The problem with the government getting into the market place

The strongest tie that binds me to conservatism is my belief that the principle that “that government is best which governs least” applies most strongly in the area of economics.  I believe that government should make a few big rules — don’t discriminate, don’t cheat, don’t commit fraud, etc. — and then it should stand out of the way and let the marketplace take over.  (As an aside, I don’t think McCain will be great in this area, but he’ll still be so much better than Obama and Hillary that it goes without saying that people like Rush and Ann and Michelle should should sheath their nails and vote for him.)

The moment government starts micromanaging the market, bad things happen.  Earl has just tipped me off to the fact that the recent mortgage collapse, which was the first pebble in the avalanche that is now a nascent recession, started with government insistent on manipulating the mortgage market to advance social policy:

PERHAPS the greatest scandal of the mort gage crisis is that it is a direct result of an intentional loosening of underwriting standards – done in the name of ending discrimination, despite warnings that it could lead to wide-scale defaults.

At the crisis’ core are loans that were made with virtually nonexistent underwriting standards – no verification of income or assets; little consideration of the applicant’s ability to make payments; no down payment.

Most people instinctively understand that such loans are likely to be unsound. But how did the heavily-regulated banking industry end up able to engage in such foolishness?

From the current hand-wringing, you’d think that the banks came up with the idea of looser underwriting standards on their own, with regulators just asleep on the job. In fact, it was the regulators who relaxed these standards – at the behest of community groups and “progressive” political forces.

In the 1980s, groups such as the activists at ACORN began pushing charges of “redlining” – claims that banks discriminated against minorities in mortgage lending. In 1989, sympathetic members of Congress got the Home Mortgage Disclosure Act amended to force banks to collect racial data on mortgage applicants; this allowed various studies to be ginned up that seemed to validate the original accusation.

In fact, minority mortgage applications were rejected more frequently than other applications – but the overwhelming reason wasn’t racial discrimination, but simply that minorities tend to have weaker finances.

Yet a “landmark” 1992 study from the Boston Fed concluded that mortgage-lending discrimination was systemic.

That study was tremendously flawed – a colleague and I later showed that the data it had used contained thousands of egregious typos, such as loans with negative interest rates. Our study found no evidence of discrimination.

Yet the political agenda triumphed – with the president of the Boston Fed saying no new studies were needed, and the US comptroller of the currency seconding the motion.

No sooner had the ink dried on its discrimination study than the Boston Fed, clearly speaking for the entire Fed, produced a manual for mortgage lenders stating that: “discrimination may be observed when a lender’s underwriting policies contain arbitrary or outdated criteria that effectively disqualify many urban or lower-income minority applicants.”

Some of these “outdated” criteria included the size of the mortgage payment relative to income, credit history, savings history and income verification. Instead, the Boston Fed ruled that participation in a credit-counseling program should be taken as evidence of an applicant’s ability to manage debt.

Sound crazy? You bet. Those “outdated” standards existed to limit defaults. But bank regulators required the loosened underwriting standards, with approval by politicians and the chattering class. A 1995 strengthening of the Community Reinvestment Act required banks to find ways to provide mortgages to their poorer communities. It also let community activists intervene at yearly bank reviews, shaking the banks down for large pots of money.

Read the rest here.

What is being described above is precisely the same type of racism my daughter is having foisted on her by her classmates, little kids who are channeling the ideology of their liberal parents:  to make up for past bad racism, we’re going to engage in present “good” racism.  None of these highly educated people seem to have figured out that what we need to do is eliminate racism entirely.


3 Responses

  1. May I be the first to mention the “Law of Unintended Consequences”? But I wonder if they were really all that unintended.

  2. My brother has a dictum about this sort of thing…..if you do something that has perfectly predictable negative consequences, then you “intend” the consequences. You are not allowed credit for your good intentions when the ugly aftermath can reasonably be foreseen.

    And exactly what has happened was predicted by informed people years and years ago. This CANNOT have been a surprise to anyone paying attention – and not paying attention in these matters is culpable in itself.

  3. Ah, highlander, I think this truly was a case of unintended consequences. No one would have wished such a large number of home foreclosures on people who in good faith – but with great ignorance – bought into more financial risk than they could handle.

    In this country, you’re allowed to take great risks for potentially great rewards – or great failure. Ignorance is no excuse for failure; it just puts you at greater risk. Do you really want to make failure comfortable? We have safety nets in place already for people so that the failures don’t result in total calamity.

    I had a coworker who three years ago wanted to get in on the speculative frenzy of home ownership as a great short-term investment. To produce a huge profit quickly. I shook my head and said, anytime you or I hear about such an “oppportunity” through widespread mass media communication, it’s already too late, and the speculative bubble must be about to burst.

    I don’t feel bad for people who used home ownership as a get rich quick scheme. I do feel bad for the suckers who bought into the ARM mortgages, especially the ones with outrageous rider conditions. (Conditions that functioned as inevitable traps for the unwary, and were hidden in voluminous fine print that they lenders KNEW from experience were never read nor understood.) I pity these people, but what can you do?

    If it seems to good to be true, it probably is. There’s no substitute for wisdom.

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