From television specials to newspaper editorials, the media are pushing the idea that current
economic problems were caused by the market and that only the government can rescue us.
What was lacking in the housing market, they say, was government regulation of the market’s
“greed.” That makes great moral melodrama, but it turns the facts upside down.
It was precisely government intervention which turned a thriving industry into a basket case.
An economist specializing in financial markets
gave a glimpse of the history of housing markets when he said:
“Lending money to American homebuyers had been one of the least risky and most profitable businesses
a bank could engage in for nearly a century.” That was what the market was like before the
government intervened. Like many government interventions, it began small and later grew.
The Community Reinvestment Act of 1977 directed federal regulatory agencies to “encourage”
banks and other lending institutions “to help meet the credit needs of the local communities
in which they are chartered consistent with the safe and sound operation of such institutions.”
That sounds pretty innocent and, in fact, it had little effect for more than a decade.
However, its premise was that bureaucrats and politicians know where loans should go,
better than people who are in the business of making loans.
The real potential of that premise became apparent in the 1990s, when the Department of Housing and
Urban Development (HUD) imposed a requirement that mortgage lenders demonstrate with hard data
that they were meeting their responsibilities under the Community Reinvestment Act.
What HUD wanted were numbers showing that mortgage loans were being made to low-income
and moderate-income people on a scale that HUD expected, even if this required “innovative or
flexible” mortgage eligibility standards. In other words, quotas were imposed—and
if some people didn’t meet the standards, then the standards needed to be changed.
Both HUD and the Department of Justice began bringing lawsuits against mortgage bankers
when a higher percentage of minority applicants than white applicants
were turned down for mortgage loans. A substantial majority of both black
and white mortgage loan applicants had their loans approved but a statistical
difference was enough to get a bank sued. It should also be noted that the same
statistical sources from which data on blacks and whites were obtained usually contained data
on Asian Americans as well. But those data on Asian Americans were almost never mentioned.
Whites were turned down for mortgage loans more often than Asian Americans. But saying that would
undermine the reasoning on which the whole moral melodrama and political crusades were based.
Lawsuits were only part of the pressures put on lenders by government officials. Banks and other
lenders are overseen by regulatory agencies and must go to those agencies for approval of
many business decisions that other businesses make without needing anyone else’s approval.
Government regulators refused to approve such decisions when a lender was under investigation
for not producing satisfactory statistics on loans to low-income people or minorities.
Under growing pressures from both the Clinton administration and later the George W.
Bush administration, banks began to lower their lending standards.
Mortgage loans with no down payment, no income verification and other “creative” financial
arrangements abounded. Although this was done under pressures begun in the name
of the poor and minorities, people who were neither could also get these mortgage loans.
With mortgage loans widely available to people with questionable prospects of
being able to keep up the payments, it was an open invitation to financial disaster.
Those who warned of the dangers had their warnings dismissed. Now, apparently, we need
more politicians intervening in more industries, if you believe the politicians and the media.