Thursday, September 18, 2008


Like animals jarred from hibernation, the economic and financial Neanderthals have re-emerged from their caves to plunder the countryside. The recent bailouts of AIG, Freddie Mac and Fannie Mae have energized these intellectual throwbacks. Headed by people like Nancy Pelosi and just about any other liberal you care to name, as well as a majority of Republicans, they are now screaming for economic reform and greater and more stringent regulation of Wall Street and lending institutions.

Their whipping boy in this mortgage debacle is the free market. Not enough government oversight, they scream. Too few regulations, they rant. Insatiable greed of bankers and Wall Street traders, they bellow. Were it not for the unregulated capitalist system, this crisis would have never occurred. Their solution is three fold: More government control; more government control; more government control.

The probelm is, government involvement in the economy is what created this financial hell house. Think back to the image of banking and lending institutions of 40, 50, 60years ago and longer. Bankers had reputations as parsimonious people who guarded their money jealously and ferociously, and who made people jump through hoops to obtain a loan or mortgage. It was common practice to require a minimum of 20% down to obtain a home mortgage. On top of that, they had stringent requirements in terms of employment histories and financial assests before you were approved for a loan.

So what happened? Starting in the 1970's with the Fair Housing Act, the Feds got involved in the banking industry. Under pressure from people like Jesse Jackson,Al Sharpton and the NAACP to loosen standards for minorities, politicans decided to pander for votes and make it easier for low income people to obtain home loans. In the 1990's, President Bill Clinton, the quintessential liberal do-gooder, ordered the banking industry to relax their loan standards for the express purpose of allowing more minorities and low income Americans to become homeowners. Implicit in his order was a threat that if they didn't loosen standards, the Feds would come after them with all regulatory guns blazing. President George W Bush, the faux conservative, continued this policy, often bragging about the increase in home ownership under his administration.

Under pressure from the Feds, the loan industry opened their vaults to just about any warm body that walked through the door. No upfront money was necessary, employment and income requirements were virtually nonexistent. It didn't take an Alan Greenspan to predict what the results of this free money giveaway would be. People purchased homes they couldn't afford, and as a result, an epidemic of foreclosures swept the financial landscape, paving the way for the economic collapse we are now enduring. Here is a sobering statistic that would have never developed had the Feds not intervened: Sixty percent of all the loan applications on foreclosed properties in 2006 and 2007 had false information on them. People lied about their job histories, income, assests. Fifty years ago, lenders would have examined those apps like a doctor studying a biopsy. But with the politicians putting a gun to their heads while assuring them they had their backs, these lenders had no real incentive to scrutinize those applications. They simply complied with the demands of Washington. Now that its crumbling all around them, these same politicians are blaming the bankers and the free market.

Don't be fooled. This crisis was caused by too much Washington, not a lack of it. We can only hope that these Neanderthals crawl back into their caves before we are all reduced to cave dwellers.