Government Caused the Mortgage Meltdown

Ronald Reagan once said “The most terrifying words in the English language are ‘We’re from the government and we’re here to help’.”  The economic hardships America has been suffering for the last four or five years are a good example of what the Gipper was talking about.

The liberal narrative on the mortgage finance meltdown that caused this long-lasting worldwide recession is that insufficient government oversite allowed profiteering private sector bankers to destroy the economy. The answer to this problem is the same answer liberals offer to every other problem, real or imaginary: more power and control for the government.

The truth of the case is just about the opposite of what liberals in the media and elsewhere are saying.

It wasn’t deregulation that allowed the banks to mess up the economy, it was ever-increasing regulation that caused the problems. As economist Walter Williams pointed out in an excellent 2009 column on the mortgage crisis,  the government spent over two billion dollars regulating banks in 2007. And the regulations had been steadily increasing, not decreasing, right up to that time.

During the Clinton administration, liberals in the press and elsewhere made much of the fact that mortgage loan applicants from black neighborhoods had their loan applications rejected at a higher rate than applicants from white neighborhoods. (The fact that white applicants were rejected more often than Asians was studiously ignored.) Using this “evidence” of “racism” as its justification, the government began browbeating lenders to extend loans based on political, rather than financial, grounds.

Forced to lend money to borrowers who didn’t meet traditional standards of credit worthiness, many lenders ended up with extremely risky loans on their books.

Today, even though loan defaults by these high risk (but politically correct) borrowers have done such awful damage to the United States economy, the government is still in the business of coercing lenders to make loans on political grounds.  The Justice Department just signed a settlement with Countrywide Financial under which the lender paid  a $335,000,000 fine for allegedly denying loans to deserving minority applicants.

While it was pressuring businesses to  make loans for reasons other than sound financial practice, the government was exacerbating the problem by allowing Freddie Mac and Fannie Mae to package and sell these unsound mortgages to investors, with the implied backing of the poor dumb taxpayers who always end up paying for the government’s excesses.

Led by House Banking Committee Chairman Barney Frank, congressional Democrats resisted calls for greater oversight over Freddie and Fannie for years. Way back in 1991 Representative Frank used his position on the House Financial Services Committee to persuade Fannie Mae to give a job to a gay lover of his. For the next twenty years he used his ever-growing power in Congress to empower Fannie Mae to employ aggressive and risky tactics in the mortgage market with the backing of the Full Faith and Credit of the US Government (i.e. the poor dumb taxpayers). Fannie took advantage of this position, bundling the toxic mortgages that the government was forcing lenders to create, and selling them to investors worldwide.

Over the last few years we Americans have suffered awful loses in our investment portfolios, and many of us have lost our jobs, all because of government “help” in the mortgage market. The government caused the problem two ways. First, the Community Reinvestment Act created a tidal wave of toxic mortgages by forcing banks to make bad loans. Then Barney Frank, and his unhealthy interest in Fannie, facilitated the fraudulent marketing of these toxic assets to unsuspecting investors.

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