The Cause of the Housing Crash

A recent post by our friends at TruPolitics.net covered the current financial crisis. The analysis brought up a point that has been bothering me for awhile. Whenever you hear about the housing bubble burst it is almost always being talked about as the market failing. You hear about the “greedy” investors on Wall Street causing the meltdown. It seems as though everyone is eager to buy into this theory. The problem with this explanation is that it just simply is not true. There is no market failure in this crash. The crash, as we will see, is the direct result of government intervention in the market.

In 1977, the Community Reinvestment Act was passed. The purpose of this law was to make housing affordable to anyone and everyone. As recent events have proven not everyone should be able to get a mortgage. The law “was used to pressure banks into making loans they would not otherwise have made and to adopt looser lending standards that would make mortgage loans possible for individuals who could not meet the down payment and other standards that had previously been applied routinely by banks and other housing lenders.” (Wallison)by Stanley Kurtz on ACORN and its ties to the CRA, Obama and the Democratic party go here.

A quick side note on the CRA. This Act was pushed for by the now infamous “community organization group” called ACORN. You may remember this group coming up during the 2008 campaign. For a very detailed and well written article

ACORN along with the new law were “able to delay and halt the efforts of banks to merge or expand until they had agreed to lower their credit standards.” (Kurtz) This is the most critical part of the whole operation. The US government “created the necessary conditions for a housing boom by directing investments into the housing sector, requiring banks to make mortgage loans they otherwise would never make.” (Wallison)

In 1993, banking regulators were aggressively attempting to reform the CRA laws. In 1994, Janet Reno said this “[W]e will tackle lending discrimination wherever and in whatever form it appears. No loan is exempt, no bank is immune. For those who thumb their nose at us, I promise vigorous enforcement.” (Wallison) Finally in 1995, the Clinton/Reno efforts came to fruition with a massive overhaul of the CRA. The new rules are the cause of the downturn we are feeling today.

The new and improved CRA took most of the decision making away from the banks when it came to who got loans. Basically, the evaluations were now results based. They looked at how many loans were given not at whether the banks were trying to find qualified customers. An economist writes “[This] can be thought of as a shift of emphasis from procedural equity to equity in outcome. In that, it is not sufficient for lenders to prove elaborate community lending efforts directed towards borrowers in the community, but an evenhanded distribution of loans across LMI [low and moderate income] and non-LMI areas and borrowers.” (Wallison) The banks were now forced to use aggressive or lax lending practices in order to comply with the law.

Now some may say there were not enough defaulting CRA mortgages to cause the industry to implode. This is true. However, Wallison states,”The key question, however, is the effect of relaxed lending standards on lending standards in non-CRA markets. In principle, it would seem impossible—if down payment or other requirements were being relaxed for loans in minority-populated or other underserved areas—to limit the benefits only to those borrowers. Inevitably, the relaxed standards banks were enjoined to adopt under CRA would be spread to the wider market—including to prime mortgage markets and to speculative borrowers. Bank regulators, who were in charge of enforcing CRA standards, could hardly disapprove of similar loans made to better qualified borrowers.” In short, the poison of the CRA spread into non-CRA areas and even into non-housing areas. Wallison goes on to say,”Interest on consumer loans of all kinds—for cars, credit cards, or other purposes—is not deductible for federal tax purposes, but interest on home equity loans is deductible no matter what the purpose of the loan or the use of the funds. As a result, homeowners are encouraged to take out home equity loans to pay off their credit card or auto loans, or to make the purchases that would ordinarily be made with credit cards, auto loans, or ordinary consumer loans. Under these circumstances, homeowners are encouraged not only to borrow against their homes’ equity in preference to other forms of borrowing, but also to extract equity from their homes for personal and even business purposes.”

As if the CRA wasn’t enough government intervention Fannie Mae and Freddie Mac also played a role. These are government sponsored companies, meaning if anything goes wrong with them the taxpayer pays for it. Fannie and Freddie started to purchase the subprime and Alt-A loans (the high risk loans). In 2004, they increased their purchasing of these loans, which caused non-government run businesses to lose market share. This created a large demand for the loans by all the mortgage dealers. Because of “the increased demand from the GSEs and the competition with private-label issuers drove up the value of subprime and Alt-A mortgages, reducing the risk premium that had previously suppressed originations. As a result, many more marginally qualified or unqualified applicants for mortgages were accepted, and these loans joined the flood of junk loans that flowed to both the GSEs and the private-label issuers.” (Wallison)

When the bubble started to burst and home values dropped “about half of all home loans being made in the United States were non-prime loans.” (Wallison)

Due to the government intervention of the CRA, Fannie Mae and Freddie Mac the economy is in the gutter. If the government hadn’t forced the market to make high risk loans there would not have been a problem. If the government hadn’t falsely driven up the value of the sub-prime loans there would not have been a problem. This is the root cause. You cannot attempt to manipulate the market through government regulation without consequences. The free market works for a reason. It calculates value and risk. When you socialize any aspect of process it skews the market. Prior to the CRA, the market knew it should not loan to high risk individuals.

