Government Policy Got Us Into the Subprime Mess
From Walter Williams' column today "Subprime Bailout":
As with most economic problems, we find the hand of government. The Community Reinvestment Act of 1977, whose provisions were strengthened during the Clinton administration, is a federal law that mandates lenders to offer credit throughout their entire market and discourages them from restricting their credit services to high-income markets, a practice known as redlining. In other words, the Community Reinvestment Act encourages banks and thrifts to make loans to riskier customers.
The Bush bailout plan for the subprime crisis is a wealth transfer from creditworthy people and taxpayers to those who made ill-advised credit decisions, and that includes banks as well as borrowers. According to Temple University professor of economics William Dunkelberg, 96% of all mortgages are being paid on time. Thirty percent of American homeowners have no mortgage. Delinquency rates were higher in the 1980s than they are today. Only 2 to 3 percent of all mortgages are in foreclosure. The government bailout helps a few people at a huge cost to the rest of the economy.
Government policy got us into the subprime mess and government's measure to fix the mess is going to create more mess.
5 Comments:
Really now... isn't this classic regret shunning; blame someone else?
The truth is that free markets sometimes have excesses and correct themselves.
Another example of a "do-good" law hurting the people it was meant to help.
Instead of living within their means, the poor decided to splurge and buy homes they couldn't afford. Encouraged by a combination of public policy and financial engineering, the banks were more than willing to enable them.
The result is that the subprime mess has hurt the poor the hardest of all. They are being thrown out of their homes and although I do feel that this is their own responsibility, I can't help but feel sorry for their predicament.
Look folks the bankers knew what the outcome would be.
It was no secret in the industry that this so-called "subprime mess" was the inevitable result of irrational, irresponsible and ill conceived lending practices.
Read my lips folks, the lenders knew it was going to happen before even the first subprime mortgage was funded.
I know, I was there, we talked about it daily. The money was good while it lasted.
Really? Was it Bush's policies that caused the housing bubble in the UK as well?
Look, the housing bubble was not just a U.S. thing.
The sub prime mess is caused by lenders who dug their own hole and were not restrained by government regulation.
Question. What happens to people who get foreclosed? The people I know who have lost their homes actually are a lot more comfortable without the burdensome mortgage and have more disposable income.
So why all the fear?
Look, nobody is debating that markets undergo corrections.
Indeed, without corrections there would be no tendency toward equilibrium and the world would look like quite a strange place.
In these corrections, or more generally, as price moves toward equilibrium, it sends a crucial message about relative opportunity costs so that economic participants with only a modicum of knowledge can make appropriate decisions.
It's the fact that these corrections are highly magnified by incredibly bad government policy which is what is very destructive.
Economists and social scientists refer to the so-called "law of unintended consequences" about which Walter Williams just wrote.
Amongst the intelligence community, it's called "blowback".
In either case, government policy is almost invariably about 1.) making people do what they do not want to do, or 2.) preventing them for doing something they do want to do.
It's no surprise that people find incredible creative ways to defeat the original intentions of policymakers.
Beside policymakers' naivety, the policies might have been enacted by strong interest groups/rent seekers irrespective of policymakers' understanding of perverse consequences!
What ever happened to a free and open society?
Post a Comment
<< Home