No Credit? No Down Payment? No Problem -

My Top Ten reasons to vote for McCain/Palin:
Reason #2 Our Current Economic Problems, why? Who is responsible? Could we have avoided them?
By Jay Branson, CFP, ChFC


What happened? Who is responsible for this? Could we have avoided all this? Those are the questions on many people’s minds right now. With the financial markets, consumer confidence, and our economy more or less in a turmoil, David Kelly Chief Market Strategist of J.P. Morgan, characterizes as a Tantrum I think it is important to consider how we arrived here and how do we avoid this type of experience in the future. In short this is an example of Good Intentions = Unintended Results on a colossal scale. The Good Intentions were affordable housing, and you know what the unintended results have been. There was a time recently when a proposal was made that could possibly have avoided the whole mess, but Washington (half of it) killed the attempt to fix it.

Fundamentally, the subprime mortgage bust of last year and the recent liquidity crisis do not represent a failing of capitalism. It does not mean that free markets have failed our country, so beware of anyone trying to make that connection to their own political benefit. Some blame greed for our problems. It makes a nice moralistic argument about the corruptions of modern society, but as it relates to Wall Street, it doesn’t explain their failings. However, immorality does explain the actions of the group that is most culpable for our current economic crisis: the government.

This problem started with Carter, got a big boost from Clinton, and then the current Democrat leadership stopped any efforts to fix the problem 3 years ago. So, the $700 billion Troubled Asset Relief Program (TARP) should be seen not as a bailout of fat cat investors, but instead as the “you broke it you pay for it” except that it is not their money. The underlying cause of the credit crisis stems from last year’s subprime mortgage fiasco, which itself resulted from the bursting of the housing bubble. These events have the government’s fingerprints all over them.

To start with, look at the policies of Washington on housing. Homeownership is the political Holy Grail, and every politician savors the ability to brag to their constituents about voting to help the homeowner. Bonus points if those new homeowners are from minority groups. Consequently, we’ve seen the powerful influence of groups such as the Association of Community Organizations for Reform Now (ACORN) impact the directives and legislation from Capitol Hill.

Chiefly, the government has pushed lenders of all types to make more loans and more credit available to borrowers who would not normally qualify for a loan. When more people had mortgages, there were more prospective homebuyers, which drove up the cost of housing through basic supply and demand. Hence, the government has played a pivotal role in the housing bubble.

One of the most egregious examples is from California and the Sacramento home of Rep. Laura Richardson. The Southern California Democrat bought the house for $535,000 with no money down in January 2007. In addition to 100% financing on the home itself, the woman who sold the house to Richardson also gave Richardson $15,000 toward closing costs. Approximately one year later she let the home go into foreclosure owing Washington Mutual nearly $575,000 and it was sold at auction for $388,000. This is not just an average everyday irresponsible individual trying to game the system and flip a house for a profit. This is a member of Congress, a lawmaker, someone who votes on serious issues that effect the entire country.

Washington’s legislation also had a profound impact on Fannie Mae and Freddie Mac, the mortgage giants recently taken over by the Feds. For the purpose of promoting homeownership among the lower and middle classes, the Department of Housing and Urban Development (HUD) set targets for the percentage of loans Fan and Fred had to make to anyone earning less than an arbitrary amount. Strangely, the same groups that hailed this a way to promote equality are the groups that now grouse about the practice of “predatory lending,” or when banks supposedly make loans to people with poor credit at high rates.

The politicians did not stop there, however. During the Clinton administration, the Community Reinvestment Act (CRA) was given new teeth to encourage banks to promote the “common good.” Effectively, it did to all of Wall Street what the HUD had done to Fan and Fred. Any bank that didn’t jump through hoops to satisfy these demands ran the risk of being sued for redlining or discrimination.

Of course, the idea of a “common good” here ignores the basic capitalist tenant that what is good for the individual benefits society in the long run. The CRA focused on the shortsighted goal of increasing homeownership, which served to fulfill the even shorter term goal of helping politicians win reelection.

As we’ve seen all too much recently, populism has again returned as a viable political strategy in Washington, with the presidential candidates using the “people vs. Wall Street” rhetoric to great impact. You will hear terms from the left like fairness, economic justice, and in simpler terms “spreading the wealth”. This crisis resulted from an effort to be fair, and economically just, and spread the wealth. Worse than the government’s incompetent handling of housing has been their attempts to fix what they often deem to be the free market’s inadequacies — never mind that their meddling caused the problems in the first place.

For example, in September, Senate Majority Leader, Harry Reid casually referred to “A major insurance company — one with a name that everyone knows that’s on the verge of going bankrupt.” While not naming names, Reid’s tremendously irresponsible action encouraged speculation and fear that caused insurance stocks to tank the following day. Similarly, Chuck Schumer suggested earlier this summer that the regional IndyMac Bank “could face collapse.” Predictably, IndyMac collapsed after spooked investors pulled their money out of the bank, a classic 11 day run caused by a loss of confidence.

There are some in Washington who can see things clearly and have the right priorities. The Federal Housing Regulatory Reform Act of 2005 stands as a good example of what is both right and wrong about Washington. The act itself called for a stronger regulator for Fannie and Freddie (right). However, it was killed off by the Democrats in a party line vote (wrong). More importantly, though, are the sponsors names attached to this bill. John McCain cosponsored it, and Barack Obama fell in line with his party and voted against change for the better. Certainly, Republicans do not advocate reckless deregulation. Instead, they just realize the difference between more regulation and more effective regulation.

TARP has become law, and the political class is crowing about how they needed to rescue Wall Street to protect Main Street. And they’re right. Without the bailout, the liquidity crisis would have gotten worse before it got better. Credit has dried up, and even sound companies like General Electric are feeling the squeeze. There’s no denying that something had to be done, and Treasury Secretary Hank Paulson’s plan represented a simple, elegant, but effective solution.

The Relief Program will work, because it will restore investor confidence, and restore banks confidence in each other. Recently, banks went to the Fed, the traditional “lender of last resort,” for a record breaking amount of overnight loans. When banks are afraid of lending to each other, they don’t even think about lending to consumers. And without consumer lending, housing prices continue to fall, and the crisis continues until we reach a painful bottom. TARP will help prevent that.

Recovery now depends on the government’s ability to keep its hands off of Wall Street and let banks do what they know is best for themselves, because what’s good for the banks is good for the economy, and what’s good for the economy is good for the American people. Everyone benefits when the economy grows, because unlike income redistribution schemes that simply chop off future growth to make everyone worse off, capitalism brings up the entire boat.

Finally, capitalism is still our best and only option for a viable economy. Anyone who thinks that patently moronic laws like the Community Reinvestment Act represent a free market environment is far from reality. We need policies that encourage homeownership among those who can afford it and economic growth plans so that anyone who can’t afford a home can work to achieve that goal. As such, we need to embrace lower taxes, a minimal government presence in the private sector, and as voters, responsibility for our elected officials. We need a return to capitalism.