With all the mess on Wall Street with the subprime mortgages, I have been hearing a lot of blame been thrown around as if it were fact. So far, I have found little that is. But the biggest thing that angers me is the idea that this is the fault of "Free-Market-Bush-Republican-Capitalist economic policies." Quite frankly, to say that the mortgage business was unregulated and a free market is an outright lie.
It all began with the Civil Rights Act of 1968, more commonly known as the Fair Housing Act, which outlawed various forms of Redlining, which prohibited banks from denying loans simply based on location. Not so free market friendly, but not so harmful. Things got ugly though in 1977 with the passage of the Community Reinvestment Act. The entire point of this Carter law was to make housing more affordable.
Stop right there. This is the beginning of the subprime mortgage debacle we are facing now. Forgive me if I'm wrong, but rarely is the purchase of a home considered "affordable." The purchase of a home is the biggest investment many people will make in their lifetime, and for most Americans, is the largest portion of household wealth. I know owning a house is the American dream, but sometimes people just can't afford to own their own home. Sorry. I would love to be driving a Ferrari right now, but I can't afford it. Well, if I had an interest-only payment plan, technically I could afford to drive one, but there would be little doubt that when the principal came due I would be in a pretty bad crunch. So why should housing be treated any differently? It's a luxury, not a right, and the idiots who felt they could force housing to be affordable to everyone should be in jail right now. Keep in mind, the biggest opponent of the CRA was the BANKING COMMUNITY!!! They did NOT want to make these loans that they knew wouldn’t be paid back, despite what the media says - it wasn't greed of the banks, but rather the meddling and goodwill of the law makers that really started this mess.
Back to the CRA. Part of the CRA literally made it illegal for Fannie Mae and Freddie Mac to only make prime loans. If you think about that for a second, the law requires Fannie and Freddie to make loans that normally banks would not make because the risk of not getting paid back is too high. This itself would negate the idea that this was a free market.
Through various rules and regulations, the CRA became the key source of power for the Association of Community Organizers for Reform Now, more commonly known as ACORN. The subject of CRA non-compliance was cited against many banks that did not want to make sub-prime loans because of the risk involved. Then ACORN would either sue, or protest the bank, sometimes even sending hundreds of activists into the bank to change dollars into pennies and back all day long - effectively shutting the branch's banking activities down until they complied and agreed to give a certain amount of loans to under-qualified borrowers. They have a term for that, and I believe the word is extortion. This should just go to further disprove the notation that this was a free and unregulated market.
Now, in now way am I implying that these forces are the reason we are in this mess. There are hundreds of factors that play in to this crisis. There certainly was predatory lending, greed, and lack of oversight in small situations. However, you must also fault someone who makes $50,000 a year that bought a house costing $300,000 with a pay-option ARM, or an interest only mortgage for borrowing money that they should've known they couldn't afford. It would take 6 years of salary just to pay off the house, and with living expenses and bills, it's just irrational to believe that they can pay off the loan within the terms, or even ever. Also, the relaxation of down payment requirements meant that people had little of their own money invested in the house, and walking away only hurt their credit.
My problem with regulation from the government is very simple - the government does not have the same goals and priorities that business have. While a business must look at the sustainability of its practices from a money perspective, the government does not always consider this in its enacting of regulations. There is no bigger example of the ruin of government regulation of an industry than the farming industry and its massive program of tariffs, subsidies, tax breaks, and laws that cost this country lots of money, and keep the market from progressing as it would in a free market. Imagine what they would do to the mortgage industry if they nationalized it too...
The cause of this problem we are having will most likely never be truly known, and every side will blame the other. However, the one place where the finger should not be pointed is at the free market. Time and time again, the free market takes care of itself - intervention is what turns it into a monster.
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