a 1977 law is silly. But it’s even more ridiculous when you consider that most subprime loans were made by firms that aren’t subject to the CRA. University of Michigan law professor Michael Barr testified back in February before the House Committee on Financial Services (http://74.125.45.104/search?q=cache:TcA9Tzx4aqgJ:www.house.gov/apps/list/hearing/financialsvcs_dem/barr021308.pdf+subprime+University+of+Michigan%27s +Michael+Barr&hl=en&ct=clnk&cd=1&gl=us&client=firefox-a) that 50% of subprime loans were made by mortgage service companies not subject comprehensive federal supervision and another 30% were made by affiliates of banks or thrifts which are not subject to routine supervision or examinations. As former Fed Governor Ned Gramlich said in an August, 2007, speech shortly before he passed away: “In the subprime market where we badly need supervision, a majority of loans are made with very little supervision. It is like a city with a murder law, but no cops on the beat.”
Not surprisingly given the higher degree of supervision, loans made under the CRA program were made in a more responsible way than other subprime loans. CRA loans carried lower rates than other subprime loans and were less likely to end up securitized into the mortgage-backed securities that have caused so many losses, according to a recent study by the law firm Traiger & Hinckley (PDF file here (http://www.traigerlaw.com/publications/traiger_hinckley_llp_cra_foreclosure_study_1-7-08.pdf)).
Finally, keep in mind that the Bush administration has been weakening CRA enforcement and the law’s reach since the day it took office. The CRA was at its strongest in the 1990s, under the Clinton administration, a period when subprime loans performed quite well. It was only after the Bush administration cut back on CRA enforcement that problems arose, a timing issue which should stop those blaming the law dead in their tracks. The Federal Reserve, too, did nothing but encourage the wild west of lending in recent years. It wasn’t until the middle of 2007 that the Fed decided it was time to crack down on abusive pratices in the subprime lending market. Oops.
Better targets for blame in government circles might be the 2000 law which ensured that credit default swaps would remain unregulated, the SEC’s puzzling 2004 decision to allow the largest brokerage firms to borrow upwards of 30 times their capital and that same agency’s failure to oversee those brokerage firms in subsequent years as many gorged on subprime debt. (Barry Ritholtz had an excellent and more comprehensive survey of how Washington contributed to the crisis (http://online.barrons.com/article/SB122246742997580395.html) in this week’s Barron’s.)
There’s plenty more good reading on the CRA and the subprime crisis out in the blogosphere. Ellen Seidman, who headed the Office of Thrift Supervision in the late 90s, has written several fact-filled posts about the CRA controversey, including one just last week (http://www.newamerica.net/blog/asset-building/2008/its-still-not-cra-7222). University of Oregon professor and economist Mark Thoma has also defended the CRA on his blog (http://economistsview.typepad.com/economistsview/2008/04/yet-again-it-wa.html). I also learned something from a post back in April (http://www.prospect.org/cs/articles?article=did_liberals_cause_the_subprime_c risis) by Robert Gordon, a senior fellow at the Center for American Progress, which ends with this ditty:


It’s telling that, amid all the recent recriminations, even lenders have not fingered CRA. That’s because CRA didn’t bring about the reckless lending at the heart of the crisis. Just as sub-prime lending was exploding, CRA was losing force and relevance. And the worst offenders, the independent mortgage companies, were never subject to CRA — or any federal regulator. Law didn’t make them lend. The profit motive did. And that is not political correctness. It is correctness.

[MetalHead]

Here is my rebuttal:

http://www.jibjab.com/view/253615

[burmafrd]

As usual they miss the forrest for the trees - whether deliberate or not does not matter. Easy credit was pushed and that was what caused the mess. BOTTOM line. And trying to deny what is so obvious is a joke.
If so many people are facing foreclosures WHY IS IT?
BECAUSE THEY BOUGHT MORE THEN THEY COULD AFFORD.
WHY DID IT HAPPEN?
BECAUSE A LOT OF RULES GOT THROWN OUT THE WINDOW.
HOW DID THAT HAPPEN?
POLITICIANS MADE A LOT OF NOISE. AND PASSED SOME STUPID LAWS.
THEY CREATED THE ATMOSPHERE.

