CNN has a commentary on the bailout by Jeffrey Miron, senior lecturer in economics at Harvard University. He’s a real libertarian, not just a conservative with libertarian leanings, like me.
Go have a look at it; it’s a pretty quick read.
He basically says what I said yesterday, that this is a government-created problem. Only, he reaches a different conclusion. While I said that the government has a legitimate role in cleaning up its own mess, he thinks the last thing we need is more government involvement.
I can see what he means.
I say, what to do depends on a couple of things. (1) Can the markets recover on their own? (2) Will the final bailout bill add more government interference or just an infusion of cash to buy up the toxic assets it helped create?
Miron says that the markets can recover on their own, but concedes “if the bailout does not occur, more bankruptcies are possible and credit conditions may worsen for a time.”
At the same time, it is unlikely that our Congress is capable of passing a bill that does not contain more government involvement that will ultimately cause more harm than good. The left has already grabbed ahold of the situation as justification for more government intervention in the markets.
I still think that there is a legitimate role for the government to play here, but the more political rhetoric I read, the less confident I am that our government can suitably play that role.
Maybe it is time for the government to just get out of the way.
October 2nd, 2008 at 2:06 pm
It isn’t clear that this is a “government-created problem.” Milron Is not very specific in his accusations but he does refer to 1977 and the 1990s when he says congress pushed Fanny and Freddy to extend sub-prime mortgages. This is a reference to the Community Reinvestment Act (CRA) passed in 1977 and expanded in 1995. According to one Illinois mortgage broker:
These [CRA] programs have had higher default rates than standard conventional loans. But not to an excessive degree, and compared to the overall mortgage market they were just a small drop in a big bucket.
I don’t know exactly how big of a drop he’s means exactly, but “a drop in the bucket” tends to refer to a negligible amount. I’m inclined to cite private greed for the meltdown, not a law from the seventies. Do you have any numbers that prove it was the Community Reinvestment Act or other federal acts that caused this meltdown?
October 3rd, 2008 at 1:39 am
This IS a government-created problem…in a way. The term “subprime” basically means loans that do not meet Fannie Mae or Freddie Mac guidelines in the first place (so they weren’t making them at all), generally due to one of an array of factors including the size of the loan, income to mortgage payment ratio, or the quality of the documentation provided with the loan.
The Community Reinvestment Act (or CRA) is a U.S. federal law that merely requires banks and savings & loan associations to offer credit throughout their *entire* market area. The act prohibits financial institutions from targeting only wealthier neighborhoods with their services, a practice known as “redlining.” The purpose of the CRA is to ensure that under-served populations can obtain credit, including home ownership opportunities & commercial loans to small businesses. CRA loans are both profitable & not overly risky, and approximately half of the subprime loans were made by independent mortgage companies that were not regulated by the CRA. Twenty-five to thirty percent came from only “partially” CRA regulated bank subsidiaries & affiliates. Apparently, institutions that were fully regulated by the CRA made perhaps one in four sub-prime loans. The worst and most widespread abuses occurred in the institutions with the least federal oversight (hence the government-created problem IMO).
According to the President of the Federal Reserve Bank of San Francisco, independent mortgage companies made “high-priced loans” at more than twice the rate of the banks & thrifts. She also stated that most CRA loans have been responsibly made and were not the higher-priced loans that have contributed to the current crisis. Studies have shown that CRA regulated institutions were less likely to make subprime loans, and when they did…the interest rates were lower. CRA banks were also half as likely to resell the loans to other parties. This kind of “bundling”, which was allowed by deregulation of the industry (again, govt. gone awry IMO), was one of the main reasons that this crisis happened in the first place.
What’s really going on in a lot of the Right-wing now is a vain attempt to get rid of the GSEs entirely, which they never liked in the first place.
Here’s a good article that, IMO, explains a lot about how this mess was created:
http://www.prospect.org/cs/art.....le_economy
October 3rd, 2008 at 2:05 pm
Thank you Wikipedia.
This is not about CRA, per se, this is about Fannie Mae lowering credit requirements to include people who were previously categorized as sub-prime borrowers.
I have a new post on this with more.