Category | Op Ed

Blame the real culprits

Published on November 10, 2009 by Matthew Cole

The federal government has assured us that they have been working tirelessly to fix our economy, employing such effective measures as spending money on tattoo removal for former inmates and renovating campground lavatories. We have all been told what is to blame for the financial crisis-unscrupulous lenders motivated by greed and “deregulation.”

These convenient excuses misrepresent the government’s role. Government policies are the main culprit behind the creation of the housing bubble. The same people who got us into this mess are now demanding we give them more power to fix the problem. Let’s look at some of the institutional factors that actually caused this mess.

First, let’s stop with this obsession over subprime loans. These loans have always had higher default rates than prime loans. That’s the whole point of charging them higher interest rates. The recent increase in foreclosures was mostly in prime loans. I know it’s convenient for anti-capitalists to imagine a devious banker preying on a poor defenseless applicant, but it’s harder to imagine a person with great finances in the same situation.

The main political factor involved in the creation of the housing bubble was the obsession with creating an “ownership society” by making it easier for people with bad credit to be able to buy their own homes. We even have a tax code that favors people with home mortgages over those who rent apartments or who buy their homes outright. A now discredited report from the Boston Federal Reserve alleging discriminatory lending practices prompted a political push for extending home loans to people whose creditworthiness would not otherwise qualify.

Former President Clinton enacted regulatory changes to the Community Reinvestment Act (CRA) in order to ensure that low-income homebuyers with bad credit could still get a mortgage. Under threat of governmental sanctions, lenders were required to meet certain quotas of loans to low-income communities. Although the CRA didn’t apply to lenders not covered by FDIC insurance, the other lenders recognized the political trends and adjusted their lending policies accordingly.

In order to maintain the capital needed to extend the amount of money they could lend, mortgage lenders would sell these mortgages on the secondary market to government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac. These GSEs operate like corporations, but with special favors from the government to ensure that they don’t get any competition from the private sector. On paper, Fannie Mae has a $2.25 billion line of credit with the US Treasury, but in practice everyone knew that this line of credit was unlimited, due to the “too big to fail” mentality.

These GSEs would then bundle these mortgages and sell mortgage-backed securities. Investors were able to buy their share of a common pool of home loans. This enabled them to free up enough capital to keep those lenders lending. The large expansion of politically-driven home mortgage lending fueled investor speculation, and thus increased home prices artificially above their market values.

So-called “private” credit ratings agencies, fearing governmental tampering with their protected cartel, were quick to follow Washington’s lead and rate the creditworthiness of home loans more highly than they should. According to the Boston Fed, which said lenders should eliminate “arbitrary or unreasonable measures of creditworthiness,” we shouldn’t worry about whether or not a loan applicant is actually good for the money, so just give them all AAA ratings. The Department of Housing and Urban Development even pushed zero-down payment mortgages.

Of course, none of this would be possible if it weren’t for the Federal Reserve and their manipulation of interest rates. In 2003-2004, the federal funds rate was set at just 1 percent. These artificially low interest rates allowed for the creation of more money. More new money was created from 2000-2007 than in the rest of this country’s history. The resulting inflation impacted home prices, which rose to unsustainable levels. More homes were being built than people could buy.

Lenders did exactly what the government wanted. People such as Barney Frank and Ben Bernanke got what they wanted. They just don’t like the consequences. They are now using the mess they created as an excuse for more power-grabs. As they continue to condemn the free market, remember that they allowed no such thing to exist.

On a personal note: I am running for Homecoming Prince and would appreciate your votes. Just log into Owl Express and click “Voting.”