[ScipioCowboy]

There's been a myriad of studies and data collected over this very issue, and there's certainly no consensus over what caused this crisis. But we're relatively certain there wasn't only one cause:

http://www.factcheck.org/elections-2008/who_caused_the_economic_crisis.html

Who Caused the Economic Crisis?
October 1, 2008
MoveOn.org blames McCain advisers. He blames Obama and Democrats in Congress. Both are wrong.
Summary
A MoveOn.org Political Action ad plays the partisan blame game with the economic crisis, charging that John McCain’s friend and former economic adviser Phil Gramm “stripped safeguards that would have protected us.” The claim is bogus. Gramm’s legislation had broad bipartisan support and was signed into law by President Clinton. Moreover, the bill had nothing to do with causing the crisis, and economists – not to mention President Clinton – praise it for having softened the crisis.

A McCain-Palin ad, in turn, blames Democrats for the mess. The ad says that the crisis “didn’t have to happen,” because legislation McCain cosponsored would have tightened regulations on Fannie Mae and Freddie Mac. But, the ad says, Obama "was notably silent" while Democrats killed the bill. That’s oversimplified. Republicans, who controlled the Senate at the time, did not bring the bill forward for a vote. And it’s unclear how much the legislation would have helped, as McCain signed on just two months before the housing bubble popped.

In fact, there’s ample blame to go around. Experts have cited everyone from home buyers to Wall Street, mortgage brokers to Alan Greenspan.
Analysis
As Congress wrestled with a $700 billion rescue for Wall Street's financial crisis, partisans on both sides got busy – pointing fingers. MoveOn.org Political Action on Sept. 25 released a 60-second TV ad called "My Friends’ Mess," blaming Sen. John McCain and Republican allies who supported banking deregulation. The McCain-Palin campaign released its own 30-second TV spot Sept. 30, saying "Obama was notably silent" while Democrats blocked reforms leaving taxpayers "on the hook for billions." Both ads were to run nationally.

And both ads are far wide of the mark.



Blame the Republicans!


The MoveOn.org Political Action ad blames a banking deregulation bill sponsored by former Sen. Phil Gramm, a friend and one-time adviser to McCain's campaign. It claims the bill "stripped safeguards that would have protected us."

That claim is bunk. When we contacted MoveOn.org spokesman Trevor Fitzgibbons to ask just what "safeguards" the ad was talking about, he came up with not one single example. The only support offered for the ad's claim is one line in one newspaper article that reported the bill "is now being blamed" for the crisis, without saying who is doing the blaming or on what grounds.

The bill in question is the Gramm-Leach-Bliley Act (http://banking.senate.gov/conf/), which was passed in 1999 and repealed portions of the Glass-Steagall Act, a piece of legislation from the era of the Great Depression that imposed a number of regulations on financial institutions. It's true that Gramm authored the act, but what became law was a widely accepted bipartisan compromise. The measure passed the House 362 (http://clerk.house.gov/evs/1999/roll570.xml)- 57 (http://javascript%3Cb%3E%3C/b%3E:void%280%29;/*1222708368291*/), with 155 Democrats voting for the bill. The Senate passed the bill by a vote of 90 - 8 (http://www.senate.gov/legislative/LIS/roll_call_lists/roll_call_vote_cfm.cfm?congress=106&session=1&vote=00354). Among the Democrats voting for the bill: Obama's running mate, Joe Biden. The bill was signed into law by President Clinton, a Democrat. If this bill really had "stripped the safeguards that would have protected us," then both parties share the blame, not just "John McCain's friend."

The truth is, however, the Gramm-Leach-Bliley Act had little if anything to do with the current crisis. In fact, economists on both sides of the political spectrum have suggested that the act has probably made the crisis less severe than it might otherwise have been.

Last year the liberal writer Robert Kuttner, in a piece in The American Prospect, argued (http://www.prospect.org/cs/articles?article=the_bubble_economy) that "this old-fashioned panic is a child of deregulation." But even he didn't lay the blame primarily on Gramm-Leach-Bliley. Instead, he described "serial bouts of financial deregulation" going back to the 1970s. And he laid blame on policies of the Federal Reserve Board under Alan Greenspan, saying "the Fed has become the chief enabler of a dangerously speculative economy."

