I am so tired of hearing the hackneyed line from Obama that insists the current economic crisis we face is due to the past eight years of failed Bush policies, namely tax cuts and a lack of regulation, even as Obama himself bears some culpability for our present situation. There is a set of misconceptions about the housing tumble and subsequent recession that is being perpetuated by Barack Obama, the Democratic Party and the “mainstream” media. You know the tale…greedy Wall Street, predatory lenders and Republicans lax on regulation all share the blame for today’s woes. The problem lies in that the facts simply do not support this narrative. How are we to 1) best and most quickly remedy the situation and 2) actually learn from this experience if we do not even recognize, understand or in the case of many, admit, what the root causes of this crisis actually are?
Truly, a complexity of circumstances combined to trigger all of this, but there are certain key policies set forth by none other than the FEDERAL GOVERNMENT that are chiefly responsible for our present predicament.
As is often the case, well intentioned but poorly thought out, and certainly irresponsible liberal policies, ended up having extremely deleterious unintended consequences on individuals and the economy as a whole.
Common Sense begs the question, and many people have asked it:
What would induce so many lenders to engage is such risky behavior…to “prey” on people whom they had to have known would be ultimately unable of paying their mortgages off?
The Answer: THE GOVERNMENT
Stan Liebowitz lays out the history of the “attack on underwriting standards [that] has been undertaken by virtually every branch of the government since the early 1990s [in] an attempt to increase homeownership–particularly among minorities and the less affluent” (emphasis added) in his National Review piece, “Anatomy of a Train Wreck.” It is a leftest ideal that as many minorities and low-income people as possible own homes. Never mind that in an effort to hastily and unnaturally catapult these folks into “Fannie Mae’s American dream of homeownership [these same leftists have led these people directly] into the American nightmare of homeownership.” It doesn’t really help anybody to make homeownership possible for people who truly cannot afford to own homes or who have not shown that they are capable of taking on the responsibility of a mortgage. There is good reason for stringent standards. Consider this: “The mortgages of low-income buyers have had, for the last 30 years at least, much higher default rates than traditional mortgages, a result that is too often conveniently ignored. Subprime mortgages have tended historically to be foreclosed at ten times the rate of prime mortgages, and FHA loans are foreclosed at about four times the rate of prime mortgages.”
I remember seeing a newscast on CNN about a minority woman who was able to buy a home for a whopping $700,000 despite the fact that her income was only $38,000 a year. (Here is the transcript: scroll about 3/4 down to find this story.) How is it compassionate to tell someone, who obviously doesn’t understand the pitfalls of this on her own, that this is ok? In fact, this type of “mortgage innovation” was celebrated by the liberal political activists who were working with the federal government to accomplish it. And in reality, it is not compassionate…it is cruel. Even as I watched this newscast the woman was suddenly a “victim” who was soon to loose her home. Well, if not for such dumb policies in the first place she wouldn’t have been temporarily handed the “American dream” on a silver platter just to have REALITY whisk it away. I think this woman and people like her would have been much better off working, scrimping, saving and waiting like most people do to get into homes. And if homeownership never became a reality for her, oh well… HOMEOWNERSHIP IS NOT A RIGHT…it never has been and it should not be. It is a privilege that comes with responsibility; that is reality. Liebowitz points out the paradox of the subprime lending phenomenon:
“Today, very few people in the area of housing regulation seem willing to point the finger at the relaxed standards in fear of where that finger will lead. Instead, almost all the blame is focused on subprime lenders (who happen to specialize in loans that use relaxed lending standards). Unscrupulous subprime lenders, we are told, are financial vampires, sucking the lifeblood from hypnotized mortgage applicants. Forgotten in this story is any explanation of why subprime lenders suddenly became so predatory. Did they wake up one morning with changed personalities? There is no reason to believe that subprime lenders became more unscrupulous in the past few years than they had been before, or that their level of unscrupulousness is much different than that of any other profession, say politicians. The fact is that the increase in subprime lending was consistent with the government’s effort to increase lending to poor and minority applicants. Countrywide, the largest subprime lender by far, winner as we have seen of minority awards and accolades from government banking regulators before the mortgage meltdown, saw itself cast as a predatory lender by the very same people who had previously praised it, when blame began to be assigned for the mortgage meltdown.”
