I could rant about the “bailout” being pitched by the Federal Government, or I could just link to an article by this Dr. Ron Paul guy …
Unfortunately, the government’s preferred solution to the crisis is the very thing that got us into this mess in the first place: government intervention.
http://www.cnn.com/2008/POLITICS/09/23/paul.bailout/index.html?iref=topnews
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I’ve got a couple of factual hiccups with his analysis. The first is that Fannie Mae and Freddy Mac were late to the sub-prime mortgage bundling game. They stayed out of it while other mortgage lenders and banks made a lot of money in it, finally taking part because their shareholders weren’t going to idly stand by while others were piling up huge virtual mounds of cash. The second is that blaming things like the Community Reinvestment Act for the current crisis is misleading at best. The CRA was sharply curtailed in 2005 (http://en.wikipedia.org/wiki/Community_Reinvestment_Act#Changes_of_September_2005 for a decent overview), and the majority of the subprime loans weren’t caused by the CRA. Investment banks didn’t hew to the CRA; neither did the mortgage companies. Analysis done for a congressional hearing showed that half of sub-prime loans were made by mortgage companies, and 30% by affiliates of banks and thrifts that don’t fully fall under the CRA.
Stephen: the CRA isn’t responsible for everything (I can agree with that). What I can agree with is that much of the rush to sub-prime lending was started by the government pushing banks into the business by threatening them with more regulation if they didn’t offer loan products to “the less fortunate” (aka people with lower credit).
http://marketplace.publicradio.org/display/web/2008/09/17/pm_frum_commentary/
There’s just a point where you have to let a business win or lose on its own terms … pushing it into a market it doesn’t want to enter or bailing it out when it doesn’t succeed isn’t what I’m interested in funding with my tax dollars.
And the next sucker to take Bush’s job needs to beware this mess as well.
http://marketplace.publicradio.org/display/web/2008/09/22/pm_shapiro_commentary/http://marketplace.publicradio.org/display/web/2008/09/22/pm_shapiro_commentary/
The CRA was created in 1977. If that were truly the catalyst for the sub-prime mortgage grab, I’d have expected it to start earlier than the 2000s. And the Board of Governors of the Federal Reserve in 1999 determined that CRA loans were roughly as risky as non-CRA loans, and were equally or slightly less profitable than non-CRA loans. As far as I can tell, the big driving force was the incredible rise in home prices over the late 1990s-early 2000s. The banks were then willing to gamble on riskier mortgages, figuring rising home prices would lessen the risk. It’s a gamble that looks like it’s paid off, since they took all of the reward and we as a nation are now assuming all of the risk.
“It’s a gamble that looks like it’s paid off, since they took all of the reward and we as a nation are now assuming all of the risk.”
Yeah, that’s the major suck of the whole deal. The government shouldn’t bail out the individual or the business who makes a bad decision.
Same problem I had with the airline bailout. If a business thinks they will be saved when they screw up, they won’t weigh risks … same as a person who thinks the government will save them when they blow it.
It’d be great if the risk-reward tradeoff still meant people who got the rewards also shouldered the risk. Now, in the era of “TOO BIG TO FAIL” that doesn’t seem to be the case.
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