What Gramm-Leach-Bliley did was to allow commercial banks to get into investment banking. Commercial banks are the type that accept deposits and make loans such as mortgages; investment banks accept money for investment into stocks and commodities. In 1998, regulators had allowed Citicorp, a commercial bank, to acquire Traveler's Group, an insurance company that was partly involved in investment banking, to form Citigroup. That was seen as a signal that Glass-Steagall was a dead letter as a practical matter, and Gramm-Leach-Bliley made its repeal formal. But it had little to do with mortgages.

Actually, deregulated banks were not the major culprits in the current debacle. Bank of America, Citigroup, Wells Fargo and J.P. Morgan Chase have weathered the financial crisis in reasonably good shape, while Bear Stearns collapsed and Lehman Brothers has entered bankruptcy, to name but two of the investment banks which had remained independent despite the repeal of Glass-Steagall.

Observers as diverse as former Clinton Treasury official and current Berkeley economist Brad DeLong (http://delong.typepad.com/sdj/2008/09/toward-universa.html) and George Mason University's Tyler Cowen (http://www.marginalrevolution.com/marginalrevolution/2008/09/did-the-gramm-l.html), a libertarian, have praised Gramm-Leach-Bliley has having softened the crisis. The deregulation allowed Bank of America and J.P. Morgan Chase to acquire Merrill Lynch and Bear Stearns. And Goldman Sachs and Morgan Stanley (http://www.nytimes.com/2008/09/22/business/22bank.html?em) have now converted themselves into unified banks to better ride out the storm. That idea is also endorsed by former President Clinton himself, who, in an interview with Maria Bartiromo (http://www.businessweek.com/magazine/content/08_40/b4102000409948.htm) published in the Sept. 24 issue of Business Week, said he had no regrets about signing the repeal of Glass-Steagall:
Bill Clinton (Sept. 24): Indeed, one of the things that has helped stabilize the current situation as much as it has is the purchase of Merrill Lynch by Bank of America, which was much smoother than it would have been if I hadn't signed that bill. ...You know, Phil Gramm and I disagreed on a lot of things, but he can't possibly be wrong about everything. On the Glass-Steagall thing, like I said, if you could demonstrate to me that it was a mistake, I'd be glad to look at the evidence. But I can't blame [the Republicans]. This wasn't something they forced me into.

No, Blame the Democrats!


The McCain-Palin campaign fired back with an ad laying blame on Democrats and Obama. Titled "Rein," it highlights McCain's 2006 attempt to "rein in Fannie and Freddie." The ad accurately quotes the Washington Post as saying "Washington failed to rein in" the two government-sponsored entities, the Federal National Mortgage Association ("Fannie Mae") and the Federal Home Loan Mortgage Corporation ("Freddie Mac"), both of which ran into trouble by underwriting too many risky home mortgages to buyers who have been unable to repay them. The ad then blames Democrats for blocking McCain's reforms. As evidence, it even offers a snippet of an interview in which former President Clinton agrees that "the responsibility that the Democrats have" might lie in resisting his own efforts to "tighten up a little on Fannie Mae and Freddie Mac." We're then told that the crisis "didn't have to happen."

It's true that key Democrats opposed the Federal Housing Enterprise Regulatory Reform Act of 2005 (http://www.govtrack.us/congress/bill.xpd?bill=s109-190), which would have established a single, independent regulatory body with jurisdiction over Fannie and Freddie – a move that the Government Accountability Office had recommended in a 2004 report (http://www.gao.gov/htext/d04269t.html). Current House Banking Committee chairman Rep. Barney Frank of Massachusetts opposed legislation to reorganize oversight (http://online.wsj.com/article/SB122091796187012529.html?mod=googlenews_wsj) in 2000 (when Clinton was still president), 2003 and 2004, saying of the 2000 legislation that concern about Fannie and Freddie was "overblown." Just last summer, Senate Banking Committee chairman Chris Dodd called (http://www.washingtonpost.com/wp-dyn/content/article/2008/09/11/AR2008091102841_2.html) a Bush proposal for an independent agency to regulate the two entities "ill-advised."

But saying that Democrats killed the 2005 bill "while Mr. Obama was notably silent" oversimplifies things considerably. The bill made it out of committee in the Senate but was never brought up for consideration. At that time, Republicans had a majority in the Senate and controlled the agenda. Democrats never got the chance to vote against it or to mount a filibuster to block it.

