Sunday, October 05, 2008

Time vs. the Times.

Time magazine has an interesting account of the small role that the “prosperity gospel” played in the housing debacle. The “prosperity gospel” tends to be associated with fundamentalist churches, typically of the Pentecostal variety, often predominantly black churches.

The basic premise of this theology is that God doesn’t just want to “save sinners” but bless them as well. Often these advocates of divine healing see wealth as another form of health -- it is financial health. And if God wants believers to prosper in all things then he is going to bless them financially.

The Time article quotes various experts on Pentecostalism all saying that these doctrines encouraged poor believers to go out and get the house that God wanted them to have regardless of their credit rating. So they did. The article said that “native-born faith built partially on American economic optimism entered into a toxic symbiosis with a pathological market.” One professor of religion said the doctrine made believers vulnerable to “greedy brokers.”

While I think they touch on a small aspect of the crisis, the way theology impacted actions and encouraged poor people to apply for loans they couldn’t afford, it is clear they know nothing about economics or politics.

Consider the “greedy brokers” for an instant. I would think that a truly greedy broker wouldn’t lend money to people who can’t pay back the loan. And what makes the market pathological?

While this article is happy to look at a very tiny role that religion played in the problem it implies the entire debacle was caused by “pathological markets” and “greedy brokers”. That view is wrong and another journal of record shows how it is wrong -- the New York Times.

The Times has run an article which more clearly shows how altruism, in contrast to greed, played a major role in the crisis. And it showed how markets weren’t allowed to operate and that the crisis was politically created by “caring” politicians.

The Times article mentions the CEO of Fannie Mae, Daniel Mudd, as someone who “wanted to work for an altruistic business”. He was happy to work with Fannie Mae which is “a government-sponsored company” that “helped Americans get cheaper home loans”. This was government “helping” people not markets acting in a greedy manner.

And remember those “greedy” individuals helping lend money to people? The article also reveals why this was happening -- and it wasn’t greed, it was politics. “Congress was demanding that Mr. Mudd help steer more loans to low-income borrowers.” In fact, Mudd’s own managers told warned he was “making too many loans that would never be repaid.” But Mudd was an “altruist” wanting to “help” people.

Congress was whining that the markets, left to their natural inclinations, wouldn’t make loans to people who can’t afford them. This, no doubt, is pretty much true. So Congress used this “government-sponsored company” to ignore “greed” and act “altruistically” by “helping” poor people borrow money. Between 2005 and 2008 “Fannie purchased or guaranteed at least $270 billion in loans to risky borrowers -- more than three times as much as in all its earlier years combined...” Mudd admits he that he feared “Congress would feel like we weren’t fulfilling our mission” and that is why he followed the policies that are causing so much misery.

Just a few years ago it was “greedy” not to loan money to high risk individuals. Now, when the shit hits the fan, the same moaners claim that loaning the money was inspired by greed. So not loaning the money is greedy and loaning the money is greedy. What they can’t accept is that it was altruistic impulses that helped cause this problem. In 2000, Fannie Mae announced “it would buy $2 trillion in loans from low-income, minority and risky borrowers by 2010.” Fannie Mae wasn’t being greedy at all -- it was being generous. It was following orders from politicians in Washington to loan out money to the poor.

And at the time, when this started, various critics warned of a crisis that could result from such reckless lending. Congressmen like Barney Frank dismissed the warnings and announced that the government-sponsored program was sound and should keep doing what it was doing. Of course Congressman Frank now blames the problem on markets and not on his own interventionist policies. The Times reports that “Capitol Hill bore down on Mr. Mudd as well. ...regulators sharply increased Fannie’s affordable-housing goals. Democratic lawmakers demanded that the company buy more loans that had been made to low-income and minority homebuyers.”

Democratic Senator Jack Reed told Mudd at a 2006 Congressional hearing: “In fact, Fannie and Freddie can do more, a lot more.” One Fannie executive said “our mandate was to stay relevant and to serve low-income borrowers. So that’s what we did.” But who issued this mandate? Congress, that’s who. This was politics at work not the market.

With the government’s Fannie-monster guaranteeing loans to borrowers lenders did precisely what the politicians wanted and started lending money to high risk borrowers. Between 2001 and 2004 the money these lenders lent to high risk clients increased from $160 billion to $540 billion.

The Times makes it quite clear that it wasn’t the free market that caused this crisis but government meddling especially meddling inspired by Democratic members of Congress. They wrote:

Had Fannie been a private entity, its comeuppance might have happened a year ago. But the White House, Wall Street and Capitol Hill were more concerned about the trillions of dollars in other loans that were poisoning financial institutions and banks.

Lawmakers, particularly Democrats, leaned on Fannie and Freddie to buy and hold those troubled debts, hoping that removing them from the system would help the economy recover. The companies, eager to regain market share and buy what they thought were undervalued loans, rushed to comply.

The White House also pitched in. James B. Lockhart, the chief regulator of Fannie and Freddie, adjusted the companies’ lending standards so they could purchase as much as $40 billion in new subprime loans. Some in Congress praised the move.

“I’m not worried about Fannie and Freddie’s health, I’m worried that they won’t do enough to help out the economy,” the chairman of the House Financial Services Committee, Barney Frank, Democrat of Massachusetts, said at the time. “That’s why I’ve supported them all these years — so that they can help at a time like this.”

While I support Barney Frank’s position on civil liberties the man is a moron when it comes to economics. Mr. Frank pushed the very policies that caused poor people to get screwed over in this crisis. And he doesn’t even have the character to admit his own role. Instead he scapegoats free markets while knowing full well that he and his fellow politicians were distorting the market.

Statist liberals (as opposed to classical liberals) helped create this crisis with their lack of understanding of basic economics. They won't admit it. And to appear concerned they voted for a massive bail out of various corporate interests. It doesn't matter how much Barney Frank and the Left want to help the poor. Motives are not important. Their stupid policies screwed the poor in the crisis and to appear "concerned" they rushed to pass legislation that will screw the poor even more. With friends like this the poor don't need enemies.

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