This is why we cannot let people get away with calling this whole mess the result of Wall Street greed. It is the result of people trying to socialize the market. This is also why I was strongly against John McCain running against Barack Obama. McCain did not make this argument once. If there had been someone out there who could articulate the true cause of the economic crisis the outcome would have been different. But instead we sent someone out there who doesn’t even believe in the Free Market. This whole problem is directly tied to the policies the Democrats have been nurturing for about 30 years, the policies of socialism.

NHS anyone? Anyone?…

Health care has been a hot button issue since early in the latest campaign cycle. Although it did lose steam once the economy went into the tank. The most common cry I hear is that the US should have a single payer health care or government run system. Whenever having this debate conservatives all across the U.S. hear the same thing, “My friend x lives in Canada, UK, etc. and says the health care system is the best EVARRRR!” I usually respond with “Welp, you sold me pal! Where can I sign up?” However, for the more intellectually inclined readers we are rolling out a new segment on The Daily Switch, which will deal directly with the topic of socialized medicine. The articles will consist of explanations and analysis on free market health care vs socialized health care and maybe more importantly articles from newspapers in the socialized countries detailing the horrors of socialized medicine.

The first article can be found here. It comes from the Guardian, a UK paper.

The title alone should sober even the most staunch socialized health care advocate, however, the first line drives the point home, “Patients who have major surgery in Britain are four times more likely to die than those in America.” You would think that a line like that would be enough for most people to abandon the system. The article also states that about 2.5% of Americas die after surgery whereas about 10% of Britons die. Towards the end of the article it states that there are an estimated 350,000 emergency surgeries a year that would fall into this category. That means about 35,000 people that fall into the types of surgeries studied die in the UK vs 8,750 people in the US.

“The authors conclude that NHS waiting lists, the lack of specialist-led care and the fact that many patients do not go routinely to intensive care contribute largely to the difference.” This is the problem with socialized health care or any socialized system for that matter. Supply, timeliness and quality. Professor Monty Mythen, who was headed the British side of the study said this, “We would be suspicious that the diseases would be more advanced in the UK, simply because the waiting lists are longer.” In short, people are dying because the single payer NHS cannot handle the amount of people and when they do the results are drastically worse than the more free market leaning US model. Unfortunately, as is the case in health care, people die as a result of socialism.

The Daily Switch

Friedman Owning…

Free market capitalism is constantly under attack from liberals, and stands as an area where we cannot allow the Left to advance their causes, specifically socialism. No matter where you turn, whether it is the nightly news or a conversation with a co-worker economic ignorance is being spread. The grassroots on the Right must be able to articulate why capitalism is the only way for a country to remain free. They must be able to spot the fallacies and lies spread by socialists parading as moderate liberals. We hope that this blog will be a source to help in the battle.

Mark Levin shared the following video on his show last Thursday night:

Aside from being wildly entertaining (seeing Friedman decimate poor Phil here), this video shows a few examples of common tactics used by the Left. The first is Phil’s opening question which was is greed a good basis for running an economy? If you start debating the Left at this point the debate is already framed in the Left’s favor. Friedman recognizes this and counters with “Is there a society that doesn’t run on greed? What is greed?” I don’t want to quote the whole video, however, his response to Phil is that “the world runs on individuals pursuing their separate interests.” This becomes a very important distinction that we have to make anytime we debate. Self interest is not greed. Period.

Jump ahead in the video for a moment, Phil states that capitalism “seems to reward not virtue, but ability to manipulate the system.” This is a topic that could be (and has been) written about for pages and pages…enough to fill any library. The Left constantly tries to make the argument that capitalism is immoral, or not virtuous. I really can’t counter any better than Friedman. “And what does reward virtue? Do you think a Communist Commissar rewards virtue? Do you think a Hitler rewards virtue?…Is it true that political self interest is more noble than economic self interest?” Forced socialism in any form is the antithesis of virtue. What is virtuous or moral about taking what you did not earn from someone who did earn it? Most circles considered this stealing, but this is exactly what the Left gets away with on a daily basis. Free Enterprise is not only the moral option between the two, but is the only moral basis for an economic system.

One thing that we cannot forget is that we are right. To quote Friedman, “The only cases where the masses escaped from the kind of grinding poverty you are talking about in recorded history is when they have capitalism and free trade. The societies that are worst off are the ones that depart from that.” This is the clincher. Throughout “recorded history” we are given examples of socialized economies failing over and over from ancient Egypt to modern day Cuba. The Left speaks of equality and virtue, but to this day the only societies that lessened the financial gap have been Free Market societies.

The Daily Switch