| Subprime Loans: Government Runs Amok |
|
|
|
| Friday, 29 May 2009 | |
|
The truth behind the fallout of American lending institutions The subprime crisis is the result of too much government interference, not the free market. The start of the havoc-producing mess began with the Community Reinvestment Act that tried to prevent "redlining" and pressure banks to make loans in low-income neighborhoods. Banks received positive ratings by giving loans they usually wouldn't have...but did with the help of government pressure and incentives. Consistently encouraged by government and politicians, these risky loans ignored the credibility of the borrowers. Problem identified Under the Clinton Administration, this problem started to become apparent. Lenders were trapped in a Catch-22. "If they comply," wrote Loyola College economist Thomas DiLorenzo during the Clinton-era, "they know they will have to suffer from more loan defaults. If they don't comply, they face financial penalties...which can cost a large corporation like Bank of America billions of dollars." Lending to those who wouldn't normally qualify, no down payments, no verifications of income, interest-only payment selections and ignoring weak credit histories became the norm. Those institutions that tried to raise interest rates to better cover their risk were accused by the liberal politicians of "predatory" loans. This economic insanity continued to look like it was working as long as home prices kept rising--the latter being an unsustainable practice. But now that the bubble has burst, many mortgage lenders are bankrupt and thousands of homes are in foreclosure. Politicians caused the problem. Politicians' bailout plans will only make it worse. In economics, this is an example of the law of unintended consequences. The free market would have protected us from this mess. Government intention is counterproductive and destructive. |
| Next > |
|---|



