26. “Meltdown…” by Thomas E. Woods Jr

09/11/2009

I usually chew books, but this one smelled interesting enough to read. I recommend it to all Americans. Hopefully you will ascertain the facts about the causes of the Credit Crisis rather than just the reporting of the symptoms by the clueless media. Better still, and beware, you might even understand why we haven’t killed off the causes and why we may have just fueled them to strike again even more violently if the government doesn’t stop its inappropriate meddling with private affairs. Here are a few highlights of chapter One:

The Clinton Administration pressured Fannie Mae “to expand mortgage loans to low and moderate income people…to increase the number of minority and low-income home owners who [tended] to have worse credit rating than non-Hispanic whites."

Additional pressure was aimed at lending institutions by the Community Reinvestment Act (CRA) enacted by Jimmy Carter’s administration, which “opened banks to crushing discrimination suits if they did not lend to minorities in numbers high enough to satisfy the authorities.”

ACORN became aggressive: “blocking drive-up lanes and made business impossible for the banks.”

Fannie Mae and Freddie Mac, Government Sponsored Enterprises (GSEs) and “creatures of Government”, complied and removed many qualification restrictions. Note that these GSEs that “enjoy special tax and regulating privileges” and have a “special $2.25 B credit line with the Treasury” do not directly lend to the prospective homeowners. They buy mortgages that meet the guidelines established by them from banks and package them into secuitized debt packages sold to the private investors under the guise that they are top rated securities. Why top rated? Because the securities sold were classified as “government securities”, even the credit rating organizations were pressured to comply with the game by rating them high.

Did we know about a future meltdown? Read the September 1999 article in the Times which I quote from the book: “…Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government subsidized corporation may run into trouble in an economic downturn, prompting government rescue…”

So far I have learned: CRA + Government pressure [to be fair] = GSEs initiating risky investments forced upon lending institutions and protecting themselves by selling the securitized mortgage packages to you and me either directly or through funds. At this point the bad loans are not on the bank books, not on the GSE books, but in yours!

But how could the government even make it worse? Well, by lowering interest rates. How is this down? By printing more money and flooding the markets. Who controls this? The Federal Reserve, the highly government influenced Central Bank. Well, Alan Greenspan accommodated by lowering interest rates and for too long. Now, not only did the original targets, the low-income and minority sub-prime candidates jump aboard, but prime borrowers also went after the now very low interest rate ADJUSTABLE mortgage loans that are most clearly defined and explained to vary with interest rates – hence, interest rates go up, your interest rate and mortgage payment will go up.

Home ownership was further encouraged by the Bush administration that “removed down payment requirements.”

Well, more than the ordered banks joined in. To compete in the loan business, businesses like Countrywide pitched in and were quite aggressive, greatly adding to the mess. While the number of loans was rampant, the house prices rose because of demand (yes, the old supply and demand rule).

Now we have: CRA + Government pressure [to be fair] + GSEs + ACORN + Federal Reserve + more Government meddling + all lending institution involvement = a frenzy of home ownership and rising home prices.

But why wasn’t the industry regulated? Would you want to regulate the beast you created? How do you regulate when you have already defined the rules? Instead, the Government sent a message that the initiating businesses and supporting businesses were “too big to fail.” Thus, the formulation of the “bailout mentality” or the “rescue mentality” should something go awry. Well, it did. And, bailouts and rescues were indeed the tools tried. No need to get into the numerous businesses bailed out with We the People tax dollars that the Government caused. What I did find enlightening though were some examples of how much the Government bent over to accommodate “dumb” homeowners with refinance deals that actually left them with mortgages they could now afford PLUS additional dollars, enough for luxury cars (making them now not-so-dumb). Meanwhile, “We get to indirectly subsidize the foolish and improvident.”

Result: CRA + Government pressure [to be fair] + GSEs + ACORN + Federal Reserve + more Government meddling + all lending institution involvement + rising home prices + increasing risky loans = a BUST!

Well, we saw it big time. Did the Obama Government change its meddling? No, bailouts continued and the “we all need to be fair” attitude blinds our leaders. New Federal Reserve chairman Ben Bernacke continues to focus on the economy with the tools within his toolbox, but they are trial and error. But, is to save everybody leaving no one to fail right? The same failing conditions were given a band-aid. But, continued low interest rates could likely be the rekindling catalyst of more chaos. Mr. Woods writes “we are in for more resource misallocation and a more intense bust in the future.”

I hope my summary of chapter one in “Meltdown – A Free-Market Look at Why the Stock Market Collapsed, the Economy Tanked, and Government Bailouts Will Make Things Worse” by Thomas E. Woods, Jr. represents his key points. Thanks you Mr. Woods for the facts.

I leave you with the following home work assignment:

Continued Government meddling into private businesses and individual affairs will yield what?