Brace yourself

There are few issues weighing heavier on the minds of American citizens, businesspeople, economists, and politicians of late than those of regulation and deregulation. The political rhetoric out of Washington has been blaming our current economic crisis on what politicians call “deregulation.”

They claim that because the housing market was left to its own devices without the omniscient hand of government to guide it, it imploded upon itself and took the rest of the country with it. They claim that government now must step in and closely watch American businesses to ensure that they don’t make the same mistakes again. They want to interfere more with the economy.

However, typical of governments everywhere, our own refuses to acknowledge the truth. The truth is that it was not decreased government interference in the economy that led to the housing collapse, but rather increased government interference.

But why then, pray tell, does the government say that it was deregulation?

The answer is that it was only by government regulation that the market was forced to deregulate. In other words, the government mandated that mortgage lenders lower their standards below what the market would have self-regulated them to.

Through methods such as the Community Reinvestment Act of 1977 and its numerous subsequent expansions as well as the infinite and monopolistic credit creation powers of the Federal Reserve System, the government regulated that lenders extend credit to borrowers that, under a free market, would never have been able to qualify for a mortgage.

Under a market free from government intervention, a person likely to default on a mortgage would not have been extended one in the first place. Banks would not incur this risk because if the potential borrower’s credit rating and personal history made the extension of the loan too likely to result in a default, the loan would not have been granted in the first place. This is a perfect example of the market regulating itself. No bank wants to lose money, so banks try to minimize the risk of bad loans. Oh, it’s also common sense.

However, when political posturing is allowed to supersede common sense economics, we get things such as the CRA. The government forced lending institutions to lower their standards and knowingly make loans they would not otherwise have made. The government regulated that the market deregulate.

Banks that did not want to extend loans faced the possibility of government sanctions, a tsunami of “discrimination” lawsuits, and not to mention the distinct possibility of being put out of business by other banks that did make these loans. Surely these banks knew the bubble was building and would one day burst, but far better to make bad loans in the hope of weathering the storm than not make bad loans and guarantee failure.

The irresponsible money and credit creation of the Federal Reserve catalyzed the bubble even further, injecting infinite amounts of money to banks that, rather than sit on these massive new assets, loaned them out to just about anyone that came along or risk failure.

Of course people wanting to sell homes, seeing how easy it was for others to buy them, hiked prices above what the self-regulating market would have set them at. Homebuilders, also eager to capitalize on the funny money themselves, built huge amounts of new houses; so many that soon the supply grew beyond the demand, and prices began to precipitously fall.

People who took out mortgages anticipating their home value to rise now saw their home values fall and their rising mortgage payments impossible to make. Foreclosure soon followed.

Fannie Mae and Freddie Mac, who had bought the original mortgages from banks, packaged them into securities, and sold them to investors and other financial institutions, now found these mortgage-backed securities worthless and illiquid.

Soon, the problem resonated throughout the financial services industry and predicated the present recession. All because of the actions of the government, not the free market.

Is this a complete explanation of the problem? Of course not. Believe me, there’s moreand I could go on. Suffice it to say that worst of all, now the government wants to do the same thing again: interfere and refuse to believe that the market is inherently self-regulating and self-correcting. They tried it once, and now we’ve let them do it again. Brace yourself. We’re in for it.

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