The Real Culprits
I keep reading about the “sub-prime crisis” (”sub-prime” being business doublespeak for ”risky loans”), and how the banks had it coming, and they were being greedy, and so on and so forth. Jeff Jacoby, however, calls it correctly:
The subprime mortgage collapse is another tale of unintended consequences.
The crisis has its roots in the Community Reinvestment Act of 1977, a Carter-era law that purported to prevent “redlining” - denying mortgages to black borrowers - by pressuring banks to make home loans in “low- and moderate-income neighborhoods.” Under the act, banks were to be graded on their attentiveness to the “credit needs” of “predominantly minority neighborhoods.” The higher a bank’s rating, the more likely that regulators would say yes when the bank sought to open a new branch or undertake a merger or acquisition.
But to earn high ratings, banks were forced to make increasingly risky loans to borrowers who wouldn’t qualify for a mortgage under normal standards of creditworthiness. The Community Reinvestment Act, made even more stringent during the Clinton administration, trapped lenders in a Catch-22.
Read the rest for its full flavor.
What is clear, however, is that this mortgage crisis (”crisis” being political doublespeak for ”eventual taxpayer bailout”) is what happens when good intentions replace sound economic or financial principles. It’s a favorite failure of Marxist theory, of course, when despite those good intentions, the market stubbornly acts in the way that it always has. So when all the systemic restraints are arbitrarily removed, the floodgates are opened for the conditions against which the restraints were set.
And then we are all aghast when catastrophe strikes.
I blame Congress for this, of course, because they should know better. It’s not as though the banking industry isn’t well represented on Capitol Hill, after all—banking and allied industries comprise the fourth-largest contingent on Capitol Hill—so it’s a clear case of politicians attempting to bend economic policy into shaping social policy, despite knowing better.
But do they know better? When your wordview is blinkered by the eyeshades of social inequity, it’s easy to think that “redlining” exists because of some malevolent desire to keep minorities from owning property, whereas a sane person would realize that the practice exists to protect the bank (and ultimately the entire system) from a mass of foreclosures, such as what we are facing now.
Here’s Jacoby’s take, in which he simply ascribes Congress’s actions to hubris:
The financial fallout has hurt investors around the world. And all of it thanks to the government, which was sure it understood the credit industry better than the free market did, and confidently created the conditions that made disaster unavoidable.
I’m not so sure I agree with him.
Either Congress was ignorant of the eventual consequences (even though there are several bankers in the House and Senate, and on their respective staffs), or else they were aware of the eventual consequences, and went ahead with the legislation anyway—and unlike Jacoby, I think that action stems from irresponsibility.
Whatever the reason, it’s a classic case of the triumph of economic reality over starry-eyed social engineering; but the worst part is that in no statements have I seen the desire to eliminate those stupid laws from the books.
So all this is going to happen all over again, sometime in the future.
