In recent weeks I’ve been reflecting on what it means to be a conservative. Given the extraordinary economic events of the last couple of weeks, I want to comment on our current economic crisis before concluding my series on conservatism.
The current economic crisis is complex and many people and institutions both in Washington and on Wall Street have a role and bear some level of responsibility for it. Many attribute the crisis to the quasi-governmental agencies Fannie Mae and Freddie Mac. Others attribute the crisis to the intervention of the Federal Reserve and the market distortions it may have created with artificially low interest rates. Still others blame the crisis on Wall Street greed and the extraordinary pay, bonuses, and severance packages realized by corporate CEO’s even while the institutions they headed were failing.
Whatever flaws and abuses exist in our economic system, what most observers agree upon is that this economic emergency has been precipitated by an extreme softening of housing markets in many parts of the country. And at the deep root of this problem is overzealous government interfering in credit markets by requiring lending institutions to abandon sound lending practices to advance a political agenda. Leading the list of government culprits are members of Congress.
In the 1970’s Congress enacted the Community Reinvestment Act (CRA) with the intent of requiring financial institutions to expand credit to a wider marketing base rather than to just credit-worthy customers. The lofty goal was to provide more affordable housing and promote more home ownership among low-income families. But the effect and scope of this act was fairly limited until 1995, at which time the Clinton Administration promoted new regulations requiring even more aggressive marketing of mortgage loans among low-income groups, imposing quotas, and mandating stiff penalties for banks that failed to offer “no money down” mortgages, floating rates, and loans made to people with no credit history or even bad credit history.
Federal law required banks to set aside prudent lending practices. Financial institutions began making profits in the expanded mortgage origination process, and they knew that even if borrowers defaulted the government would bail them out for defaulted loans they held. And so our most financially vulnerable citizens were encouraged to buy homes and take on debt they could scarcely afford. With growing pools of money being made available for home mortgages, home prices grew faster than inflation, ultimately creating a huge bubble waiting to burst.
Eventually, interest rates began to rise thus creating a crisis for those borrowers who had been enticed by adjustable rate mortgages. As monthly mortgage payments were dramatically rising, so too were gasoline prices. Many borrowers stopped paying, the once overheated housing market became a glut of foreclosed properties, lenders stopped lending, housing prices declined, and the bubble finally burst.
A national crisis -- threatening the very foundations of our nation, the stability of the dollar, and the economic well-being of future generations -- has been caused by a Congress willing to disregard the laws of human nature, prudent business practices, and free market principles all for the sake of a political agenda and the political benefits that come with promising something for nothing.
The free market is one of the most highly efficient and productive forces on the face of the earth. It intuitively understands that businesses that show poor judgment in their business practices deserve to fold, while stronger, well-run businesses gain market share and expand their profit margins for their owners.
Freed from government interference, the marketplace functions precisely as it should. Investors who made mistakes in this market should be held responsible, and those who managed to navigate all the distortions imposed by Washington should be rewarded. The last thing we need is for government to play an even larger role, to prop up institutions that should be allowed to fail, and to use massive amounts of taxpayer dollars to further interfere with the marketplace. Should we really trust the very members of Congress who created the mess and failed to see the crisis coming with the task of fixing their mess?
When we free our markets of government controls, manipulation, and political considerations to pursue what free markets do best, which is to create wealth and jobs, our nation will be stronger. A so called “bailout plan” that saddles every American with thousands of dollars of debt, that artificially props up failed institutions, and that actually penalizes risk-taking and success will make our economy smaller and weaker, and only postpones a day of eventual reckoning that will likely include even more serious economic troubles.
The current economic crisis is complex and many people and institutions both in Washington and on Wall Street have a role and bear some level of responsibility for it. Many attribute the crisis to the quasi-governmental agencies Fannie Mae and Freddie Mac. Others attribute the crisis to the intervention of the Federal Reserve and the market distortions it may have created with artificially low interest rates. Still others blame the crisis on Wall Street greed and the extraordinary pay, bonuses, and severance packages realized by corporate CEO’s even while the institutions they headed were failing.
Whatever flaws and abuses exist in our economic system, what most observers agree upon is that this economic emergency has been precipitated by an extreme softening of housing markets in many parts of the country. And at the deep root of this problem is overzealous government interfering in credit markets by requiring lending institutions to abandon sound lending practices to advance a political agenda. Leading the list of government culprits are members of Congress.
In the 1970’s Congress enacted the Community Reinvestment Act (CRA) with the intent of requiring financial institutions to expand credit to a wider marketing base rather than to just credit-worthy customers. The lofty goal was to provide more affordable housing and promote more home ownership among low-income families. But the effect and scope of this act was fairly limited until 1995, at which time the Clinton Administration promoted new regulations requiring even more aggressive marketing of mortgage loans among low-income groups, imposing quotas, and mandating stiff penalties for banks that failed to offer “no money down” mortgages, floating rates, and loans made to people with no credit history or even bad credit history.
Federal law required banks to set aside prudent lending practices. Financial institutions began making profits in the expanded mortgage origination process, and they knew that even if borrowers defaulted the government would bail them out for defaulted loans they held. And so our most financially vulnerable citizens were encouraged to buy homes and take on debt they could scarcely afford. With growing pools of money being made available for home mortgages, home prices grew faster than inflation, ultimately creating a huge bubble waiting to burst.
Eventually, interest rates began to rise thus creating a crisis for those borrowers who had been enticed by adjustable rate mortgages. As monthly mortgage payments were dramatically rising, so too were gasoline prices. Many borrowers stopped paying, the once overheated housing market became a glut of foreclosed properties, lenders stopped lending, housing prices declined, and the bubble finally burst.
A national crisis -- threatening the very foundations of our nation, the stability of the dollar, and the economic well-being of future generations -- has been caused by a Congress willing to disregard the laws of human nature, prudent business practices, and free market principles all for the sake of a political agenda and the political benefits that come with promising something for nothing.
The free market is one of the most highly efficient and productive forces on the face of the earth. It intuitively understands that businesses that show poor judgment in their business practices deserve to fold, while stronger, well-run businesses gain market share and expand their profit margins for their owners.
Freed from government interference, the marketplace functions precisely as it should. Investors who made mistakes in this market should be held responsible, and those who managed to navigate all the distortions imposed by Washington should be rewarded. The last thing we need is for government to play an even larger role, to prop up institutions that should be allowed to fail, and to use massive amounts of taxpayer dollars to further interfere with the marketplace. Should we really trust the very members of Congress who created the mess and failed to see the crisis coming with the task of fixing their mess?
When we free our markets of government controls, manipulation, and political considerations to pursue what free markets do best, which is to create wealth and jobs, our nation will be stronger. A so called “bailout plan” that saddles every American with thousands of dollars of debt, that artificially props up failed institutions, and that actually penalizes risk-taking and success will make our economy smaller and weaker, and only postpones a day of eventual reckoning that will likely include even more serious economic troubles.
