King and Crisis

Who caused this mortgage mess?

People like to play the blame game, especially in a crisis. I'm not into playing blame games, I'm into investigating the truth. Several factors come into effect in incidents like these. No one side, no one person, is the cause. To think that any one person (or Administration in many people's minds) caused this mess is to betray petty, narrow-minded thinking. There were a number of significant nudges and pushes that inevitably brought down the house.

Someone recently noted that "the single biggest piece of legislation that has led to the financial collapse we're seeing now is the Commodity Futures Modernization Act of 2000. It was rushed onto Bush's desk a few days after the Supreme Court appointed that clown to the Oval office." Once again, petty, narrow-minded thinking. The person who said this has such hatred for Bush that he can't even see past his psychosis. A little fact check goes a long way in not sounding like a wild-eyed liberal doofus: President Clinton was the one who signed CFMA 2000 into law, not Bush. And even then, CFMA 2000 was merely icing, not the cause of the problem. We can go all the way back to the Community Reinvestment Act of 1977, but that was only the nudge. We'll have to find something recent and more directly connected to the crisis.

An article by Steven A. Holmes from September 1999 entitled "Fannie Mae Eases Credit to Aid Mortgage Lending" mentioned several key ideas to the origins of this crisis. The New York Times is not the most conservative newspaper, so for it to have mentioned a Democrat party connection to the mess is at least being truthful and fair to the issue.

Some of the more interesting parts (emphases mine):

"In a move that could help increase home ownership rates among minorities and low-income consumers, the Fannie Mae Corporation is easing the credit requirements on loans that it will purchase from banks and other lenders.

The action, which will begin as a pilot program involving 24 banks in 15 markets -- including the New York metropolitan region -- will encourage those banks to extend home mortgages to individuals whose credit is generally not good enough to qualify for conventional loans. Fannie Mae officials say they hope to make it a nationwide program by next spring.

Fannie Mae, the nation's biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people and felt pressure from stock holders to maintain its phenomenal growth in profits...

In moving, even tentatively, into this new area of lending, Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980's.

''From the perspective of many people, including me, this is another thrift industry growing up around us,'' said Peter Wallison a resident fellow at the American Enterprise Institute. ''If they fail, the government will have to step up and bail them out the way it stepped up and bailed out the thrift industry...

The change in policy also comes at the same time that HUD is investigating allegations of racial discrimination in the automated underwriting systems used by Fannie Mae and Freddie Mac to determine the credit-worthiness of credit applicants."

(Side note: the economic boom of the 1990s was the result of Reaganomics. Politics 101 - Each Presidential administration receives the blessings or the curses of a previous administration's actions. The Clinton admin boom years were merely the result of Reagan admin's actions.)

So, really, the question is: What caused this mortgage mess? The cause was the culture of the time, an overcorrection if you will, of people's behavior, otherwise known as political correctness. Because of the strong desire for racial equality, especially after Rodney King and the L.A. riots, there seemed to be this nationwide need to be respectful to your fellow man. Racial discrimination is evil and being disrespectful to others is never good, but the response going the opposite direction was so extreme that the nation fell off the other side of the horse. Too much kumbaya, not enough common sense. In ignorance, government followed suit and equated risky lending with racial equality. Note to government: It's good to work on racial equality, bad to be stupid with money. Too little too late, unfortunately.

Now about the bailout: Do I agree with it? No. Is it necessary? Maybe. I absolutely hate it when government meddles with private sector business, even quasi-private like the FMs. But both parties took the chance nearly ten years ago and now we're all paying for it. As McCain said, this is only a tourniquet. Who would've known that government wasn't sure what would happen if it pointed a loaded gun at its foot then pulled the trigger. We'll see if Adam Smith's principles work even with massive government intervention like this. Can the invisible hand of a free market be led by the folly of statesmen? Ready to roll-over, Mr. Smith?

I guess it's time to sit back and see how another invisible hand will guide this process along.