Politicians and commentators are blaming the current mortgage crisis on an unregulated free market and greedy and predatory lenders. The Huffington Post writes that the "failure was not one of incompetence, but the conservative ideology of reckless government". Congressman Barney Frank wrote that "mortgages made and sold in the unregulated sector led to the crisis".
Let's remember how we got where we are now: Banks and mortgage companies made millions of loans to people who they knew were unlikely to be able to repay the money. Many of these were Adjustable Rate Mortgages, where the interest rate for the first few years was very low, and then suddenly jumped to regular rates. People who had just barely enough income to pay the "teaser" rate couldn't afford the regular rate. Others were done as "no documentation" loans: the borrower was not required to give any proof of his claimed income, but the bank simply took his word for it. Now everyone is shocked, just shocked to learn that many of these borrowers lied about their incomes.
Why did banks make such foolish loans? Saying they were "greedy" explains nothing. The banks don't make any profit by loaning out money that is never paid back. Saying they were "predatory" explains nothing. Why would they want to trick people into making deals that cost the bank money? "Lack of regulation" explains nothing. Did the banks really need the government to force them to not throw away their money?
The problem wasn't too little regulation, but too much. Primarily, the Community Reinvestment Act. First passed in 1977 but greatly expanded in 1995, this law pressured banks to make loans to people who didn't meet the bank's qualifications. The stated reason was to fight racial discrimination by banks. (The fact that most of the people denied loans were white was dismissed as irrelevant.) The law gave activist groups the legal right to sue banks for failing to make loans to their clients. Citizen Action, NACA, and ACORN quickly rose to the challenge. The banks grudgingly accepted that losing money on these loans was just another cost of doing business in our highly-regulated society. Republican and Democrat politicians alike congratulated themselves on how generous and charitable they were, giving away other people's money to help the poor and minorities.
Now the loans are coming due, and surprise surprise, it turns out that the people the bank said would never be able to repay the loan -- can't repay the loan! Those stupid, greedy bankers were right after all! And of course, the reaction of the politicians is, We need more laws to prevent bankers from making the sort of loans that we required them to make. The free market has failed again, and the only solution is more government!
Side note: Back in 2003 the New York Times wrote: "'These two entities -- Fannie Mae and Freddie Mac -- are not facing any kind of financial crisis,' said Representative Barney Frank of Massachusetts, the ranking Democrat on the Financial Services Committee. 'The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing.'"
© 2008 by Jay Johansen
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