A massive federal failing

July 29, 2011|By GEORGE MICHAEL

In the midst of the debt ceiling debate and continued economic uncertainty, it might be helpful to see how we reached the current situation. Are there any lessons for us?

The economic crisis shows little sign of improvement after three years of significant government intervention.  This administration’s attempt to solve the problem has been an abysmal failure.

Blaming the Bush policies is not only wearing thin but stretches credibility. Yet, President Obama, with the support of the national media, continues to shift the focus to the previous administration. Sadly, this has become the accepted template for many people who seem to be incapable of rational discourse about the matter.

One can make a good case that the housing and real estate collapse in 2008 was the catalyst for most of the other problems of the last three years. The housing market continues to be a drag on the overall economy.

Home ownership is a worthy goal, the capstone of the American Dream. And it really bothered the do-gooders in our society that this goal was out of reach for some.  In their haste to ensure that every American could have a home of their own, significant policy decisions were made planting the seeds of an economic melt-down.

One was the creation of two quasi-government agencies, Fannie Mae and Freddie Mac, designed to provide capital for people to get affordable housing.  While capital came from private investors to provide home mortgages, the loans were guaranteed by the government. That way, no one could lose money.  Sounds good, right?

This removed normal market risk.  As a result, loans were made that should never have been made.  Fannie and Freddie are currently taking over almost 1,000 homes a day in foreclosure. Many have been abandoned, requiring thousands of dollars for cleanup and damage restoration before they can be re-sold.  It is estimated that U.S. taxpayers may have to cough up nearly $400 billion over the next few years to clean up the mess.  This is far more money given to all the big U.S. banks and investment firms to bail out their bad loans.

Congress held a number of hearings over the years, bringing in bank executives for questioning by pompous politicians accusing them of “redlining” in urban areas and suggesting that these banks were discriminatory toward minorities.  Liberals rejected the suggestion that banks were concerned about protecting their investments. And if that was their motivation, banks should “put people over profits.”  

Another contributing factor was the Community Reinvestment Act. First passed 30 years ago, it has been upgraded several times since.  This law, in essence, pressured banks to provide more loans to less worthy borrowers.  In order to meet federal guidelines, banks and brokerages came up with new, “creative” financing methods like PMI insurance and subprime loans.   Nice folks with a smile could get into a home with no money down and very low interest rates.  These risky loans led to many defaults.   

Since the economic collapse in 2008, liberal politicians have tried to deflect the blame for their malfeasance to escape the wrath of voters. With the help of a compliant media, those most responsible, like former Senator Chris Dodd (D-Conn.), Chuck Schumer (D-N.Y.), and Barney Frank of (D-Mass.) have been able to get away with it. When questioned by Alan Greenspan and Bush officials as far back as 2003 right on through 2007, Congressman Frank continually assured everyone that things were just fine with nothing to worry about.  

These leaders tried to make greedy bankers the problem.  There is a small kernel of truth here. Bankers do like to make money. And with government taking the risk out of the market by underwriting unsound mortgages, bankers and investors would profit and more Americans could realize the dream of a home of their own.

There was just one problem.  All of it was predicated on constantly appreciating home prices and a stable job market. But if credit was overextended — which it was — and a housing “bubble” was created that could burst — which it did — what would happen to the American economy? Now we know.

There is plenty of blame to go around. Misguided social policy, the Federal Reserve, government agencies, bankers, and consumers share the responsibility for the melt down. Everyone was so busy making money, we didn’t pay attention.  Now, we are all paying the price.  

Government intervention in the housing market has been a colossal failure. Large-scale government bureaucracies are not capable of responding to the daily adjustments of financial markets. Risk is part of the investment equation. Taking out the risk, as the federal government did in the housing market, guaranteed bad decisions. Let’s hope that the federal government never gets involved in things like health care or education.  

George Michael is a Williamsport resident who writes columns for The Herald-Mail.

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