After days of moaning and blaming, perhaps a few facts should be inserted into the discussion about the current financial melt-down.
Barack Obama blames John McCain and Republicans for the mess. Why? According to Obama, Conservatives have been advocating de-regulation and free market controls and this de-regulation produced the current fiasco. Sounds great to liberals. Must be true.
However, a tiny bit of knowledge regarding economics and the free market concept are helpful. De-regulation did not cause this problem. New regulations caused it; new regulations from the Democrats.
Rewind to the 1995 Clinton Administration. Bill Clinton believed that everyone has a right to own a home. Everyone should own a house whether they can afford it or not. It was in the Constitution; or at least it should be. Banks were hesitant to follow the President’s lead however. They knew that there were certain geographic and demographic areas that foreclosure was a near certainty.
Mr. Banker, do you think it is too risky to loan money to people with a history of non-payment? Are you worried about default and foreclosure on loans to unstable people with unstable incomes? Enter Fannie and Freddie. They will cover the risk. When the loans fail (and they did by the thousands), someone else will take the loss. So, give them the loan.
To the average consumer this is great news. To the poorest in our country it is better news. It no longer takes a good work history and 10% cash down to buy a house. You just need a smile and a signature and you can finance 105%, buy the house of your dreams, and make payments when it is convenient. Trillions of federally insured dollars, that never should have been there in the first place, flowed into the credit markets. Understandably, home builders loved this plan. So did the Finance industry. All markets were booming. Politicians, especially friends of Obama, cashed in on the deals.
But everyone ignored some core principles of the free market. They forgot that risk requires compensation. Financial activities with risk fail, sometimes frequently, and require a high rate of potential return to cover the losses. Bill Clinton and Fannie Mae tried to remove the risk. But they couldn’t. They could only shift it to someone else; Fannie and Freddie. They forgot (if they ever knew) how money is actually made and how goods and services are exchanged.
Which brings us to the big, bad, predatory bankers and their outrageous practice of loaning money to people that could never afford it. This is exactly the change Bill Clinton and the Democrats were pushing. The created and changed laws so that people that could not afford a house could buy a house. Barney Frank is STILL trying to make this happen. The mortgage lenders were fulfilling the wishes of the White House. To vilify them now is to distort history.
This is not how the free-market works. It is not de-regulation it is changing regulations to produce a desired outcome with political pressure. Just the opposite of what McCain has advocated and exactly what Obama has supported. In 2005 when Conservatives tried to deal with the mess before it got out of control, McCain supported action and Obama opposed it.
Politicians are now crying that we must provide a $700 billion dollar bail-out, which is not nearly enough by the way. And who will be paying this enormous tab? You and me. People that have worked hard, paid our bills, scrimped, saved and managed our money wisely are absorbing the risk and paying the bills.
And who created this fiasco?
The Democrats did it.