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Upside Down Economics

Comment

From television specials to newspaper editorials, the media are pushing the idea that current economic problems were caused by the market and that only the government can rescue us.

What was lacking in the housing market, they say, was government regulation of the market's "greed." That makes great moral melodrama, but it turns the facts upside down.

It was precisely government intervention which turned a thriving industry into a basket case.

An economist specializing in financial markets gave a glimpse of the history of housing markets when he said: "Lending money to American homebuyers had been one of the least risky and most profitable businesses a bank could engage in for nearly a century."

That was what the market was like before the government intervened. Like many government interventions, it began small and later grew.

The Community Reinvestment Act of 1977 directed federal regulatory agencies to "encourage" banks and other lending institutions "to help meet the credit needs of the local communities in which they are chartered consistent with the safe and sound operation of such institutions."

That sounds pretty innocent and, in fact, it had little effect for more than a decade. However, its premise was that bureaucrats and politicians know where loans should go, better than people who are in the business of making loans.

The real potential of that premise became apparent in the 1990s, when the Department of Housing and Urban Development (HUD) imposed a requirement that mortgage lenders demonstrate with hard data that they were meeting their responsibilities under the Community Reinvestment Act.

What HUD wanted were numbers showing that mortgage loans were being made to low-income and moderate-income people on a scale that HUD expected, even if this required "innovative or flexible" mortgage eligibility standards.

In other words, quotas were imposed— and if some people didn't meet the standards, then the standards need to be changed.

Both HUD and the Department of Justice began bringing lawsuits against mortgage bakers when a higher percentage of minority applicants than white applicants were turned down for mortgage loans.

A substantial majority of both black and white mortgage loan applicants had their loans approved but a statistical difference was enough to get a bank sued.

It should also be noted that the same statistical sources from which data on blacks and whites were obtained usually contained data on Asian Americans as well.

But those data on Asian Americans were almost never mentioned.

Whites were turned down for mortgage loans more often than Asian Americans. But saying that would undermine the reasoning on which the whole moral melodrama and political crusades were based.

Lawsuits were only part of the pressures put on lenders by government officials. Banks and other lenders are overseen by regulatory agencies and must go to those agencies for approval of many business decisions that other businesses make without needing anyone else's approval.

Government regulators refused to approve such decisions when a lender was under investigation for not producing satisfactory statistics on loans to low-income people or minorities.

Under growing pressures from both the Clinton administration and later the George W. Bush administration, banks began to lower their lending standards.

Mortgage loans with no down payment, no income verification and other "creative" financial arrangements abounded. Although this was done under pressures begun in the name of the poor and minorities, people who were neither could also get these mortgage loans.

With mortgage loans widely available to people with questionable prospects of being able to keep up the payments, it was an open invitation to financial disaster.

Those who warned of the dangers had their warnings dismissed. Now, apparently, we need more politicians intervening in more industries, if you believe the politicians and the media.

To find out more about Thomas Sowell and read features by other Creators Syndicate columnists and cartoonists, visit the Creators Syndicate web page at www.creators.com. Thomas Sowell is a senior fellow at the Hoover Institution, Stanford University, Stanford, CA 94305. His Web site is www.tsowell.com.

COPYRIGHT 2009 CREATORS SYNDICATE, INC.



Comments

1 Comments | Post Comment
Dear Mr. Sowell, the following is 'Upside Down Politics' to go along with all their hype!
"Group shifts focus to entrepreneurship"noting that UNCG starting new
programs. I'm quoting "One aimed at undergraduates, and anyone with college
degree!" Look around, the 'fat cats' in government always hire
people to make statements like "We're putting people back to work",
when in essence they're only creating bigger goverment with no stability! It's
now a proven fact, you can get all the degrees you want, but without 'common
sense', 'getting your hands dirty', and actually working in a business from
sweeping the floors to answering the phones (I do mean answering phones when
they ring), you're backing up! It's going to take more than talent! Hard
labor and long hours come to mind. Looking like you just stepped off the
front page of a magazine won't be happening, so get over it!
I've written many articles over the years about the Heartbeat of our
America! Until Textile and Manufacturing jobs are brought back to America
there's absolutely no need for government, let alone bigger government, as
these were the 'working with your hand jobs' that used to be the backbone
and stability of our country.
Let's look at economics, my way! Fast Foods, Donut & Coffee Shops, Bars,
Saloons and many more come to mind (service oriented, not manufacturing
anything), but I'm trying to make a point! Leases/Rents, furnishings, heat,
lights, water, and licenses/permits have to be paid whether you get a
business up and running in 3-5 years or not. Just opening the doors to
public, ordering food or supplies for your new business cost money. After
all, there's only so much you can charge for a cup of coffee, donut,
biscuit, and manicure! This is why the overhead of these type businesses
will never be profitable!
Let's see if I can explain this further! Our forefathers worked long, hard
hours using their hands, horses and crude tools. Raising and pulling cotton
to put clothes on their backs, curtains, and later provide material
coverings for furniture (that we no longer have in America). Using hoes and
mules to provide gardens. Raising cows, hogs and chickens to provide for
their families. The new type American thinks all they have to do is get a
degree so they don't have to get their hands dirty! Well, I hate to burst
your bubble, but that degree is a piece of paper, and if you have acquired
none of the traits, used by your grandparents and great grandparents, you're
useless in America!
The Amish Community should always be proud that they've maintained a world,
filled with the best of everything, and to know that they've done all they
do without destroying our earth! America needs more Amish folks and less Al
Gores and big government!
Comment: #1
Posted by: Shirley deLong
Sun Feb 22, 2009 10:33 AM
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