Let us say that you are in the investment business. You loan money for mortgages. You charge competitive interest rates, which mean you must insure that people who borrow from you will pay you back. In order to gain that confidence you demand that borrowers have income adequate to continue their lives and meet this additional obligation. You also check that the prospective borrower has built a history of meeting similar obligations. The concept is simple.
But, there are many people who do not meet your requirements. They haven’t had jobs for a long time. They seek to assume more obligations than they can reasonably fulfill. They have defaulted in the past. They don’t qualify. You deny them loans. The concept remains simple.
Enter government. Why are you excluding people from the American dream! You are denying them home ownership because they have unfortunate circumstances in their background like unemployment or failure to pay their debts. We might even begin to see patterns of racist discrimination in your loan policies. You MUST provide loans to these people or we will take you to federal courts. But, have no fear, we will create a huge government agency to indemnify you against risk. You make the loans to these bad risks and we will guarantee them to you so you won’t lose money.
But, you can’t hold these loans can you? You would really like to move them through your hands quickly because you’ve got some apprehension about the government program. First there is marketability. You can’t sell them as bad credit loans, or high risk investments. Let’s call them “sub-prime” mortgages. That should sell. It sounds like they aren’t quite the best cut, but they might still be USDA Choice. Oh, and because they are sub-prime you might charge an extra percent or two of interest. Win-win situation.
The credit risky beat a path to your door. The same patterns that made them default in the past prevail. They want more than they can afford. They beseech you to adjust those down-payments away, defer interest until later, roll underwriting costs into the principal, and loss-lead them down the path of home ownership. In a booming real estate market where prices are rising it is feasible and besides, you are government indemnified and subsidized.
Entire businesses spring up mixing and stirring “instruments” of investment to somehow convince those few who still engage in the arcane practice of “due diligence” that the risk is abated and the profits are going to be high. A bag of bad loans is less risky than a single one. Some can default but most will prevail, at least until you move them out of your portfolio to the next entity in the chain. Then rising energy costs rear their head. Industries cut back. Jobs are out-sourced or simply eliminated. Home sales slow. Housing values stabilize and in many markets decline. Financing is upside down on homes and adjustable rate contracts are due to adjust. Defaults abound.
Here is where it all started:
Mix Finance and Social Engineering, Stir Well
A free market works magnificently. Intelligent people understand that a price is what a willing buyer and a willing seller agree upon. It isn’t about what is socially correct or what makes someone feel good. It isn’t about what you want, but about what you can afford. When the government steps in to the fray and confuses economic reality with sociological visions, disaster is looming.
But, who benefits from this situation? Take a look here and read it slowly. If necessary follow some links, but return to the page to insure you get to the end where you notice who got the big political contributions for making this happen:
Smoking Guns Found Here
What absolutely should amaze you is how the snake oil salesman can stand up and keep a straight face while linking this financial crisis to the Bush administration. I’ll be fair and accept only a peripheral link (but a firm one) to the Clinton policies on mortgages and note that it goes back farther with roots in the New Deal and the Great Society.
The belief that government solves problems and creates some sort of economic justice is the root cause.