A Replay Of 1929? Don’t Count On It
Then we had over 25% unemployment; now it’s 6% and could move somewhat higher, which is typical for economic corrections. Then, by 1934 about one-half of mortgages were in default, today it is only 6%. Nearly 94% of homeowners are still making their monthly payments.
The editorial goes on to ask and answer how we’ve gotten in this situation in the first place. The answer: Big Government, of course.
In 1977, President Carter and a Democrat Congress created the Community Reinvestment Act mandating that banks must meet the credit needs of everyone in the banks’ community, including uncreditworthy borrowers. It was done for a good social purpose and had the greatest intentions — expanding home ownership. And, through the 1980s and into the 1990s at least, it seemed to work.
However in 1995, President Bill Clinton imposed more and stronger regulations and performance tests. These coerced banks into significantly increasing their loans to low-income borrowers in economically-troubled communities, or face possible fines and expansion restrictions.
These new rules encouraged banks to bundle their risky subprime loans together with prime loans and re-sell them in packages to other financial institutions, thereby freeing the original lenders from any further risk. Thanks to the new rules and oversight from the CRA, Fannie Mae and Freddie Mac got involved in a big way, buying literally trillions of dollars of the questionable loans from banks and feeding the dangerous cycle that had begun.
Eventually, it turned into a kind of pyramid scheme that overwhelmed some lending organizations when housing prices softened in late 2006 and 2007.
So what’s the big lesson to be learned here by the public? That this financial crisis was the result of yet another Big Government program that had great intentions but created devastating unintended consequences that hurt millions of people.
It was not the fault of African American groups, which naturally want to help their people. Nor was it the fault of America’s free enterprise system, or a lack of enough regulation. No, it was Big Government once again trying to run a private industry.
You can’t take one dollar and loan it 50 times. Watch out when Big Government spenders tell you they can run our entire medical industry, give you far better care and save you lots of money.