By the time McCain signed on to the legislation, it was too late to prevent the crisis anyway. McCain added his name on May 25, 2006, when the housing bubble had already nearly peaked. Standard & Poor's Case-Schiller Home Price Index (http://www2.standardandpoors.com/portal/site/sp/en/us/page.topic/indices_csmahp/0,0,0,0,0,0,0,0,0,1,1,0,0,0,0,0.html), which measures residential housing prices in 20 metropolitan regions and then constructs a composite index for the entire United States, shows that housing prices began falling in July 2006, barely two months later.

The Real Deal


So who is to blame? There's plenty of blame to go around, and it doesn't fasten only on one party or even mainly on what Washington did or didn't do. As The Economist magazine noted recently (http://www.economist.com/blogs/democracyinamerica/2008/09/the_bailout_and_the_elite.cfm), the problem is one of "layered irresponsibility ... with hard-working homeowners and billionaire villains each playing a role." Here's a partial list of those alleged to be at fault:

The Federal Reserve (http://www.business.cch.com/bankingfinance/focus/news/Subprime_WP_rev.pdf), which slashed interest rates after the dot-com bubble burst, making credit cheap.
Home buyers (http://knowledge.wharton.upenn.edu/article.cfm?articleid=1824), who took advantage of easy credit to bid up the prices of homes excessively.
Congress (http://www.gao.gov/new.items/d051009sp.pdf), which continues to support a mortgage tax deduction that gives consumers a tax incentive to buy more expensive houses.
Real estate agents (http://knowledge.wharton.upenn.edu/article.cfm?articleid=1824), most of whom work for the sellers rather than the buyers and who earned higher commissions from selling more expensive homes.
The Clinton administration (http://thehill.com/leading-the-news/clinton-rejects-blame-for-financial-crisis-2008-09-25.html), which pushed for less stringent credit and downpayment requirements for working- and middle-class families.
Mortgage brokers (http://www.pbs.org/newshour/bb/business/july-dec08/econtrouble_08-20.html), who offered less-credit-worthy home buyers subprime, adjustable rate loans with low initial payments, but exploding interest rates.
Former Federal Reserve chairman Alan Greenspan (http://www.federalreserve.gov/boarddocs/speeches/2004/20040223/), who in 2004, near the peak of the housing bubble, encouraged Americans to take out adjustable rate mortgages.
Wall Street firms (http://www.pbs.org/newshour/bb/business/july-dec08/econtrouble_08-20.html), who paid too little attention to the quality of the risky loans that they bundled into Mortgage Backed Securities (MBS), and issued bonds using those securities as collateral.
The Bush administration (http://www.iht.com/articles/2008/09/20/business/prexy.php), which failed to provide needed government oversight of the increasingly dicey mortgage-backed securities market.
An obscure accounting rule (http://www.consumeraffairs.com/news04/2008/07/mark_to_market.html) called mark-to-market, which can have the paradoxical result of making assets be worth less on paper than they are in reality during times of panic.
Collective delusion (http://www.business.cch.com/bankingfinance/focus/news/Subprime_WP_rev.pdf), or a belief on the part of all parties that home prices would keep rising forever, no matter how high or how fast they had already gone up. The U.S. economy is enormously complicated. Screwing it up takes a great deal of cooperation. Claiming that a single piece of legislation was responsible for (or could have averted) the crisis is just political grandstanding. We have no advice to offer on how best to solve the financial crisis. But these sorts of partisan caricatures can only make the task more difficult.

–by Joe Miller and Brooks Jackson
Sources
Benston, George J. The Separation of Commercial and Investment Banking: The Glass-Steagall Act Revisited and Reconsidered. Oxford University Press, 1990.

Tabarrok, Alexander. "The Separation of Commercial and Investment Banking: The Morgans vs. The Rockefellers. (http://www.qjae.org/journals/qjae/pdf/qjae1_1_1.pdf)" The Quarterly Journal of Austrian Economics 1:1 (1998), pp. 1 - 18.

Kuttner, Robert. "The Bubble Economy. (http://www.prospect.org/cs/articles?article=the_bubble_economy)" The American Prospect, 24 September 2007.