Wow, imagine that…the government passing off blame so as to escape accountability. It was actually the Clinton administration, in 1994, that really got the ball rolling on the “weakening of underwriting standards [that] had the intended impact of increasing home ownership and the unintended impact of increasing the price of housing, helping lead to a housing-price bubble that masked for many years the crucial (and predictable) problem of increased defaults.” The weakening of underwriting standards includes things we’ve become all too familiar with: the requirement of virtually no down payment, few restrictions on the size size of monthly payments relative to income, and little examination of credit scores and employment history. All of this “was the government’s goal and, as homeownership rates increased, there was self-congratulation all around. The community of regulators, academic specialists, and housing activists all reveled in the increase in homeownership and the increase in wealth that ensued. The decline in underwriting standards was universally praised as an ‘innovation’ in mortgage lending.’ Although banks were “initially forced [into] cooperation…they became happy participants when they found they could make money selling these mortgages.”
Other factors came into play as a natural result of all of this. The “[housing] bubble brought in a large number of speculators, in the form of individuals owning one or two houses in the hope of quickly reselling them at a profit. It is estimated that one-quarter of all home sales were speculative.” The lax standards “allowed homes to be purchased with little or no cost to the purchaser, [and thus] they allowed speculators to bet without using any of their own money.” Also, “although the original mortgage innovations were rationalized for low- and middle-income buyers…the decade-long attack on underwriting standards [led] to more relaxed standards for higher-income borrowers.” I saw this firsthand in our market. There were plenty of high-earning families using non-traditional loans (subprime, interest only, etc.) to purchase expensive ($400,00-$700,00) homes. But in the end, you can only build a house of cards so high before it all comes crashing down. This idealistic a home for everyone now mentality owned by the left eventually met reality…and now we’re all suffering the consequences, except for possibly (and ironically) those chiefly responsible, who are now using this crisis to demonize capitalism and promote socialism…and having unnerving success as it seems. (All previous quotations were taken from Liebowitz, Stan J. “Anatomy of a Train Wreck,” National Review, Vol. LX, NO. 19, 20 Oct. 2008, pg. 34)
Lanny Ebenstein argues that the Fed “is the main culprit in the current mess–much as it was during the Great Depression, when its mismanagement of the money supply turned a recession into a catastrophe.” “Since 2001,” he says, “the Fed has followed the most erratic course in its history; the fiscal reversal from a modest federal budget surplus to a prospective $1.4 trillion-plus deficit in this same period is unprecedented in peacetime. The problem is “that if interest rates are too low they will attract resources to areas of the economy that would not otherwise be attractive investments. This was certainly the case in the housing bubble.” He continues, ” The Fed played at least as important a role as inadequate lending standards in the escalation of house prices between 2002 and 2006, when many real-estate markets saw double-digit annual increases in the sales price of a good that could be acquired for a single-digit down payment.” (“The Anti-Keynes,” Lanny Ebenstein, National Review)
Any way you look at it the government is largely to blame here. The question likely arises now, but wasn’t Bush in office the last eight years, and didn’t the Republicans control congress for much of that time? Yes, and here’s where it gets really interesting. As it turns out, in 2006 Senate Republicans, backed by Bush’s White House, actually tried to pass a bill that would have better regulated Fannie and Freddie and mitigated, if not prevented, the mortgage meltdown. And none other than Barack Obama led a filibusterer to prevent it from going through. From But As For Me:
…We found this letter signed by 19 Republican Senators demanding regulation of the housing industry. But the Democrats blocked this regulation. This one bill, that Rove talks about, may have saved us from the billions and billions lost in the subprime mortgage crisis, the catalyst for our current economic crisis.
Economic and political experts say the one bill Obama tried to block would have made this crisis more manageable by confining early the contaminated securities.
But As For Me has put together a very thorough and well cited summary that I highly recommend, chock full of primary sources documenting the Republican effort to reign in Fannie and Freddie and the Democrat blockade against any regulation of the mortgage industry (including the a fore mentioned letter and video footage of Republicans begging for regulation and Democrats denouncing the suggestion that there was even a problem).
The information, THE FACTS, are out there. The sources are numerous. You just have to look for them, but you’re never going to find them if you rely solely on the mainstream media for your news and information. Here is another fantastic article on this, at Investors Business Daily.