What REALLY Caused the Housing/Financial Crisis?

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Congress created the same dynamic as the California electricity fiasco a few years ago. There, the legislature devised a system with bizarrely skewed and perverse incentives, and then all the politicians and media pretended to be shocked when private players acted on the basis of those incentives, causing the rotten policy structure to collapse. 

 

In this instance the incentives were too-easy money (thank you, Federal Reserve), and public policies originally created with the intention of increasing lending and home ownership in “underserved and under-represented communities” (thank you, the last seven or eight Congresses, building on bad policy foundations laid by earlier ones).

 

What were those “expanding access” policies? They created incentives for bankers to remove all the prudential practices that had previously constrained foolish lending – things like 20 percent downpayment requirements, verified income statements, etc. That was done deliberately by Congress, encouraged by leftist rackets like ACORN, the Jesse Jacksons of the world, the corrupt “house-banks” of Fannie and Freddie (also creatures of Congress). It was a bipartisan political scam, too – R’s and D’s were all equally willing to play the role of “compassionate” provider of “access to housing.”

 

Well, you can evade reality, but you can’t evade the consequences of evading reality. A lot of blaming fingers are being pointed at those exotic financial instruments that were created by Wall Steet to “securitize” the debt – allow the lenders of origin to “bundle” the loans and unload them to willing chumps somewhere else – but here’s the thing: If lenders had not been encouraged in the first place to abandon prudential lending practices for reasons of public policy, the fancy downstream financing wouldn’t matter a bit – that funny paper would all be backed up by performing loans, and none of the current gyrations would be happening.

 

Now McCain and Obama and the entire political and media establishments are rounding up a lynch mob to go after those no-account regulators and scalawag bankers, when any reasonable person can see that they themselves were who created the problem.

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4 Responses to “What REALLY Caused the Housing/Financial Crisis?”

  1. Nick Says:

    You’re not allowed to say anything nasty about ACORN. Their most famous community organizer says we have to practice a new kind of politics…

    You can make fun of POWs who were tortured and can’t type by ridiculing them for not using computers.

    You can call Republicans “disabled” because of their opinions.

    But you can’t say anything bad about ACORN. OK? OK? Good.

    –Nick
    http://www.RightMichigan.com

  2. KCuz Says:

    Jack,

    I couldn’t agree more. My question is where are the conservatives standing up against this bailout on the grounds of limited government, personal responsibility and the free market?

    Makes no sense.

    KCuz

  3. jmchugh4u Says:

    I disagree, KCuz. Let’s back up a step here.

    The losses from bad loans for overpriced real estate have already happened. They probably amount to a few hundred billion – hardly chump change, but not a big deal compared to a $13 trillion US economy and a capital pool of like around $75 trillion. The problem is that the paper on the bad loans is all mixed in with the paper on the performing ones and can’t be separated easily or quickly. That’s causing the world financial system to lock up, which could cause a wordwide depression.

    Now that would be really stupid, because the magnitude of the problem is just not that great. To prevent is for a deep-pocketed entity to provide the thing that’s needed most to sort out all the good loans from the bad ones – time. That entity is Uncle Sam.

    The devil’s in the details, but properly constructed this would not be a bailout at all. The guilty will take their lumps, and tough on them. Indeed, it probably won’t happen but Uncle could actually come out ahead on the deal, buying bad loans at fire-sale prices, and selling the underlying properties for a profit. In any event, to repeat, the numbers just aren’t big enough to lose sleep over, or to put the world at risk of a global depression.

  4. KCuz Says:

    And how often does Uncle Sam make good decisions to lead to profits? We are in real trouble if Uncle Sam is the only one with deep enough pockets to “bail out” these companies. If there is money to be made, why wouldn’t we leave it to the free market to make it?

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