"The Gramm-Leach-Bliley Act of 1999. (http://banking.senate.gov/conf/)" U.S. Senate Committee on Banking, Housing and Urban Affairs. Accessed 29 September 2008.

Bartiromo, Maria. "Bill Clinton on the Banking Crisis, McCain and Hillary. (http://www.businessweek.com/magazine/content/08_40/b4102000409948.htm)" Business Week, 24 September 2008.

Standard and Poor's. "Case-Schiller Home Price History. (http://www2.standardandpoors.com/portal/site/sp/en/us/page.topic/indices_csmahp/0,0,0,0,0,0,0,0,0,1,1,0,0,0,0,0.html)" Accessed 30 September 2008.

"Understanding the Tax Reform Debate: Background, Criteria and Questions. (http://www.gao.gov/new.items/d051009sp.pdf)" Government Accountability Office. September 2005.

Bianco, Katalina M. "The Subprime Lending Crisis: Causes and Effects of the Mortgage Meltdown. (http://www.business.cch.com/bankingfinance/focus/news/Subprime_WP_rev.pdf)" CCH. Accessed 29 Septem

[ScipioCowboy]

And then there's this rather informative article by Dr. Ron Paul, who foresaw this crisis several years ago:

Commentary: Bailouts will lead to rough economic ride


http://www.cnn.com/2008/POLITICS/09/23/paul.bailout/index.html

By Ron Paul
Special to CNN


Editor's note: Ron Paul is a Republican congressman from Texas who ran for his party's nomination for president this year. He is a doctor who specializes in obstetrics/gynecology and says he has delivered more than 4,000 babies. He served in Congress in the late 1970s and early 1980s and was elected again to Congress in 1996. Rep. Paul serves on the House Financial Services Committee. Rep. Ron Paul says the government's solution to the crisis is the same as the cause of it -- too much government.

(CNN) -- Many Americans today are asking themselves how the economy got to be in such a bad spot.
For years they thought the economy was booming, growth was up, job numbers and productivity were increasing. Yet now we find ourselves in what is shaping up to be one of the most severe economic downturns since the Great Depression.
Unfortunately, the government's preferred solution to the crisis is the very thing that got us into this mess in the first place: government intervention.
Ever since the 1930s, the federal government has involved itself deeply in housing policy and developed numerous programs to encourage homebuilding and homeownership.
Government-sponsored enterprises Fannie Mae (http://topics.cnn.com/topics/Fannie_Mae) and Freddie Mac (http://topics.cnn.com/topics/Freddie_Mac_Holdings) were able to obtain a monopoly position in the mortgage market, especially the mortgage-backed securities market, because of the advantages bestowed upon them by the federal government.
Laws passed by Congress such as the Community Reinvestment Act required banks to make loans to previously underserved segments of their communities, thus forcing banks to lend to people who normally would be rejected as bad credit risks.
These governmental measures, combined with the Federal Reserve's (http://topics.cnn.com/topics/U_S_Federal_Reserve) loose monetary policy, led to an unsustainable housing boom. The key measure by which the Fed caused this boom was through the manipulation of interest rates, and the open market operations that accompany this lowering. When interest rates are lowered to below what the market rate would normally be, as the Federal Reserve has done numerous times throughout this decade, it becomes much cheaper to borrow money. Longer-term and more capital-intensive projects, projects that would be unprofitable at a high interest rate, suddenly become profitable.
Because the boom comes about from an increase in the supply of money and not from demand from consumers, the result is malinvestment, a misallocation of resources into sectors in which there is insufficient demand.
In this case, this manifested itself in overbuilding in real estate (http://topics.cnn.com/topics/Real_Estate). When builders realize they have overbuilt and have too many houses to sell, too many apartments to rent, or too much commercial real estate to lease, they seek to recoup as much of their money as possible, even if it means lowering prices drastically.
This lowering of prices brings the economy back into balance, equalizing supply and demand. This economic adjustment means, however that there are some winners -- in this case, those who can again find affordable housing without the need for creative mortgage products, and some losers -- builders and other sectors connected to real estate that suffer setbacks.
The government doesn't like this, however, and undertakes measures to keep prices artificially inflated. This was why the Great Depression was as long and drawn out in this country as it was.
I am afraid that policymakers today have not learned the lesson that prices must adjust to economic reality. The bailout of Fannie and Freddie, the purchase of AIG, and the latest multi-hundred billion dollar Treasury scheme all have one thing in common: They seek to prevent the liquidation of bad debt and worthless assets at market prices, and instead try to prop up those markets and keep those assets trading at prices far in excess of what any buyer would be willing to pay.
Additionally, the government's actions encourage moral hazard of the worst sort. Now that the precedent has been set, the likelihood of financial institutions to engage in riskier investment schemes is increased, because they now know that an investment position so overextended as to threaten the stability of the financial system will result in a government bailout and purchase of worthless, illiquid assets.
Using trillions of dollars of taxpayer money to purchase illusory short-term security, the government is actually ensuring even greater instability in the financial system in the long term.
The solution to the problem is to end government meddling in the market. Government intervention leads to distortions in the market, and government reacts to each distortion by enacting new laws and regulations, which create their own distortions, and so on ad infinitum.
It is time this process is put to an end. But the government cannot just sit back idly and let the bust occur. It must actively roll back stifling laws and regulations that allowed the boom to form in the first place.
The government must divorce itself of the albatross of Fannie and Freddie, balance and drastically decrease the size of the federal budget, and reduce onerous regulations on banks and credit unions that lead to structural rigidity in the financial sector.
Until the big-government apologists realize the error of their ways, and until vocal free-market advocates act in a manner which buttresses their rhetoric, I am afraid we are headed for a rough ride.
The opinions expressed in this commentary are solely those of the writer.

[burmafrd]

ITs exactly right that a lot of the blame can be spread around. BUT to say the Republicans really controlled the agenda is to frankly guild the lilly. They had in the senate a very fragile hold due to so called moderate republicans ( and that includes McCain) and downright liberal republicans that were democrats in all but name. Why do you think the Democrats want to get to 60 seats in the Senate= that means TOTAL control even to being able to force cloture. The republicans a) were NEVER close to 60 and with the aforementioned weak kneed types would not have made much difference and b) once trent Lott got forced out as Majority Leader for the weak Frist it was pretty much all over anyway. Between Hastert in the House and Frist in the senate there were no cojones at all in the republican leadership. Say what you want about Pelosi and Read, they are hard core leaders who are pretty much able to force compliance by their followers. Cannot say the same about Republican leaders. Once Newt, Delay and Dole left congress we had none to really point to.

[Hoofbite]

Here is my rebuttal:

http://www.jibjab.com/view/253615

Did you make that video?

You're sure pimping it like you own it.

[arglebargle]

Interesting too the amount of silence evident in this post about another favorite talking point.

Also wanted to point out a topic where Burma could not manage to blame everything on the evil libs.....;)

[braw]

This will twist the problem around into a different direction.

http://www.cbsnews.com/stories/2008/10/05/60minutes/main4502454.shtml

[arglebargle]

An interview with two economists here, one year ago, including the conservative SEC boardmember who was fired for just wanting Hedge Funds to register their existance. This was not some problem that cropped up with no one calling warning. The warnings were ignored.

http://www.pbs.org/moyers/journal/10122007/transcript4.html

Classic example of this: In 2002 the Produce industry and their lobbyists went to the Bush Administration to make sure that no tracking regulations would interfere with their businesses.

So when the Salmonella epidemic hit, they were unable to figure out where the problem was. Result? Hundreds of millions of dollars in losses, crops rotting on the vine, major troubles.

Now the same groups that deep-sixed the tracking and regulations in 2002 are calling for the federal government to institute tracking and regulation.

As it was put in the interview above:

"Markets don't regulate themselves. Clearly. Anymore than you can have an intersection and no stop signs and red lightS."

[Jordan55]

Here is my rebuttal:

http://www.jibjab.com/view/253615

Artie, enjoyed it
Thanks

Qoute of the day
Per Obama


Plumber to Obama: “Your new tax plan is going to tax me more. Isn’t it?”

Obama: “It’s not that I want to punish your success, I just want to make sure that everybody that is behind you, that they have a chance for success too. I think that when you spread the wealth around, it’s good for everybody.”

No, he's not Socialist
Income redistribution, it's on it's way
As Americans we should look forward to the future of America